Rare Return On Rare Earths Investment

Todd Shriber
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I am going to take a little break today from my normal commentary on the oil industry to take a look at the scorching-hot rare earths sector. It has been mentioned dozens of times over the past couple of months as rare earths stocks have been ushered to the forefront of the investment lexicon as the new high-growth opportunities in the materials sector, that rare earths are not that rare at all.

The alleged scarcity comes from the fact that the U.S. has not actively mined rare earths in decades and China now controls 95% or more of the export market. So when China says it is going to reduce rare earths exports, as it recently did, rare earths equities respond to the upside.

One such example is Molycorp, the largest U.S.-based rare earths miner. As is almost always the case with high-flying growth stocks, there is an interesting tale regarding Molycorp and one prescient early investor. Colorado-based Resource Capital Funds is not well known in the private equity universe, but the company has poured $110 million in Molycorp over the past two years, according to Forbes.

Wise move. The shares are up 70% in the past month and 92% in the past three months. Resource Capital's Molycorp stake is now worth a cool $1.5 billion. That is not bad for two years and it is probably enough to make private equity titans like Blackstone and the Carlyle Group green with envy. This is a sweet deal to be sure, so sweet in fact that the title of the Forbes piece is ''Molycorp Looks Like One Of The Greatest Private Equity Deals Ever'' and that may not be a stretch.

Of course profits on paper are meaningless until those profits are realized and put in the bank, but thanks in part to the Chinese, Resource Capital is enjoying some rare returns on a rare earths investment. It would appear that Molycorp (MCP) is poised to continue its astounding growth as global demand for smarthphones, tablet devices and hybrid cars, all important destinations for rare earths, is expected to remain robust over the next several years.

Pivotal to the Molycorp growth story is the company's ability to reopen a California rare earths mine. That would not only make the company a more attractive investment, but help the U.S. from being held hostage by China's market dominance.

To be sure, Molycorp is fairly typical of many growth stocks. With no positive cash flow, the stock trades for 10 times book value and even generous estimates by some critics value the company at $4.7 billion. It closed today with a market cap of roughly $4.3 billion. On the other hand, Dahlman Rose recently raised its price target on the stock to $85 from $49, making the $53 and change it closed at today seem like a bargain.

For those waiting for a pullback, it may come in February when the lockup period for early investors ends. Just do not bet on Resource Capital dumping a ton of shares. The firm told Forbes it doesn't want to upset Molycorp's incredible run.