Molycorp Shares Popped: What You Need to Know


Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of rare earth miner Molycorp (NYS: MCP) have popped by as much as 12% today as China's Ministry of Land and Resources has clamped down on rare earth metals mining, processing, and sales.

So what: The ministry has ordered for tighter controls over the industry in the name of "sustainable and healthy development." Since China produces 97% of the world's rare earth metals with only 30% of known reserves, any action by the Chinese government has effects that ripple throughout the sector. Molycorp has been a roller coaster lately after yesterday's and last week's respective plunges, today's bounce provides a little relief for rare earth pricing fears.

Now what: China's move will limit rare earth supply, which in turn pushes prices higher to the benefit of companies such as Molycorp and Avalon Rare Metals (ASE: AVL) , which is also seeing some upside today. There's little doubt that the minerals have many uses and importance in high-tech industries, but the overall investment thesis for the group remains questionable in my mind. Companies that specialize too heavily on rare earths are bound for volatility since the Chinese government has huge effects on pricing power. This group is definitely not for the faint of heart.

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At the time thisarticle was published Fool contributor Evan Niu holds no position in any company mentioned. Click here to see his holdings and a short bio. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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