Insiders Are Buying This Mining Company

We have seen a number of insider purchases at Molycorp, Inc. (NYSE:MCP) recently (see insider purchases at Molycorp). The largest of these, a purchase of 2.5 million shares by director Ross Bhappu’s Resource Capital at an average price of $10/share, represents a substantial amount of confidence from a major holder of the stock (Resource Capital has been a large private investor in Molycorp, Inc. for some time). The fund was joined by other insider buying: President and CEO Mark Smith directly purchased 50,000 shares, and the company’s CFO as well as another Board member added shares as well. This drew our attention because on a statistical basis copying insider trading tends to be a profitable investment strategy, especially when multiple insiders buy. In theory, this is because insiders already have a lot of exposure to the company’s fortunes and give up potential to diversify their portfolio when they buy additional stock. Furthermore, Molycorp currently trades at about $9.50 per share- it has dropped in price since these insiders bought the stock, so investors have an opportunity to buy it at a discount to the point where insiders thought it was a good value.

Julian Robertson

Molycorp, Inc. mines and sells rare earth oxides, alloys, and metals. These compounds are used for a variety of functions such as high technology, clean energy, and defense; Molycorp offers an alternative to a market which generally favors Chinese producers. The stock has fallen 62% so far in 2012, and is down 82% from a year ago. This downward momentum is troubling, but perhaps the consensus buying by insiders serves as a signal that its fortunes are about to turn around. The company actually increased its revenue 5% in the second quarter compared to the same period in 2011, but costs rose dramatically and Molycorp reported a $67 million loss compared to earnings of $49 million in the second quarter last year. This was due to decreases in commodity prices, which nearly wiped out revenue gains from production while the company was still forced to pay higher expenses as a result of the increased volume.

Wall Street analysts also think that the stock has been hit hard enough: forward earnings estimates for Molycorp imply a P/E of 16 and a five-year PEG ratio of 1. The stock is remarkably sensitive to the broader market on a statistical basis, with a beta of 3.9, so investors who are generally bearish might want to ignore any value potential in the stock for the time being.

In addition, hedge funds took an interest in Molycorp over the course of the second quarter. Blue Ridge Capital, managed by Julian Robertson’s former second-in-command at Tiger Management John Griffin, initiated a position of 2.2 million shares in the stock (find more stocks Blue Ridge Capital is buying). Another Tiger Cub, Philippe Laffont, manages Coatue Management and this fund left its position in Molycrop unchanged at 1.1 million shares between April and June (see more of Philippe Laffont’s stock picks). Coatue had increased its stake in the company in the fourth quarter of 2011. Aletheia Research and Management reduced its position but still reported owning 2.6 million shares at the end of June.

We would consider Molycorp against peers such as Freeport McMoRan (NYSE:FCX) and Turquoise Hill Resources (NYSE:TRQ), which focus on copper and gold mining but also produce other minerals; uranium miner Cameco (NYSE:CCJ); and palladium and platinum miner Stillwater Mining (NYSE:SWC) with the caveat that much of Molycorp’s future depends on prices of rare earth compounds. These companies trade at a wide range of forward earnings multiples: 7, 50, 15, and 20 respectively, which at least tells investors that Molycorp is not unusually priced compared to analyst expectations. Investors should consider the company based on the strength of the insider buying if they are patient enough to not panic at any continued declines in the stock price that might result from its current negative momentum.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Burger Kings: The 10 Most Expensive Burgers in the World

The 10 Most Ethnically Diverse Countries in the World

The 10 Most Exclusive Credit Cards in the World

The 10 Most Expensive Cruise Ships in the World

The 10 Fastest Supercomputers in the World

The 10 Best Countries for Doing Business 2015

6 Most Expensive Fruits In The World

10 Worst Airlines in the World

The 10 Biggest Tax Havens in the World to Stash Your Money

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!