Is Molycorp A Good Pick?

Apr.17.14 | About: Molycorp, Inc. (MCPIQ)

Summary

The expected global demand will increase the role of the non-Chinese manufacturers.

The fundamentals of the company are expected to remain under pressure.

Chinese influence on the global supply will decrease due to the non-Chinese rare earths players.

Molycorp (MCP) was trading for over $70 a share in April 2011 when the rare earths market was going through a boom and the prices for rare earths were sky-high. At the moment, the stock is trading for just under $5. The prices for rare earths have been on the decline, and the stock price of the company has followed the trend. During the last year, the stock lost about 46%, and year-to-date, Molycorp is down about 16%. However, it is not all doom and gloom for the company. The rare earths market looks to have reached bottom, and the supply and demand situation over the next 2-3 years is expected to be favorable for the companies operating in this sector.

Expected Global Demand and Supply

The global rare earths production for 2013 was approximately 100,000 MT, of which China accounted for 82%. IMCOA anticipates that the global production for REE will increase to 182,500 MT by 2016, of which China would only account for 63%. China falling to 63% shows that the projects outside China will be contributing more towards the global supply of the rare earths. The image below shows the trend in the demand and supply of rare earths.

Click to enlarge

Source: IMCOA and discussions with the rare earths industry stakeholders

Demand from China is expected to rise over the next two years; however, supply from China will be enough to cover the local demand. Total global demand is expected to take a sharp upward trend over the next two years, which will create an opportunity for the projects outside of China to exploit this opportunity - Molycorp's Mountain Pass facility is expected to play a vital role for the company to exploit this growth opportunity. The Chinese supply will be slightly above the global demand by the end of 2016 - however, global demand will create enough opportunity for the producers outside of China to sell their products at a good price.

Click to enlarge

Source: IMCOA and discussions with the rare earths industry stakeholders

According to the IMCOA forecasts, Cerium, Neodymium, Europium, and Dysprosium are expected to see the problem of oversupply, and for Terbium and Yttrium, demand will be more than the global supply. Furthermore, IMCOA expects the global demand to be between 200-240,000tpa in 2020, and the global supply to be 240-280,000tpa - so, we are expected to see demand remain below supply over the next few years. However, the good news for the global manufacturers is that the availability of the non-Chinese rare earths will be greater and IMCOA expects the long-term rare earths prices to remain between $40-60 - rare earth average selling price was $38/kg during the last year. As I mentioned at the start of the article, industry experts believe that the prices are close to the bottom, and in the long-run, some recovery in the prices should allow these companies to widen their margins.

The company has recently announced that its Chlor-Alkali plant situated at the Mountain Pass facility is ready for operations. The company believes that the facility will allow them to extract the same amount of REE from one-half the amount of ores. This will significantly improve its efficiency and reduce its costs. The facility was under development since 2011, and is now complete. This is positive news for Molycorp - the facility will allow the company to exploit the expected increase in the global demand, and the cost savings will allow the company to enhance its profitability.

As a result of falling rare earths prices, the margins of the company have suffered. In the short term, I expect the margins to be under pressure due to the weak pricing environment in the sector. However, the completion of the Chlor-Alkali facility should allow the company to enhance its margins in the long term. The cost savings from the plant will lessen the impact from the falling prices in the short term, and in the long term, recovering prices, along with the cost savings will have a dual impact on the margins and the profitability of the company.

Bottom Line

In the short term, Molycorp might remain under pressure - however, in the long term, the outlook for the rare earths is positive and the global demand patterns will allow the non-Chinese manufacturers to have a say in the sector. Furthermore, the recovering economy should also have a positive impact on the rare earths market. At the moment, Molycorp looks a good speculative play. If the market recovers and the rare earths prices start to climb - the company will be well-positioned to benefit from the opportunity. Chlor-Alkali facility will certainly enhance the profitability of the company. The current price levels indicate that the downside is limited, as the stock has lost substantial value over the last two years. However, the upside can be substantial due to the expected recovery in the market. At current price levels, Molycorp is a good speculative play on the recovering global economy as well as the recovering rare earths market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.