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Molycorp's (NYSE:MCP) 2Q earnings were almost spot on with my estimates with one large but temporary exception. In Molycorp's earnings release the company recorded sales of 217 mt of REO product from Silmet, yet also stated that Silmet was running at 381 mt of REO in 2Q. Listening to the earnings conference call leads one to believe that the sales are one month behind the production and thus even though Molycorp had been previously sending material to Silmet before the merger, it was only able to sell two months of material during this quarter. This merger delay in achieving full quarter sales leads to a difference in $13.4M or almost $.14 per share. Removing $.14 per share from my mid 60 cents per share 2Q estimate brings the estimate exactly in line with Molycorp's report. This delay in realized earnings is a one-time event and will not need to be recorded in future estimates.

In order to estimate 3Q earnings we will need to make a few assumptions. The first assumption is that the current average REE pricing recorded to date will be the REE price projected for the entire quarter. As of now it appears that the average REE price is 20% greater this quarter than in 2Q. In order to be conservative we will assume that pricing remains flat.

The second assumption is that Molycorp delivers production at a level that is in the middle of its estimated future production ranges that it provided in the 2Q report. The third assumption is that Niobium, Tantalum, and all MMA's metal sales values will be the same as last quarter.

The fourth assumption is that the average COGS value per unit can be used to determine the increase in 3Q's COGS due to higher production. The fifth assumption is that the selling general and administrative expenses will be flat in 3Q. It was growing in the last few quarters as Molycorp staffed up for project phoenix and performed the two mergers. In this next quarter no large increases would be expected unless another acquisition is performed.

The sixth assumption is that taxes are 25%. I will need to review the conference call and earnings report in more detail to determine a better tax assumption for future estimate updates. Currently Molycorp has a lot of past loss tax credits to help defer taxes, and it could have advantages from Silmet being on foreign soil. For this quick estimate however we will assume that the company is required to pay significant taxes next quarter.

The seventh and final assumption is that this 3Q estimate will be done without any changes to the Grace (NYSE:GRA) contract pricing. Molycorp was not able to provide any guidance on the Grace contract at Grace's request. Due to the limited information and potential variability of this item, I will show this item as an additional earning add on that the individual will need to estimate themselves. My last article "Estimating the Value of Molycorp's Grace Rare Earth Contract" can help provide readers with a way to quickly estimate the contract's value.

Here is the Molycorp 3Q earnings model once these assumptions are added:

Income $163,080,080

COGS $-63,662,176

Sell,General,Admin $-13,817,000

Net Income Before Taxes $85,600,904

Taxes at 25% $-21,400,226

Income After Taxes $64,200,678

Earnings Per Share $.78

To repeat, the numbers above do not include any gains from the new Grace contract. Without any guidance I still believe that my last article's estimate of increased value of the new Grace contract is $1.00 per share over the course of a year, or $.25 per quarter. This assumption still seems reasonable as it is splitting the difference between the old contract price and the current price that Molycorp receives for non-contracted sales. It is very likely that Grace has tried to contract a very large portion of the full production Lanthanum and is seeking to be a dominant world player as it could have rights to a huge portion of the non Chinese Lanthanum market. It is quite possible that it was willing to pay more in the short term in order to secure these rights and to limit future non Chinese competition.

Adding the additional 25 cents per share on to the above 78 cent estimate yields Molycorp's 3Q earnings of $1.03 per share. Despite the speed at which these assumptions were produced, every attempt to be conservative has been taken. Molycorp's 3Q earnings should easily be in the $1.03 range. It will only be a matter of time before the analysts raise earnings assumptions and price targets.

My end of 2013 Molycorp price target from "Unlock, Relocked, and REE-Loaded" still stands. The overall market has dealt Molycorp a tough environment to trade in, but everything is still on track. The traditional investment house analysts continue to play catch up. They will likely provide higher guidance, but still be too low on future guidance. My long-term price target even assumed that Cerium and XsorbX would be selling for around $14/kg. If Molycorp can pull off getting XsorbX sold near current prices as a drinking water purification product, then the Cerium portion alone out of future production will bring in $36 per share in earnings. This would be a coup de gras of mega proportions to any short holders

Source: A First Pass at Molycorp's Q3 Rare Earth Earnings