Pat McKeough responds to many personal questions on specific stocks and other investment topics from the members of his Inner Circle. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions.

This past week, an Inner Circle member asked us about one of the mining stocks involved in the quest for rare earth metals. China’s iron grip on the rare earth market is a key factor in the pricing of these minerals, Pat notes, and he looks at how this stock is working to contest it with a re-opened mine and a new acquisition.

Q: Dear Pat: I would appreciate your views on Molycorp and its prospects. Thank you.

A: Molycorp (symbol MCP on New York; www.molycorp.com) will soon complete the full reopening of its rare earth metals mine in the Mojave Desert, near Mountain Pass, California. The mine closed in 2002 due to low rare earth prices.

By the end of 2012, Molycorp hopes to be producing 19,050 tonnes of rare earth metals a year. In 2013, it hopes to push that up to 40,000 tonnes.

Rare earth elements are used in a variety of modern devices and applications, including catalytic converters and petroleum refining; magnets in small and large motors; glass additives and glass polishing compounds; rechargeable batteries; television and computer screens; lighting; X-ray machines; and lasers.

In the three months ended December 31, 2011, Molycorp’s revenue rose sharply, to $132.9 million from $21.7 million a year earlier. Earnings per share jumped to $0.41 from a loss of $0.11. The gains resulted from the reopening of the mine.

However, despite the mine’s successful restart, Molycorp’s share price remains low—it’s down over 65% from its high of $79.16 in May 2011.

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Mining stocks: Molycorp combats higher prices and rare earth smuggling

The stock reached its high because rare earth prices hit a peak in response to lower Chinese export quotas. (China accounts for around 95% of global production of rare earth metals.)

However, the higher prices then led to lower demand, mainly because users substituted rare earths with cheaper materials and increased recycling. Rare earth producers are also raising production to take advantage of the higher prices.

High prices have also encouraged extensive smuggling of rare earths out of China. Estimates place smuggled rare earths as high as 20,000 tonnes per year, against official export quotas of around 31,000 tonnes. Smugglers use a range of methods, including injecting rare earths into pottery, which they then ship out of the country. The metals are later extracted when the pottery reaches its destination.

Molycorp recently announced an agreement to buy Neo Material Technologies (symbol NEM on Toronto) for $1.3 billion. Neo Material is a rare earth processing company that converts the raw elements into products such as magnetic materials.

The deal gives Molycorp a greater range of products to sell. As well, Neo Material has plants in China.

In the most recent Inner Circle Q&A, Pat looks at international moves to limit China’s control of rare earth metals and how this could affect Molycorp. He also examines whether Molycorp can cut its risk thanks to the Chinese plants it inherits with its new acquisition. He concludes with his clear buy-hold-sell advice on the stock.

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