Commodities & Metals

Molycorp Earnings Meets Short Sellers (MCP, AVL, REE, REMX)

Molycorp, Inc. (NYSE: MCP) is almost surprisingly trading higher after its earnings report.  The surprise is that shares were already up 300% from last year’s IPO and it already even had a secondary offering that allowed insiders to sell even more shares.  The revenue gains were huge on the surface until you see the real numbers, but that is what makes for a controversial ballgame.  This is one of those instances where short sellers are driving shares higher in a likely short covering squeeze.

We are watching the gains in Molycorp help moves along in Avalon Rare Metals, Inc. (AMEX: AVL), Rare Element Resources Ltd. (AMEX: REE), and even in Market Vectors Rare Earth Strategic Metals ETF (NASDAQ: REMX).

Revenue did rise by 154% from just Q3-2010, but only to $21.7 million; Volume sold rose 20% to 638 metric tons.  Now that the cynical review of the gains is over, here is what is helping to force some bears to cover:

  • Molycorp secured all critical environmental permits to start its Project Phoenix;
  • Its mining operations resumed for first time since 2002;
  • It commenced the construction of its new processing facility ahead of plan;
  • It secured supply agreements to cover all expected 2011 production;
  • It signed a JV-LOI with Hitachi Metals to produce alloys and magnets by 2012;
  • It signed an MOU to supply Sumitomo and revived $130 million in financing for Molycorp.
  • During 2010 it was invited by the DOE to advance to the second round of consideration for a federal loan guarantee.

Other pacts signed were a supply pact with W. R. Grace & Co. with a significant amount of REOs and signed a second pact to supply Grace with about 75% of its lanthanum production per year.  Here is the first money-shot: In January 2011 its directors approved the execution of Phase 2 and when it begins production in 2013 it expects to be able to produce up to approximately 40,000 metric tons of REO per year.  Molycorp sees an additional $250 million in capital costs for the Phase 2 expansion, which will bring total cap-ex to about $781 million.

Molycorp is also keeping the China fears alive and well.  That is going to be THE driving force for investors here as the second money-shot because it reinforces the steady domestic demand story.  Molycorp sees the issues in 2011 and beyond where the Chinese government will follow through on its announced intent to keep “rare earth oxides” supplies limited outside of China.  It also expects reduced export quotas and further restricted production and supply availability.  The firm expects China to keep cutting illegal rare-earth exports, quotas reductions over reserves, price coordination, a forced industry consolidation, higher environmental oversight and controls, and increased internal consumption.  The last of the big issues is a national stockpile after China, South Korea, and Japan have made stockpiling plans.

Molycorp has a short interest of more than 9 million shares as of mid-February, a record since its IPO.  Shares closed down 2.3% at $48.62 but shares are actually up 4.3% at $50.90 in the after-hours session on almost 1 million shares since the market closed.

This move also has Avalon Rare Metals, Inc. (AMEX: AVL) higher by about 4% and Rare Element Resources Ltd. (AMEX: REE) up by over 3% in the after-hours session.  Even the lass-active Market Vectors Rare Earth Strategic Metals ETF (NASDAQ: REMX) is up by 0.5% in the after-hours.

JON C. OGG