Is There Value in Rare Earth Minerals? Insiders Seem to Think So
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We track insider transactions because we believe that no one knows a company better than the people who work there. It has been shown that insiders tend to outperform the market by as much as 7% annually (read more about how this strategy can boost your returns).
In a recent Form 4 filing with the SEC, a board member of Molycorp (NYSE: MCP) increased their shares owned by over 35%. Brian Dolan is a Molycorp director and partner at RCF Management who bought over 4,400 shares between $8.68-$8.69 a pop.
The insider buying is not limited to Dolan though, as the month of November has been robust for bullish behavior at Molycorp. Other notable purchases made just last week along with Dolan's 4,400 shares include an increase of shares owned by Molycorp's largest shareholder Molibdenos y Metales SA. Molibdenos now owns over 17 million shares and 12.3% of Molycorp after buying up 50,700 shares last week between $8.15-$8.75 each.
Other notable large insider trades during the month of November included a 10,000-share purchase by EVP John Ashburn and 45,000 shares purchased by Director Charles Henry. The month of November has seen the first round of insider purchases since August when a number of insiders collectively snapped up over 7 million shares at $10.00 per share.
In the hedge fund industry, billionaire D.E. Shaw was one of the top investors increasing their stake in Molycorp during 3Q (check out Shaw's newest picks). Shaw increased his 2Q stake by over 60%, and Shaw's real interest came during the second quarter when his firm increased its stake by almost 800% from 1Q. Interestingly, since the end of the first quarter, Molycorp's stock has dropped almost 75%.
Molycorp is the world's largest rare earth minerals deposit owner ex-China. After managing to beat 3Q EPS estimates by over 25%, the company's stock price is still down almost 25% over the last three months. We believe insiders consider the issues in China as being close to sorted out and that rare earth mineral prices may be ready to appreciate. Previously pressuring the company was low mineral prices due to illegal mining in this region, and since prices started slumping in 2011, China has worked to shut down these mines. The country's government now plans to offer subsidies to state-owned rare earth mineral producers, signaling the industry might be ready for a turnaround.
On the downside, there is a large short interest in Molycorp, with over 40% of the mining company’s float being held by short sellers. It's possible that insiders believe a short squeeze could take place, where short sellers scramble to cover their positions on the back of improving company performance. Molycorp is expected to grow EPS at 20% for the next five years and could be poised for a short covering stock pop.
Other major metal mining companies include BHP Billiton Limited (NYSE: BHP), Vale SA (NYSE: VALE), Freeport-McMoRan Copper & Gold (NYSE: FCX) and Southern Copper Corp (NYSE: SCCO). BHP is a diversified metals company that trades in the mid range of the industry. BHP also has expected growth that pales in comparison to Molycorp—expected to grow EPS at only 6% compounded annually. Even so, BHP has been relatively flat year to date and is making efforts to better focus its business for growth, having recently sold off its diamond business.
Vale is much like BHP as a diversified metal mining giant. The Brazil-based mining company pays a much richer dividend than BHP at 6.2%, compared to BHP’s 3.2%. Vale also trades at the cheapest P/E of the five mining stocks listed at 7x earnings.
One big concern for Vale investors though, is the slowing Brazilian economy, which will pressure the company's bottom line; the miner is expected to see an earnings decline of 20% each year over the next half-decade. Nonetheless, Ken Fisher, billionaire investor and founder of Fisher Asset Management, has been a big fan of Vale and increased his stake over 200% during 3Q (check out Fisher's new picks).
Freeport is the copper and gold company that trades at 13x trailing earnings, below notable copper competitor Southern Copper at 16x. Driving the future growth of these two companies will be the expected copper shortage on the back of expectations that China doubles its copper consumption over the next few years.
Both Freeport and Southern Copper appear to be solid value and growth plays. Freeport also operates gold mines, which should further boost the miner as gold prices appreciate on the back of global uncertainty and commitments to low rates in the U.S. through 2014. Southern Cooper trades at only a 14x forward P/E—below its 16x trailing P/E—and pays out a dividend yield around 6% (excluding its recent special dividend). Freeport pays a lower dividend yield at only 3.2%, but the copper-gold miner trades at only 8x forward earnings.
We believe that Molycorp is an interesting speculation play that could see an interim boost in share price as rare earth mineral demand increases and prices rise. The catalyst will be a combo of strong earnings growth and potential short coverings.
This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!