That’s the headline of the latest ad for the Oxford Club, which is teasing us with a special report on the “Black Ops Resource” and the huge wealth it will create for you and yours.

And no, you can’t be cynical yet — it’s only January 5th, for pete’s sake!

Let’s read the ad with an open mind, shall we?

Here’s how they reel us in …

“A Gov’t-fueled resource shortage could upset the global balance of power… making one strange, new commodity more valuable than gold, silver and platinum combined….

“If you missed out on the big bull market in gold… don’t worry.

“Our research indicates that an even bigger resource explosion will sweep the globe in 2012.

“Because another precious commodity – which most Americans know nothing about – is set to outpace gold over the next year.

“And it could prove safer, too.

“I’m not talking about crude oil, silver, uranium, platinum, or natural gas…

“This exotic commodity – a kind of magnetic substance – promises to revolutionize our nation’s technology industry, and our national security programs.”

We learn that this is more important than steel in the 20th century, or than uranium in the dawning of the nuclear age, or oil in the OPEC-dominated 1970s. And the Congressional research folks apparently believe that the gap between supply and demand for this critical whatever-it-is will quadruple over the next two years.

So what is this “Black Ops Resource?”

Well, the name of the person pitching it might sound familiar — the ad is for the Oxford Club, which apparently now has Steve McDonald on board. He ran a newsletter called the Bond Trader for a number of years that was much loved by some of my readers, so I thought I should check him out in his new endeavor — but it turns out that this is definitely not a “relatively low risk” bond investment like the ones he often teased us with in the past.

Nope, this is … wait for it … rare earths. Again.

So after the huge run-up that the rare earth miners and explorers saw in the second half of 2010, and the occasional spurts of interest in 2011, we’re seeing some teasing and touting of these companies again. Most of them had a relatively weak second half of 2011, and are down a bit over the last month or two, and most of the stocks in this sector, absent a big discovery or company-specific news, trade primarily on news releases about Chinese rare earth export quotas.

Which isn’t a surprise, because most rare earths names are “story” stocks in the truest sense of the word — explorers and searchers and drillers who haven’t ever really made or produced anything. Of course, most junior resource stocks are the same way — but rare earths are a strategic resource with a dominant monopoly supplier and an often inelastic demand (these are usually tiny components in large systems for the end users, shortages are a big deal but even if the price of a rare earth magnet, for example, goes up by 500% the impact on the final price of the iPad that uses several of those magnets will generally be minimal) … so the price can swing even more wildly than the more widely-followed commodities in part because higher prices don’t destroy demand (ie, doubling in a month — or more — at times last year).

So which rare earther is Steve McDonald pitching?

Well, he’s not going for a bond here, but he is moving to the top of the food chain — he tells us that he’s recommending not just a stock that has a rare earth property to explore, but one who can actually produce the stuff … and expand production dramatically to help meet demand and assuage the fears of Congressional and military leaders about strategic shortages from China (rare earth minerals are needed for all that whiz-bang military technology, too — in fact, McDonald relies heavily on military demand when he says this could be “the most lucrative investment opportunity in 30 years”).

And then we start to get hints about the specific company being pitched:

“The key to this opportunity is enormous amounts of pending government demand – for use in strategic weapons systems, high-tech fighters, communications, and countless other applications.

“And there are no options to secure commercialized rare earth metals from a friendly source outside of China, with one exception.

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“I’ll tell you about the one company that could save Uncle Sam…. “

He also goes on to elaborate on why this pick is a “real” company, not just a junior penny stock explorer:

“… you need access to raw rare earth metals.

“But you also need ores of rare earth metals of a certain quality.

“And most importantly, you need a way to process and refine the high-quality rare earth metals into a useful product for use in high-tech fighter planes or advanced night vision riflescopes.

“Without this refining and processing, raw rare earth ores are as useful as dirt.”

And yes, this company is actually producing stuff …

“And not only is this company already producing finished rare earth products, but it is only months of away from opening its new state-of-the-art facility… and doubling – even tripling – its production.

“It all starts with the new ‘super plant’. You see, this company has the technical capacity to start producing tons of finished rare-earth products right now.

“We’re not interested in this company because it just discovered a bunch of rare earths in some hill somewhere. This company does something no miner can – it produces finished, commercialized products made from rare earth elements.

“Rare earth oxides, alloys, metals and magnets…ready for use in the manufacturing of fighter jets and smart bombs….

“Not only does this company have operations based outside of China…it also makes its headquarters in the Western Hemisphere. So it’s entirely based in countries friendly to the U.S.

