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Author: PaulEngr Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 11000  
Subject: Possible call option MCP Date: 8/5/2012 11:50 AM
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First off, let me just say that MCP (MolyCorp) is definitely NOT a stock to be in for the faint hearted. In 2 months time I watched my holdings go from $33 to $40. Then in a matter of days it went from that to $65 at which point I bought a protective put. Then it went to over %70, then plunged all the way back to $48. Needless to say I breathed a sigh of relief for having bought an insurance policy. This kind of price move is not unusual for MCP. So in some ways it's almost to the level of playing around with highly leveraged (ATM) puts and calls.

Just recently it plunged from around $17 to $11.50 much to my dismay. It's not that I won't hold onto what I have. It's just that these kinds of things are somewhat aggravating on the stomach if you know what I mean. Now how I'm thinking of responding to this...more back story.

The back story is this. MCP is a mining company that started out by going back and redeveloping/restarting/rebuilding a site in California to produce rare earth metals. For those not in the know, rare earths are a group of metals that are the last two rows on the periodic table. Chemically they are all ALMOST identical...almost, but not quite. Most are radioactive to one degree or another because on an atomic level, their nucleus's are so large and unstable that it is fairly easy for them to fly apart given a little push from a stray neutron or two...so plutonium, uranium, cesium, thorium, and americium (the most popular radioactive metals) are all rare earths. At the same time they go into the most mundane applications. The "flint" on a typical disposable lighter is actually coated with a material called "mischmetal" which is a polite way of saying that it's a conglomerate of whatever rare earths are available cheaply at the time since rare earths are again, almost chemically identical.

Certain ones however have absolutely amazing properties outside of this. For instance, cerium causes major radical changes in metal chemistries. Ductile cast iron is a revolutionary "new" (circa 1960's) form of cast iron that has the toughness of steel strength of cast iron. Most of it is made of about 95% scrap metal. Adding 0.005% to it controls detrimental effects of certain contaminant elements such as lead and reduces the need for much larger amounts of magnesium. Effectively it is difficult to produce good quality ductile iron without it.

It is also the catalyst used to convert CO into CO2 in automobile catalytic converters, it makes self-cleaning ovens do their thing, helps prevent fading in pigments, helps prevent clear polymers from turning dark, and is often used as the basis for rare earth (super strong) magnets.

OK, and Cerium is one of the more common of the "rare earth" metals, and one of the more popular ones for the reasons stated above, but there are many more of these rare metals that have various fascinating uses.

Starting about 3 or 4 years ago China kept making noise about capping exports. Overall from an outside perspective it looks to me like some Chinese folks are playing a game of insider trading but that's another story.

Overall before they went acquisition crazy, MCP was worth about $30-$35. It is hard to value them at this point with so many fingers in so many pies but so far it looks like if you look at their individual businesses, they have not diluted themselves down to much worse than around $25-$30.

When they first started "producing" by draining off material that had been laying in thickeners (think large, flat "tanks" if you don't know) and getting some material on the market quickly. The site wasn't actually supposed to go into production until the end of this year. The moment that they started "going positive" on the production front, the market went nuts and at one point the stock was North of $70. That's on top of the yo-yo'ing that the stock price does every time a Chinese official comes out with yet another proclamation. In some ways this is sort of like the whole European economy issue on steroids.

So now we come to the current period. The California operation just started into production "for real" this time. They completed another acquisition of a Canadian operation. And there are some other activities surrounding them. So needless to say with pulling off what is effectively two major startup operations simultaneously, their quarterly report was pretty abysmal. The "street" promptly trounced and cut them to the current $11.50 when this news was coupled with more noise out of China and the current European scare.

At least that's my view point. Needless to say I'm a bit concerned that it may drop further and that the recent acquisitions have driven it off a cliff similar to what Cisco has done to themselves over the past couple years. BUT...I don't see anything in their acquisitions to deserve a 50% hair cut other than the fact that the "Street" has dropped anything resembling risk lately in the flight to safety.

Now the "safe way" out of this is to buy MCP at $11.50 and sit on it. But I was thinking of something else entirely. MCP December $10 call is running $1.80. That's just $0.30 of time value over the current price after it plunged to $11.50.

If I'm right about MCP it is unlikely to go much lower. Still giving myself a 10% margin here but hey for this stock, that's a pittance. If it goes lower than $10 and stays there, I bag a big, fat zero. If it floats between there and around the current stock price, I lose a lot of principle but not much. BUT if it goes above $12, I'm highly leveraged here and make out really good.

Am I missing something here with regards to the underlying stock? And just why isn't the time value much higher for that matter? Is this really as good as it looks? I've gotten burned before so many times on buying calls (and since it's a tax sheltered account I normally use for these things, I'm restricted from selling puts). But this is the first really good looking call I've seen in a while.
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