The bad news about Molycorp Inc. (NYSE: MCP) seems to just keep coming.
But Molycorp insiders just seem to keep buying.
And the latest insider buys are downright huge.
On Jan. 30, Chilean miner Molibdenos Y Metales SA, also known as Molymet, bought 15 million Molycorp shares for $90 million – a move that nearly doubled its stake in the U.S. firm. The deal elevates Molymet's stake from 10% to a current 18.26%, and means the Chilean miner now holds 32.052 million shares of the Greenwood Village, CO-based rare-earth miner.
And the Molymet purchase wasn't the only move that an insider made.
On that very same day, Molycorp Vice Chairman Constantine Karayannopoulos, who also serves as the company's interim president and CEO, more than doubled his direct holdings when he spent $100,000 to buy 16,667 Molycorp shares.
Karayannopoulos now owns 29,932 shares directly, and an additional 198 shares through his spouse.
The Molymet and Karayannopoulos purchases were each made at an average price of $6 per share.
As I've said to you many times in Private Briefing columns, massed insider buying on a beaten-down stock immediately puts put that company on my "watch list."
And we've certainly seen lots of buying with Molycorp, a promising-but-troubled rare-earth minder whose shares are off 79% from their 52-week high of $35.79. Molycorp shares bottomed at $5.75 a share on Nov. 16. And on Jan. 25, the company priced a follow-on offering of 37.5 million shares at $6 each.
Our focus on Molycorp started back on Aug. 24, when Permanent Wealth Investor Editor Martin Hutchinson recommended the stock to Private Briefing subscribers. The stock soared as much as 50% within three weeks, but the gains didn't hold.
But that didn't stop insiders from boosting their stakes – several times in the weeks and months that followed, as we'll see.
Late that same month, just after Martin's recommendation, Molycorp insiders – including then-CEO Mark Smith – bought 90,000 shares at an average price of about $10. Ross R. Bhappu, a veteran executive of the mining industry who serves as Molycorp's outside chairman, spent $25 million to buy 2.5 million shares.
That's also when Molymet – already a major Molycorp shareholder – ponied up $45 million to purchase 4.5 million shares for itself.
The rally that followed Martin's recommendation didn't hold, and the already-troubled Molycorp was the focus on new problems and controversies. Those troubles – new disclosure issues, worries about global rare-earth prices, the ouster of Smith, and reductions in guidance -caused a reversal and for a time sent Molycorp shares to record lows.
And still insiders continued to buy.
In our Nov. 27 report "Guess Who's Buying Molycorp Shares," we told you that three insiders (including the soon-to-be ousted Smith), spent a combined to spend almost $510,000 to purchase more than 75,000 shares of their own company's stock.
Just a few days after that, Molymet was back again, spending $415,000 to add 57,000 more shares to its stake. And Director Brian T. Dolan ponied up $38,000 to buy 4,400 shares of his own.
That brings us back around to the Molymet purchase we described at the outset of today's Private Briefing … and our philosophy on insider buying.
In an interview with Barrons.com, a Molycorp spokesman said the company is "always pleased to see insiders invest again in the company as that sends a message of support and confidence."
There are lots of reasons that insiders sell their shares. And during my years as a business journalist, I saw most of them: Portfolio reallocations, estate planning, raising cash to pay a hefty tax bill … even getting the cash needed to finance a long-awaited dream house.
But while there are countless reasons an insider might sell, there are very few reasons an insider would buy. And when you're talking about a company whose stock has been trashed, that list of reasons gets very short.
In fact, there's only one reason.
With a beaten-down stock, insiders buy because they expect the stock to gain ground.
A lot of ground.
And that rule extends to "Knowledgeable outsiders" – external investors such as Molibdenos, who are in a position to understand the target company's upside potential.
The bottom line here is that, despite its problems – which are substantial in number and substantive in nature – there's still value in Molycorp. We're talking about an operating, turn-key rare-earths miner. And it's one with differentiating, "value-added" twist, thanks to Molycorp Canada's "mining-to-magnets" strategy, which means the company has a product to sell, and an R&D initiative to back it up.
And these insiders seem to strongly believe that this value is going to be extracted somehow – either from a rebound, or through an outright buyout.
We're continuing to look at this. And we'll be watching this one carefully for you.
[Editor's Note: We recommend investors employ "trailing stops" - typically 25% - on all holdings.]