UPDATE: Molycorp Finds New Rare-Earth Deposit

10/04/2011 4:55 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

I know I just finished a big post on rare earths, but this news from Molycorp (MCP) arrived too late to get into that post.

Molycorp has filed a form 8K with the Securities and Exchange Commission announcing that the company has discovered a heavy rare-earth deposit near its Mountain Pass, California, mine.

This is a big deal—even with the company’s disclosure that it still has to do lots of test drilling to determine the quantity and quality of the deposit.

A story in this morning’s New York Times fills in some of the details.

The discovery is actually a rediscovery of a find that dates back to 1950. In the 1980s, the oil companies that owned the mine, Unocal and then Chevron (CVX), were interested in light rare earths used in oil refining and color TV screens, and the discovery of a deposit of heavy rare earths was buried in the files.

Global demand and pricing have shifted since then, so now it’s heavy rare earths, such as dysprosium and terbium, which are in short supply and command the highest prices.

The heavy rare-earth deposit, Molycorp CEO Mark Smith told the Times, is on land near the existing mine and where Molycorp already has claims and permits. That, and because the deposit is relatively near the surface and would require very little strip mining, might allow the company to begin producing heavy rare from the deposit in a little more than a year.

The company’s new rare-earth refinery, set to open in stages at the Mountain Pass site through 2014, can process either light or heavy rare earths. And a heavy rare-earth discovery has the potential to make a major difference in Molycorp’s profitability.

Take dysprosium, one of the ten heavy rare-earth elements. Total annual global production came to just 100 metric tons, so we’re talking rare, rare earth here. At the beginning of September, dysprosium oxide sold for about $2,270 a kilogram. A light and more common rare earth, such as lanthanum oxide, sold for about $140 a kilogram.

Since we don’t know how big this deposit might be, or what the concentration of heavy rare earths might be, it’s impossible to tell how much this rediscovery changes Molycorp’s bottom line. But I liked this stock before the announcement, and I certainly don’t like it less now.

I’m bullish on Molycorp, but since I’m bearish on the market as a whole, I don’t see a reason to chase this stock today. (It did close up 6% today, almost all in the last 30 minutes.)

Certainly a $30 price is reasonable for this stock, but with the trend in the market pointing downward you will be able to get this more cheaply, in my opinion.

If you want to hedge your bets you can, of course, dollar-cost average down by beginning a small position now and adding to it as the months go by (or the stock prices sinks.) At the moment (October 4), though, I’m going to add this stock to my watch list.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Molycorp as of the end of June. For a full list of the stocks in the fund as of the end of June, see the fund’s portfolio here.

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