Selling the Bubble: More Insiders Selling Out Molycorp (MCP)

Molycorp, Inc. (NYSE: MCP) is about to see even more shares come to the market.  The company has filed with the SEC to sell up to an additional 11,500,000 shares.  The offering would amount to nearly $700 million more for the market to absorb in stock.  The proceeds from this sale are not going to help the company ramp up its key production site for rare earth elements.  This is not going to fund more acquisitions.  This is not even going to pay off debt.  All of these shares are being sold by shareholders.

It is no secret that the rare-earth bubble became too inflated.  In April, we noted that rare earths were becoming the new crack or meth for Wall Street.  Timing is always tricky in calling any bubble, but one 24/7 Wall St. reader sent in this message on May 16, 2011: “I was wise to heed your warning. I sold (Molycorp) on April 29 at $73.52 and locked in a 25% gain. Thank you. You may have damn near called the top.” 

While that worked, we still have illusions that the bubble cannot reflate.  What if China one day walks in and actually lives up to its pledge by reducing rare earth exports?  Molycorp has already given its earnings, but it did include the following guidance in its offering:

• “We expect our quarterly production for the rest of 2011 to range from approximately 40% to 50% higher than the first quarter due to increased processing capacity from the recent acquisitions of MMA and Molycorp Silmet AS and increased production from our Mountain Pass facility. Substantially all of our lanthanum production in 2011 (which accounts for approximately 60% of our production and is expected to be approximately 1,250 mt for the remainder of 2011), will be sold pursuant to a contract under which our pricing is subject to a price ceiling, which was set based upon market prices at the time the contract was entered (and which is well below current prices); production of our remaining materials will generally be sold based on prevailing market prices. Accordingly, our ability to realize prevailing market prices in the near term is limited due to our sales contract for our lanthanum product, which reverts to prevailing market pricing upon the completion of the initial modernization and expansion plan at Mountain Pass.”

Before the effects of this share sale, the prospectus lists that the insiders and backers who are selling shares still have some 27,857,988 shares of Molycorp that represents some 33.2% of the outstanding shares.  Molycorp closed at $60.67 on Tuesday and the stock is indicated down around $59.00 this morning. 

The offering lists J.P. Morgan and Morgan Stanley as the two underwriters and the full filing is here.  The larger float may make it harder for traders to run this stock up and down on thin volume as you originally saw.  Still, if you were an insider and got the chance to lock in exponential gains in such a short period of time wouldn’t you sell?

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JON C. OGG