Insider Trading At Molycorp (MCP) Shows There Is Value In Rare Earth Minerals

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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 Inc (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.

David Shaw

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 been 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.

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