Molycorp (NYSE: MCP - News) CEO Mark Smith said in an interview with Mineweb Tuesday that supply issues remain the dominant factor facing the rare earths industry today, noting that demand for the 17 elements used to produce an array of high-tech and military devices is expected to remain robust. Smith said in the interview that the only factor that could hamper demand going forward is supply itself and that is a key reason why Molycorp, the largest U.S.-based rare earths miner, is working to bring its Mountain Pass, California mine online.
Charting is a wonderful tool as long as the situations charted are similar and there is no dynamically new information to change a stock's course. Due to its simplicity, many investors love to use this tool to try and predict patterns. Determining just how Molycorp will react after a major run-up and into a looming stock unlock is the perfect application for this tool. MCP fell from $62.78 on Jan. 4 down to a low of $40.25 on Jan. 24.
Trading into the unlock period, Molycorp lost more than a third of its value in three short weeks. In some ways it is in a better position today, due to the deals that have been announced; however, the potential large earnings are all in the future, and the stock unlock will be happening within a month. On the flip side, the shorts did not believe in the fundamental story from the beginning and view a higher-priced stock as one that has further to fall.
The general mood of both sides of the trade should be relatively the same as it was back in the beginning of January. Pending any major announcements, supply and demand should end up being the dominant factor in the next few weeks, and the supply of shares will be growing. This release of shares into the retail market will have an even larger effect, as the amount of shares available to short will also increase. Currently it is hard to find shortable shares at most retail brokerages, and despite the stock's run-up there is a line of waiting and willing short-sellers. Once more shares get released onto the retail market, a lot more short-sellers will enter the game.
The Molycorp lockup will be expiring 90 days after the Feb. 14 registration statement. This information can be found on form 424B4, page 164. This would mean that May 11 would be the unlock date: On this date, 39,137,087 shares will be unlocked. Unless the unlock period gets extended again for some of these shares, this would translate into almost a doubling of the retail shares. In turn, this could also translate into a doubling of the shares that get shorted. In the next few weeks, the downward pressure on the stock could be enormous and very profitable for anyone short this sector.
The positive note for bullish investors is that this could be the best long-term buying opportunity for anyone who wants to get into the stock or the sector. If the stock was to drop by a third the way it did during the first unlock period, long-term investors would be able to buy in at around $50 per share. Investors would also be wise to limit exposure in other rare earth plays. Perhaps it is just sector emotion or how the stocks are linked together in ETFs, but in general how Molycorp performs, so performs the sector. Earlier this year, when only Molycorp was experiencing a stock unlock, the whole rare earth sector experienced a significant pullback. If you are long, this would be a good time to think about limiting exposure and collecting cash to invest after the unlock.
Investors who are short could stand to make quite a profit in the next few weeks. From various posting on message boards, it appears that most shorts believe that the long-term story is flawed. Short investors would be wise to enjoy this pullback while reviewing the other side of the trade. Disclosure: I hold a hedged position on MCP (both long and short). Fundamentally, I am bullish long-term.
Killswitch9: I agree with your assessment. I don't know why anyone would want to be long at this point. In the short term there is too much downside risk. Overall, I'm bullish, but short term, MCP is going to drop a little. I'm expecting at least 20%.