“This company is positioning itself to acquire a virtual monopoly selling the Black Ops Resource to the U.S. market. The company’s already producing this resource, today, with plans to ramp up production by 200% over the next 12 months.

“In fact, it’s about to double production of the Black Ops Resource… and start selling it by the TON. This company is nearly finished building a brand new state-of-the-art facility to produce the Black Ops Resource, the largest outside of China.”

Sounds impressive, right? After all, rare earth elements are not necessarily all that “rare” — it’s just that it’s hard to find an economic deposit of high concentration, and it’s even harder (and dirtier, and more complicated) to refine those deposits into the finished oxides, etc., that manufacturers need. China doesn’t dominate this sector because they have the only rich deposits, they dominate the sector because they have the cheap refining and lax environmental standards to allow for huge production that they used to swamp the non-Chinese producers by slashing prices. And no, they didn’t do this to dominate military applications … it appears to me that the end game was their manufacturing and employment growth strategy, not a military strategy — the Chinese leveraged their strength in rare earths to encourage high-tech manufacturers to move their manufacturing to China, where they’d get a better deal on rare earths and not face export quota problems.

But the fact remains, yes, everyone wants a steadier supply of rare earths without the risk of China cutting them off in any given year when they revise their export quotas.

And a few more clues about this specific company?

“In October of 2011, this company’s board of directors authorized investing $114 million into the new plant. This capital infusion will speed up the opening of this facility a full 3-months earlier than anticipated, bringing the facility online early in 2012…

“By the end of this year, this company will be on track to produce 19,050 metric tons of the Black Ops Resource per year. That’s nearly three times the company’s production in 2011.”

And not to leave out any potential Thinkolator fuel:

“This is a real company trading on the New York Stock Exchange. This company is so well capitalized it can spend an extra $114 million to complete its new facility three months early …and pay for this expansion using existing cash and current cash flow….

“This company has a direct and powerful connection to the purse strings in Washington.

“We’ve discovered its board includes a retired U.S. general who has signed off on billions of dollars in defense contracts…

“This former U.S. Army general now works as a company insider… and could begin feeding similar contracts directly to the firm’s bottom line over the next 7-12 months.

“… the CEO of this company was asked to testify on record on what it will take to get the U.S. Government the finished rare earth products it needs.

“And even more recently, this company signed a cooperative research and development agreement with the U.S. Department of Energy’s Ames Laboratory.”

OK, so that’s enough to feed the Thinkolator — this is, after all that, the one rare earth company that most US investors have ever heard mentioned on CNBC: Molycorp (MCP)

And really, if we’re going to have another crazy ramp-up in prices of rare earth minerals, Molycorp is probably the safer bet that most investors will focus on — they are far more established than most rare earth companies outside China, though there are a few that are on their heels (like the Australian Lynas, which we also have covered several times — they have the other “most advanced” project now, though they’re waiting for license feedback on their sometimes controversial refinery in Malaysia that’s under construction).

China has kept the export quota relatively stable on rare earths for 2012, though there’s also some talk about export quotas being tighter for heavy rare earths (HREOs), which might support pricing of those elements. Molycorp doesn’t produce much of the “heavies”, they are relatively rarer in the projects now under development by most emerging companies — Avalon Rare Metals (AVL) and Stans Energy (HRE in Canada, HREEF on the pinks) have more HREO resources among the stocks I’m familiar with, though neither is currently at much risk of producing anything in the near term.

I have no idea what will happen to the prices of rare earth elements in the next few years — generally you’d expect pricing to come down with the weak economy, since there’s generally less demand for high tech stuff that REOs go into, and that has happened to some degree (prices dipped in the crash, almost destroying some of the junior companies in the sector, and have fallen in the last six months after their big run over the previous year or so). And of course, even with new production coming online from Molycorp and a few other emerging producers, the vast majority of global supply will still come from China — so whatever they do, whether it’s flooding the market to crush prices and take market share again, or restricting exports further to boost their own manufacturing sector, they’ll be a big driver of the market.

Molycorp is the big-name player in this business, and they did see their share price take a big hit, down 15% or so, just because the Chinese announced a (almost) flat export quota for 2012. And with Molycorp and Lynas both expected to add substantially to non-Chinese supply sometime over the next year+, the fear is that the additional supply will put downward pressure on pricing, and that margins will take a hit for MCP. So that’s why the stock is down from the high-$70s right before REO prices peaked over the Summer to about $26 now.

