By Ian Hoffman
Molycorp (MCP) describes itself as the only rare earth oxide producer in the Western Hemisphere. It claims to own and operate the world's largest, most fully developed rare earth mine and oxide manufacturing facility outside of China, located in Mountain Pass, California. The company states that it has been producing rare earth products for more than 59 years. It also boasts that its team of more than 815 scientists, engineers, chemists, technologists, and highly skilled workers are among the foremost assemblages of rare earth manufacturing expertise in the world.
In addition to the Mountain Pass Rare Earth Facility in California, it also owns a controlling interest in Molycorp Silmet, which reportedly produces high-purity rare earth oxides and metals at facilities in Sillamae, Estonia, and owns Molycorp Tolleson, located in Tolleson, Arizona. Molycorp Tolleson produces high-purity rare earth metals and alloys, including Neodymium-Iron-Boron alloy and Samarium-Cobalt alloy -- which are both used to manufacture highly prized permanent rare earth magnets.
Below, I intend to present some of the reasons I believe that buying MCP at current levels and on dips, going forward, should pay off nicely.
First let's get to some fundamentals and technicals:
The stock currently trades around $29 with 83.90M shares out, giving it a market cap of about 2.46B. Its forward P/E is just over 10. Insider and institutional ownership stands at about 80% and the total short interest as of 12/31/11 was 14.56M shares. The average analyst 12-month price target is 60, with the highest estimate being $90.
As rare earth elements and rare earth metals suffered a sharp and swift price decline on a global basis in mid to late 2011, it pulled Molycorp's share price down quite a bit, along with many other equities in its sector, as well as some related commodities.
REE prices are now trending back upwards and if the Chinese put further restrictions on REE exports, the Molycorp should stand to benefit greatly.
In December, the company announced that it had secured government approval for heavy rare earth exploratory drilling near Mountain Pass and, earlier this month, the company issued a press release in which it announced that it had secured 78% of phase 1 rare earth production in customer agreements and XSORBX production.
CEO Mark Smith, from the January 3 press release:
I am very pleased that we have met the Phase 1 off-take allocation target that we set for 2011, and have found a home for more than three-quarters of our Phase 1 production prior to start-up…In an industry that traditionally has been driven by spot sales, Molycorp continues to break ground by moving customers to stable, secure, long-term supply contracts…Securing long-term rare earth sales contracts requires the ability to produce and deliver actual product to customers for extensive testing, qualification, and fine tuning so that precise specifications can be met. This process can take many weeks, even months, to complete. I am very pleased with our progress to date in working with our customers to ensure we can serve as a reliable, long-term supplier of these strategic materials.
I see REEs playing an increasingly important role in the future for both civilian and militarily applications. I can't imagine that the U.S. military, and those that govern it, intend to allow other nations to completely control pricing the REE market, which had pretty much been the case for far too long, and Molycorp holds rights to one of the largest proven reserves on lands they have had success with and plan to continue to mine there for the foreseeable future.
Below are some of the company's stated initiatives:
Our company is engaged in several historic initiatives:
1. Modernizing and expanding our rare earth mine, mill, and rare earth oxide manufacturing facility at Mountain Pass. This initiative, known as Project Phoenix, consists of two expansion phases.
Phase 1 of this project is scheduled to be mechanically complete in mid-2012. By the end of 2012, we expect to be producing at an annual rate of 19,050 metric tons of high-purity rare earth oxides.
Phase 2 of our expansion project is scheduled to be completed in 2013, which will provide us with the capacity to manufacture up to 40,000 metric tons per year of high-purity rare earth oxides.
2. Deploying the world's most efficient "mine-to-magnets" integrated manufacturing supply chain. Currently, Molycorp is manufacturing rare earth products across four of the five manufacturing steps in the mine-to-magnets supply chain. Learn more here.
3. Developing new and innovative technologies that use rare earths. Our team of scientists, chemists, engineers, and technologists have working intensely to find new applications and technologies that use rare earths or are improved with rare earth materials. One such breakthrough technology, which we have recently commercialized, uses rare earths to filter out contaminants from water in an extraordinarily efficient and effective manner. Learn more here.
4. Developing technologies that allow for the efficient recycling of rare earth materials. The Molycorp team is working to develop technologies and processes that can allow for the economic recovery and recycling of rare earths from end-use products. Learn more here.
The company recently reported record YOY quarterly revenue growth and with solid Q4 numbers, I believe the market will once again begin to appreciate the company's true value and the share price should make its way back into the $50s again, before too long. Just wait until production really picks up for this young and rapidly growing company with a solid handle on products essential to the future of technological advancements in retail products, and perhaps more significantly, military applications.
As shares of Molycorp are currently trading roughly 63% below their 52-week highs and 25% above its 52-week lows, buying the stock in increments on substantial dips and unwarranted pullbacks should heavily reward MCP holders in late 2012 to early 2013 and I will continue to look for opportunities to add to my position at these low levels.
Disclosure: I am long MCP.