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Molycorp Becomes King of Stockholder Pain, but Real Concerns Cannot Be Changed

Jon C. Ogg

Molycorp Inc. (MCP) is becoming an expert at screwing its investors. If anyone wanted a "death before dilution" company in their portfolio, they have been slaughtered over and over here. The supposed rare earth elements leader in America killed its stock on Tuesday with double-digit losses after forecasting that it needed to raise $200 million or so in new equity, diluting the you know what out of its existing investor base again. The real issue is that Molycorp's SEC filing was a confessional that the bulk of its rare earth materials are simply not the greatest rare earth materials in demand right now.

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Now we have the pricing, down at $5.00 per share, for a whopping 45 million shares. This move sent shares down another 5% or so to $5.27 right after the opening bell on Wednesday. The problem is that the close was at $5.58 on Tuesday, and the larger concern is that the stock was at $7.10 on Monday. That is a shareholder loss of more than 25% in about 36 hours or so.

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Some investors had higher hopes with a new chief executive officer coming in. On paper it looked good, but the reality is that the greatest CEO in the world cannot change the composition of all the materials buried deep in the dirt at the Mountain Pass, Calif., facility. The CEO also cannot immediately change the demand for the company's major inventories. It is fairly certain that "alchemy" was not one of the required talents in order to get the job.

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New investors need to understand that opportunity has now shifted to hope here in Molycorp. The hope is that demand shifts to its mix of rare earths, and that pricing follows that demand higher. We outlined all the Molycorp business woes already, but we want to keep the reminders fresh and harsh that the dilution woes are only a fraction of the problem here now.

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What is amazing is that, as bad as things are, Molycorp still has not put in a 52-week low, as the 52-week trading range is $4.70 to $11.89. This is still hard to consider as anything positive. It turns out that not all rare earth materials are created equally when it comes to business opportunities. As with all companies, particularly in chasing current trends and fads, caveat emptor!

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Be advised that the woes of Molycorp also are creating risks for the Market Vectors Rare Earth/Strategic Metals ETF (REMX). This is the only rare earths exchange traded fund, and volume is generally thin. Its shares are indicated down 1% at $40.44, against a 52-week range of $37.15 to $55.60, and this ETF is down only from $42.00 as of the close on Monday. Maybe it is a good thing that Molycorp is down to only a 4.6% weighting in this ETF, and maybe it is good that only two of the 10 largest holdings have their primary listings in the United States.

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