Is There More Hope Than Reality in Molycorp and Rare Earth Gains?

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Rare earth elements are back in focus. CBS’s weekly news show “60 Minutes” reported on rare earth elements in its show that aired Sunday night, and that was followed up with a blog post by Kevin Livelli. 24/7 Wall St. has highlighted a couple of the key points in the debate and given some background on the U.S. rare earth company, Molycorp Inc. (NYSE: MCP), which can give a broader picture.

So far, the move is not just contained to Molycorp. The question that has to be asked is if there was too much hype, rather than reality, behind this latest catalyst.

Forbes contributor Tim Worstall pointed out a few issues in the “60 Minutes” analysis of the rare earth industry. The main point that he refuted is that China has a stranglehold monopoly in the rare earths industry or 90% of the supply of rare earths as suggested by “60 Minutes.” Another supposition he contests is that there are only a “few places on earth with concentrations high enough to mine.”

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Worstall said in Forbes:

60 Minutes is also wrong on the geology and metallurgy of the rare earths. We do not need to have mines to produce them, we can extract from other minerals that we already process. They are used in various defense programs, I know that very well as I’ve supplied more than one of them. But they’re not important to the extent that 60 Minutes seems to think …

This was not the first time that Worstall has said anything about the rare earths industry. He has worked in and around it, so suffice it to say he knows it very well. In fact, he was very much on point in his statement from 2010 that eerily predicted where this industry would go:

If rare earths are so precious, why isn’t the United States working harder to collect them? The main reason is that, for these last 25 years, China has been supplying all we could eat at prices we were more than happy to pay. If Beijing wants to raise its prices and start using supplies as geopolitical bargaining chips, so what? The rest of the world will simply roll up its sleeves and ramp up production, and the monopoly will be broken.

With a spot-on prediction like that in 2010, it might make more than at least some sense to take some consideration about what was pointed out here.

Molycorp’s chart included a massive spike in the share price in 2010, which lead to all-time highs in 2011 and eventually the drop-off in 2012. Things have more than soured since then.

Shares of Molycorp were up 29% at $0.47 Monday morning. The stock has a consensus analyst price target of $1.85 and a 52-week trading range of $0.28 to $5.15.

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Other U.S. rare earth companies are up on this news as well, and the moves have been substantial. Avalon Rare Metals Inc. (NYSEMKT: AVL) was up 9.6% at $0.2926, in a 52-week range of $0.16 to $0.73, and Rare Element Resources Ltd. (NYSEMKT: REE) was up 21% at $0.69, in a 52-week range of $0.24 to $1.66.

Another driving force behind Monday’s rally could be short covering. Molycorp’s short interest may not be at a high, but it is still very elevated at over 57.8 million shares, with 9.5 days to cover. Avalon Rare Metals has more than 2.8 million shares short, and Rare Element Resources has a short interest of more than 634,000 shares.