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Remember when "rare earths" were all the investment rage? Shareholders of Molycorp Inc. certainly do; in early 2011, shares in the company nearly reached $80 (U.S.). Today, they trade close to $5, at all-time lows.

It's fair to say Molycorp should never have traded at $80. And it's understandable why it's down to $5. But it's also an interesting bet to trade for much, much more than that.

First, let's review the good times: "Rare earth" minerals, we came to learn, are essential in a wide range of products, from mobile devices to hybrid vehicles to water-filtration systems. And they are found, overwhelmingly, in China, which decided in 2010 to severely limit their export to the rest of the world.

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Molycorp, as it happens, owned the Mountain Pass rare earth mine in Southern California, a site near the Nevada border started in the 1950s but subsequently abandoned by its owner. Chevron Corp., which had inherited the shuttered the mine in an acquisition, restarted operations and sold it to Molycorp.

The company was able to position itself as the rare provider of rare earths outside of China. As even as its Mountain Pass mine was nowhere near its capacity, shares zoomed along with the pricing for rare earths.

For example, cerium, the major rare earth at Mountain Pass, went from $4 per kilogram in 2008 to $99 in 2011. Lanthanum, another major mineral at the mine, went from $8 per kilogram to $101.

Like many other commodities, no matter how scarce, the rare earths have reversed course. China's historic hyper-growth is in question, and certain customers stockpiled supplies as prices rose. In the fourth quarter of 2012, cerium was back down to $14 and lanthanum to $13, which are prices Molycorp gamely notes "remain significantly higher than historic [pre-2010] levels."

Of course, Molycorp's investments in its business were not premised on such a collapse. It spent billions of dollars buying companies (including Canada's Neo Material Technologies Inc.) and opening plants to create a global network of processing and sales facilities.

The reversal of fortunes has meant the company has had to raise capital twice in the last 12 months, layering on debt and diluting shareholders in the process. Operating cash flow is negative, and the company is taking writedowns on inventory and on past acquisitions. The CEO resigned. Oh, and the U.S. Securities and Exchange Commission is formally investigating the company's disclosures. (The company says it is "co-operating" and it says a similar shareholder lawsuit is "without merit.")

Hoo boy. Sounds like the stock could go to zero. So why do the bulls think it can go so far in the other direction?

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Jon Hykawy, an analyst (and PhD holder in physics) for Byron Capital Markets in Toronto, says Molycorp was a mining company with high costs from an aging plant that required high rare earth prices to make money. Now, with its plant network, it's vertically integrated, poised to sell finished mineral products to the end user, with no middleman. And production improvements as Mountain Pass ramps up will improve its costs.

"This is a company that can [spin off cash flow] in nine figures every year, but the market has no precedent to look at to see this happening, so is a little lost."

Mr. Hykawy, who has a "buy" rating and $15 target price, adds that Canadian investors have seen the company's new CEO, Constantine Karayannopoulos, at work for a long period at Neo Materials, "so we have a shot at understanding this story before the Americans."

Is $15 aggressive? Try $50, which is the price Laurence Isaac Balter of Fox Island, Wash.-based Oracle Investment Research told the U.S. investing newspaper Barron's the shares could reach some time in the coming years.

Mr. Balter says that as prices rise and Molycorp ramps up production and lowers costs, the company could produce EBITDA, or earnings before interest, taxes, depreciation and amortization of $400-million by 2015. (With 188 million shares outstanding, $50 per share would still yield a rich price-earnings multiple.)

There's no assurances rare earths will snap back thusly, or that Molycorp can execute its plans if they do. But the possibility of such a scenario makes one wonder whether Molycorp stock will demonstrate truly rare returns.

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About the Author
Business and investing reporter and columnist

A business journalist since 1994, David Milstead began writing for The Globe and Mail in 2009. During eight years at the Rocky Mountain News in Denver, Colo., he individually or jointly won nine national awards from SABEW, the Society of American Business Editors and Writers. He has also worked at the Wall Street Journal. More

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