Why I Bought $MCP...

First and fore most it's the western hemisphere's only producer of rare earths. When you see the words "only" and "rare" in the description of a stock that's a good thing. A really good thing. Rare earths are used in newer wind turbines, hybrid car batteries, defense systems and computers. China has 97% of the worlds rare earths in their Inner Mongolia mines, so the company is not a pure monopoly, but it's damn close. There's no way the US Government will depend on China to supply rare earths for our defense systems, so that's an automatic contract. Molycorp has the only mine in the US (Mountain Pass in California, it has a 30 year mine plan permit it got in 2004) that has these rare earths so competition in the US is none. the mine has been down since 2002 so the company is using money raised in a recent IPO to expand it, and get it up and running.

These rare earths are in demand and supply is dwindling due to the demand. Here's what Wikipedia says about the rare earths supply/demand picture:

"The use of rare earth elements in modern technology has increased dramatically over the past years. For example, dysprosium has gained significant importance for its use in the construction of hybrid car motors.^[9] Unfortunately, this new demand has strained supply, and there is growing concern that the world may soon face a shortage of the materials.^[10] In several years, worldwide demand for rare earth elements is expected to exceed supply by 40,000 tonnes annually unless major new sources are developed'

Jeff Siegel in an seeking alpha post pointed out a Congressional Accountability Office report released in April that took a look at the national security risks associated with our dependence on rare earth materials. Here are a few key points from that report:

•While rare earth ore deposits are geographically diverse, current capabilities to process rare earth metals into finished materials are limited mostly to Chinese sources.

•The United States previously performed all stages of the rare earth material supply chain, but now most rare earth materials processing is performed in China, giving it a dominant position that could affect worldwide supply and prices.

•Based on industry estimates, rebuilding a U.S. rare earth supply chain may take up to 15 years and is dependent on several factors, including securing capital investments in processing infrastructure, developing new technologies, and acquiring patents, which are currently held by international companies.

•Government and industry officials have identified a wide variety of defense systems and components that are dependent on rare earth materials for functionality and are provided by lower-tier subcontractors in the supply chain.

•Defense systems will likely continue to depend on rare earth materials, based on their life cycles and lack of effective substitutes.

•Some DOD components, other federal agencies and companies are taking initial steps to limit their reliance on rare earth materials or expand the existing supplier base.

Currently Molycorp is producing 3,000 tons of rare earths a year, they're modernizing the Mountain Pass mine and expect to be producing 20,000 tons by 2012. Let's say, for some unforeseen reason they're only producing half that by then, that's still triple their production now.

Not only are they mining the rare earths but they're launching an operation to make the magnets (they call the operation "Mine-To-Magnets"). They just hired one of the leading rare earth magnet experts by the name of Stan Trout to head that operation. This is one of the guys that helped pioneer the use of rare earth magnets in MRI machines. CEO Mark Smith has a lot of confidence in Trout, we'll see if it's well deserved.

That's the fundamental picture, Here's the technical look.

A big volume spike this month has the chart looking strong. A big drop Tuesday Sep. 29th was a good test that the stock passed, and bounced back the next three days ending the week back near the highs. Bloomberg ran a story on China cornering the rare earth mineral market on Thursday and that brought in volume that day most likely, but after watching it all that day and the next showed the strength in the stock. Some one is buying and it's not us small Fry's. You could see the accumulation in the price action.

We're sure to get a drop, so volume will show just how strong this baby is, but for me this is not a trade, it's an investment. I plan on holding and adding as long as it doesn't drop 8% from my buy point of $28.39 (my base price)

technically, it looks sound even though it's up a lot, it still looks sound since it's been tested, first with resistance at $24.15, and again when it tested that same area proving it now to be support.

Now, the risk. Based on gross operating, and net margins, it has a cost structure that eats up a percentage of its revenues, worse, the company is losing money on an operating basis. I remedy this with the fact that by 2012 the production should be up 500% to 600%, assuming the cost structure stays the same or is improved, the company should be ok. Not only that but who's to say how much rare earth minerals and the magnets they make will be worth in a few years?

It's a new issue that came to market July 1st 2010 so the market has had time to take a long hard look and the verdict is buy... So far. Every one knows it's losing money for now, but big buyers are still all over it because the future potential is pretty big.

It's had a big run up so it could have a big drop. I'll sell at -8% like I said, but if the first drop is on too heavy volume I'll sell before then and look for a re-entry. It's highly possible I bought late but when I saw the chart with a nice drop and bounce back I felt more confident in buying when I did. Any one else who wants in should watch it and get in at a proper buy point. In my opinion it's a buy for the reasons stated. This is not a recommendation for any one to buy this stock, this is just the reasons I did. As always I recommend you do your own research so you can make a decision to buy or not on your own, since it's your own money.

My risk tolerance is pretty high, so please do what's right for you and your risk level.

Until next time, Do Some Home-Work, Make Some Money.