Short Sellers Place Record Molycorp Bet as Rare Earths Sink

Molycorp Inc. CEO Mark Smith
Cerium oxide, which is used in glass polishing, jumped to 207,500 yuan a ton in the period, the data show. Cerium and lanthanum account for 81 percent of Molycorp’s shipments, Chief Executive Officer Mark Smith said Nov. 30. Photographer: Scott Eells/Bloomberg

Investors’ bets against Molycorp Inc. stock are at their highest since the rare-earth producer’s July 2010 initial public offering on speculation prices for the minerals will keep falling.

About 19 percent of Molycorp shares outstanding were sold short on Nov. 28, up from 7.2 percent at the beginning of the year, according to the most recent data from Data Explorers, a New York-based research firm. That compares with an average of 3.6 percent for the Russell 1000 Index, the data show. Molycorp is the 12th most shorted stock in the index.

Cerium and lanthanum, the rare-earth minerals that are most abundant in the ore mined by Molycorp, have dropped 33 percent and 18 percent respectively since touching records on June 13. Prior to that date, they had both risen more than fivefold this year, following export restrictions imposed by China, the largest rare-earths producer.

There’s a “buyers’ strike” among rare-earth consumers such as automakers and oil refiners who are looking for cheaper alternative raw materials, said Jonathan Hykawy, an analyst with Byron Capital Markets in Toronto.

Earnings estimates for rare-earth producers “have gotten a little ahead of themselves as analysts put out numbers that were based on unrealistic pricing assumptions,” said Scott Goginsky, a portfolio manager and analyst at Biondo Investment Advisors in Milford, Pennsylvania, which has 10 percent of its assets invested in Molycorp, the most of any fund, according to data compiled by Bloomberg.

Mining Restart

Molycorp dropped 0.2 percent to $32.46 in New York. It’s dropped 35 percent in 2011, lagging behind the 7.2 percent decline for the Russell 1000 Materials & Processing Index. While the company’s price-earnings ratio has sunk to 35 times reported results from 248 times on Aug. 1, Molycorp has more than double the valuation of the stock index, according to data compiled by Bloomberg.

The company, based in Greenwood Village, Colorado, owns the Mountain Pass mine in California, the largest rare-earth deposit outside China. In October, it resumed mining at the site, which was shut in 2002.

Rare earths are 17 chemically similar metals used in products including refining catalysts, electric cars and wind turbines. China, which said in 2010 it would cut exports by 72 percent, controls at least 90 percent of global supply, according to the U.S. Geological Survey.

Business Model

Lanthanum oxide, used in catalysts for oil refining, rose to a record 164,000 yuan ($25,810) a metric ton this year through June 13, according to data from Shanghai Steelhome Information. Cerium oxide, which is used in glass polishing, jumped to 207,500 yuan a ton in the period, the data show. Cerium and lanthanum account for 81 percent of Molycorp’s shipments, Chief Executive Officer Mark Smith said Nov. 30.

Jim Sims, a spokesman for Molycorp, said the company doesn’t comment on individuals’ investment decisions.

“Molycorp is delivering on exactly the milestones it said it would deliver on,” Sims said. “Prices are an order of magnitude higher then when we did our business model.”

In a short sale, a trader borrows shares and sells them. If the price drops, the trader profits by buying back the stock at a lower price, repaying the loan and pocketing the difference.

“Most of the people putting the shorts on are anticipating earnings are going to weaken from here,” said Hykawy, who has a “buy” rating on Molycorp. “Given the capacity expansion, the volume expansion, that was probably as good as it was going to get in terms of their earnings for a while.”

‘Strategically Important’

The reliance on one country for most rare earths means Molycorp will benefit from companies and governments seeking non-Chinese supplies, said Robert Stimpson, a money manager at Oak Associates Ltd. which owns shares in Molycorp.

“We cannot depend on the generosity of China for access to the minerals that we need for key products,” Stimpson, whose Akron, Ohio-based firm oversees $850 million in assets, said in a telephone interview on Nov. 14. “Politically, the whole industry is now on the radar of the government as being strategically important.”

Molycorp plans to double Mountain Pass’s annual capacity to 40,000 metric tons of rare-earth oxides by the end of 2013. The company said in October it would spend $114 million to accelerate output at Mountain Pass.

Molycorp said Nov. 10 it will produce 4,586 to 4,975 metric tons of so-called rare-earth oxide equivalent in 2011, compared with an Aug. 11 forecast of 4,941 to 5,881 tons. The company said the lower projection was caused by equipment outages related to the speeding up of development work at Mountain Pass. Molycorp plans to produce at an annual rate of 19,500 tons by Sept. 30.

“It’s going to be somewhat of a lumpy business while they’re trying to get the mine going and they also have operations there where they’re trying to build a whole new infrastructure,” Goginsky said. “We’re not concerned about it.”

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