I just wanted to follow up on the rare earths piece which I recently published (click here for "Rare Earths Are Becoming A Lot More Rare" ). Despite lackluster market conditions at best, Molycorp (MCP) managed to raise $394 million through its July IPO at $14/share. The company will use the funds to reopen a rare earths mine at Mountain Pass, California, making it the largest such producer in the world outside of China. The company will start production by the end of the year, and go full scale by 2012.
This is important because China, supplier of 97% of the world's supply of rare earths, has cut back export quotas by 40% this year. These incredibly expensive metals are crucial for the manufacture of a variety of alternative energy hardware, as well as a number of military applications. Since the launch, the stock has risen 11%, making it one of the best performing stocks in the market this summer.
So far, the Australian miner Lynas Corp (LYSCF) has been the big beneficiary of the stampede into rare earths shares, doubling since I first recommended it in May (click here for the call on Story #4). Lynas offers established production and experienced management, higher grade ore with a 9.7% yield, higher levels of the more valuable rare earths, realizations per ton that are 57% higher, and a book value of 1.87.
MCP is expected to have a 8.24% yield, is easier to trade with a US listing, has better liquidity, and prospects of greater profitability down the road through vertical integration and economies of scale, at the price of a 2.61 book value. MCP may also receive a political boost in the fall if a group of 20 senators and congressmen are successful in getting the Department of Energy to provide $280 million in loan guarantees. Look at these companies as an alternative energy, national defense, commodity play, a win-win-win.
This originally was posted in the Diary of a Mad Hedge Fund Trader.