(By Rich Bieglmeier) A onetime, high flying rare earth stock that's been grounded might be taxing for takeoff, again. Molycorp, Inc. (MCP) hit iStock's weekly accumulation screen and apparently insiders got the memo first.
According to SEC filings, in the third week of August, four insiders and directors purchased $900,000 at $10 during a stock and convertible note offering. At the same time, two large stakeholders upped their positions in the basic materials company. Molibdenos y Metales S.A. added another $45 million to their stake, and mining-focused, private equity firm, Resource Capital Funds dropped $25 million on MCP.
Then, last week, Wall Street and investors rolled $23.7 million or 1.7% of Molycorp's market cap into house accounts. Is that smoke we smell?
As we mentioned up top, MCP's stock price has been abused by the street since May of 2011. Back then, Molycorp traded for more than $75. In fact, in June 2011, some of the same insiders buying at $10 today were selling the stock for more than $50. Hmm, selling at $50 and buying at $10, sounds pretty savvy to us.
The stock has been under pressure because profits have fallen on hard-times due to lower product volumes, lower prices, and transactions related costs. However, the company's Project Phoenix and Canadian acquisition should help contribute to a nice rise in 2013 profitability and sales.
Wall Street analysts believe the top line will expand by 79% year-over-year in 2013, and that eps will grow to 74 cents in 2013. Based on MCP current price, Molycorp is trading with a forward P/E of 15. Considering the street's growth expectations, there is room for expansion in iStock's view; especially if the global economy begins to recover.
At the very minimum, we can see the Colorado based company eventually trading up to its book value of $13.16, which is upside of 18.5% from here. Gabelli & Co analyst, Brian Chin, is more aggressive with a 2013 price target of $21 and recently upgraded Molycorp to buy from hold.
How the stock performs will depend heavily on the state of the world economy, particularly China. If FedEx is correct and struggles lie ahead, MCP's price is likely to remain under pressure. The stock chart says a close under $9.40 could be technically disastrous.
On the upside, shares could rally to the mineral company's 50-day average in the neighborhood of $15 and then possibly $20. While the overall market saw interest wane in August, Molycorp's volume spiked sharply, which suggests institutional accumulation and is bullish in our view.
If the management can produce a positive surprise and provide an upbeat outlook when MCP reports earning on November 5, 2012, shares could get an immediate bump to nearly 4 out of 10 shares in the float (stock available for trading) is sold short.
Conclusion: Molycorp, Inc. (MCP) is a high risk/ high reward play for aggressive investors. Shareholders will have to hope for brighter days from the global economy, for rare-earth prices to start rising, for the dollar to weaken or run in place, and for the cost of production to eat up less of the top line. Certainly, there is plenty to worry about, but that is exactly why the stock is trading much closer to its 52-week low of $9.40 than its yearly high of $58.74.