Analysts have been cutting estimates for MCP earnings over the last couple months, and as it now stands they believe the company will earn almost $3 a share in 2012 — you can do the math without even taking your shoes off, that means the PE ratio is below 9. If you had told me two years ago that I could buy a producing and growing rare earth miner for a single-digit PE ratio, I’d have said you were crazy. But there are, of course, reasons for the cheap price — principally the uncertainty over rare earth pricing, but also the risks that come from any miner and refiner that’s expanding and building new facilities … these things are often more complicated and expensive than is first estimated.

But still, they will indeed be producing, they say, 19,050 tonnes of “high purity oxides” by the end of 2012 (the plant expansion is on track for being complete in the second half of the year, and they did “fast track” it for an extra $114 million last Fall), and that number bumps to 40,000 tonnes under their expansion plans to 2013 (details are here on Molycorp’s website). In addition to the processed oxides they also sell their own finished products as what is effectively a sideline business, principally in water treatment, so they do produce some more complex and value added stuff — not just rocks that other people have to refine. And they do have tight connections to the government, I’m sure, since they’ve been pushed as a strategic producer since before they were taken public a couple years ago. And yes, per the tease they do have a retired general on the Board of Directors (though lots of other companies with defense connections or aspirations do as well).

So does that make you want to rush out and buy Molycorp? Well, that’s your call. There’s a lot of interesting stuff to read out there on the rare earths market and on Molycorp itself, I always like to see what Jack Lifton has to say. Lifton’s latest note on Seeking Alpha had some very cautionary words on Molycorp, partly because they produce mostly light rare earths (part of the reason why they’re pushing their “heavy” exploration now) — here’s an excerpt from that note:

“The only way that Molycorp could sell its total planned production would be by marketing into China and Japan. This will place Molycorp, at least in China, in direct competition with a mature Chinese mining sector, with much lower costs across the board than have ever been previously achieved, in practice, outside of China.”

And I found this other recent commentary from Dave Cohen interesting as well. Which will give you at least a little start on thinking through the big picture for rare earths.

Molycorp has customers for at least 58% of their initial production of those 19,050 tonnes per year, and will allocate another 20% to their water treatment products (called XSORBX), so there is at least a base level of demand for the next probably two years — though we don’t know what their pricing is for those deals, or how much the pricing in their contracts might fluctuate with the global market.

Finally, if you do decide to take a look at MolyCorp, look at the preferreds, not just the common stock. Molycorp has a series-A preferred stock available, also trading on the NYSE (tickers vary for preferreds at different brokers, but at Yahoo Finance it’s MCP-PA). This is a convertible preferred with a decent yield, so if you do think MCP is going to have a great couple of years this gives you exposure to most of the upside in the stock along with a good dividend.

The basics on the convertible preferred are that it pays 5.5% interest until March 2014, and that at that point it converts to common stock — as long as the shares are below $50 it’s just a clean conversion at 2 shares of common for each share of preferred that you hold (the ratio changes if it’s over $50, maxing out at 1-2/3 shares if it’s over $60. The 5.5% is calculated on the original offer price of $100 for the preferreds (these were offered when the common was at $50, just about a year ago), so you get $5.50 per year — at the current price of $60 for the preferred shares that means a yield of about 9%. The prospectus is on Molycorp’s website here if you’d like to read through all of the details.

Thought of another way, if you get nine more dividend payments before the conversion that’s $12.37 in dividends returned to you over two years. The current conversion value of the preferreds, with the common at $26.50, is $53. So you add $53 to $12 and the preferreds ought to be worth $65 if you don’t discount those future dividends. They’re trading at $60 now, so in theory you can interpret that as a bit of a blue light special.

But do note, you only get this yield for two more years, and as far as I know there’s no protection of principal like there might be for a convertible bond, if the share price for the common stock is down to $10 in two years (just an example), you just get your $20 worth of common stock (two shares for each preferred share) at the conversion date. If that happens, the $12 or so you’ve received in dividends in the interim would be some solace … but you’d still be losing half of your money. And from what I can tell from the prospectus (I didn’t scour it carefully, I just scanned a couple key sections), they can pay the dividends in common stock instead of cash if they want to.

This is certainly not a recommendation to go out and buy MCP preferred shares, but if I were interested in MCP stock and confident that it (and rare earths oxide prices, particularly LREO’s) would rise significantly over the next few years (I’m not, particularly), I’d probably buy the preferreds over the common — particularly if the price disparity between the two widens a bit more, (as it might if folks ignore it for a little while). Doesn’t hurt to get a wee bit of a dividend in the interim, and to get an advantage over the common share price … even if it’s a relatively small advantage of less than 10% by my rough calculations. If you like Molycorp, I think the preferred is a little better … if you don’t like Molycorp, well, there’s not much reason to like the preferred very much either.