Steer Clear of This Popular Stock
Remember the whole rare earth hysteria that started in the fall of 2010?
And no, I’m not talking about Motown’s all white rock band from the 1970s. I’m referring to the rampant speculation on companies getting into the rare earth mining business.
Well, it struck me recently that I haven’t heard much about rare earths this year. So, I decided to check in on the industry.
The first thing I did was pull up a chart of Molycorp (MCP).
You may recall this American company is leading the charge to restart rare earth production in the US. They’re developing the Mountain Pass mine in San Bernardino County, California.
You may also remember shortly after their IPO in July 2010, MCP shares went on a rally for the ages. In case you forgot, I’ve inserted the stock chart below.
As you can see, MCP started moving higher right out of the gate. The shares jumped from the IPO price of $14 and eventually traded as high as $79.16 in early May 2011.
That’s a phenomenal 465% gain in just nine months!
But when I saw what the stock has done since hitting that lofty high, I was stunned. Check it out…
Over the past eight months, MCP has dropped from $79.16 to just $28 per share. That’s an astonishing 65% decline in eight months’ time. Talk about a train wreck.
Now, my first thought was this could be a huge buying opportunity…
Remember, rare earth elements are in high demand. These unique materials are used to make all sorts of items, including aerospace components, lasers, portable x-ray machines, and various high tech devices.
What’s more, the prices of rare earth elements had been skyrocketing due to a shortage of global supply. China, which has a near monopoly on rare earth production currently, has been curbing exports of rare earth elements.
You don’t have to be Warren Buffett to realize shares of the leading rare earth miner in the US are bound to head higher at some point.
Unfortunately, after further analysis, I believe now is not the time for a big rally in MCP.
First off, China’s threats to cut exports of rare earths have been greatly exaggerated. While the Chinese say they’re cutting exports by 27% for the first half of 2012, they also said full-year 2012 limits would be nearly the same as in 2011.
The reason… global demand for rare earths has dropped significantly in recent months.
According to industry experts cited in the Wall Street Journal, global demand for rare earths has been falling since June. And Australian rare earth producer, Lynas Corp., recently said prices for certain rare earth elements are down 60% over the same time period!
Another reason, I’m not diving into MCP here is the amount of supply ready to hit the market in years ahead.
More than 350 rare-earth mine projects outside of China and India are now under development. It won’t be long until the global market is flooded with rare earth elements.
A third reason to stay away from MCP is a potential further drop in demand coming down the pike.
Major companies like Toyota Motor (TM) and Tesla Motors (TSLA) have both said they plan to stop using parts made with rare earth elements. And I’m sure many more companies will soon follow their lead.
Declining demand globally and the fear of huge potential supplies are driving rare earth element prices down sharply. This supply/demand dynamic will definitely take a bite out of future earnings at rare earth miners.
In fact, MolyCorp’s earnings estimates are already falling back to earth.
Over the past three months, analysts have slashed their 2012 estimates from $3.48 a share to $3.17. And once analysts start cutting estimates, it usually continues for some time.
No question about it, rare earth mining company stocks face serious headwinds heading into 2012. While MCP might look like a fantastic value at these levels, I’d say it’s more likely a value trap. Steer clear of MolyCorp for now.
– Robert MorrisSource: Dynamic Wealth Report
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