If anything good come out of the long-expected collapse of Molycorp (MCP), it will be that the Molycorp bankruptcy puts an end to retail investors speculating in rare-earth stocks like MCP.
As a story, rare earths had a number of attractive selling points to unwitting investors.
First, there’s the name itself, which is probably the only way to make elements like scandium, praseodymium or ytterbium sound sound close to sexy.
Then there was the 60 Minutes report back in March that went with the angle that China had a virtual monopoly on the mining of rare earths. Since rare earths are an essential part of everything from consumer electronics to smart bombs, Chinese dominance of this critical industry obviously represented a threat to the security of the U.S. iPhone supply.
Apart from the fact that the China threat was totally overblown, there’s has always been an even more important reason for investors to avoid investing in rare earths:
We’re talking about nothing more than a bunch of penny stocks.
Penny stocks are dangerous. Over-the-counter mining stocks have had a particularly bad reputation for decades, well before the Securities and Exchange Commission busted 20 “purported mining companies” last year.
Of course, Molycorp wasn’t an over-the-counter penny stock.
Rare Earths, Rarer Winners
Four years ago, NYSE-listed Molycorp was hitting $75 a share. Which just goes to show that even an allegedly up-and-up rare earths mining stock can be a disaster. Anyone holding MCP stock was wiped out by the Molycorp bankruptcy filing.
Now that MCP is gone, though, it’s almost impossible to find any rare earths securities that trade on a major U.S. exchange. Perhaps there are more hiding in the weeds, but there are only two easily found rare-earth plays left that don’t trade OTC (not that they trade all that much). Even then, we’re still looking at a penny stock and an exchange-traded fund that holds a number if penny stocks.
- Rare Element Resources (REE) lists on the NYSE Market exchange with a share price of about 50 cents, a market capitalization of $29 million and low average daily volume. That’s just not a sober investment.
- And since there is an exchange-traded fund for everything, NYSE Arca lists the Market Vectors Rare/Earths/Strategic Metals ETF (REMX). To be fair, this concentrated portfolio holds a bunch of small- and mid0cap mining stocks, but those reflect the part of the fund that invests in strategic metals like titanium, not rare earths. As for the rare-earths side of the portfolio, holdings include the usual suspects of overseas, OTC penny stocks. Furthermore, the ETF has minuscule assets — about $55 million — and trades only about 14,000 shares a day, on average.
Bottom Line
What this should make clear is that just because rare earths are valuable, that doesn’t automatically make rare-earth stocks a smart investment for 99.9% of investors.
If the Molycorp bankruptcy can scare the last of the rank-and-file investors out of rare-earth plays, at least it will have achieved at least one positive thing.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
