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Shares of Molycorp (MCP -7.5%) fall off as investors try to read between the lines of China's...

Shares of Molycorp (MCP -7.5%) fall off as investors try to read between the lines of China's rare earth export quotas for 2012. JPMorgan takes a slightly negative tone in maintaining a Neutral rating on MCP, saying it sees "additional pressure" on rare earth prices off a small Y/Y increase in quota levels.
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Comments (3)
  • asles
    , contributor
    Comments (115) | Send Message
     
    What happens when stated quotes and future price forecasts confuse valuations.

     

    China has announced full-year 2012 limits for rare earth elements would likely be unchanged. In 2011 China exported only 49% of its stated quota. Some have claimed price erosion, or rather the effort to maintain prices, the Chinese stated environmental concerns as a reason to halt production and therefore reduce export.
    The Chinese said that a new system would exclude exporting from the quota mining companies that don’t meet its environmental standards.

     

    It looks like China’s 2012 exports are following the same direction 2011 49% of the stated quota at current prices.

     

    MCP’s basket of metals sale prices are down 20% - 30% from its highs, prices on average are up 55% - 60% from January 2011 and up 300%- 400% from January 2010. MCP stock is up 78% from its July 28, 2010 IPO (14.00) but down 68% from the 5/3/11 of 77.54 high.

     

    LYC AU is an Australian rare element miner who has an equity market cap of about 1.92 billion AUD. The scope of Lynas's projects will process total approximately 11 million metric tons after Phase 1 starts up. It has not received an Operating License from Malaysia to process the rare earth because of environmental issues. It appears that LYC AU will have its first year of full production starting 1st quarter 2013, if it gets its license within a reasonable time.

     

    MCP now has an equity market cap of around $2.13 billion; MCP will process and sell almost 5 million Metric tons Y/E 2011 and be a profitable in its first year of partial operation. MCP have indicated a 3rd quarter 2012 completion of its Phase 1 with 8-10 million metric tons processed in 2012 and a full capacity of 19 million Metric tons for the year 2013. They will complete Phase 2 by mid-2013and have the capability of processing a total 40 million metric tons in the future. MCP if fully licensed by both California and U.S. Federal Agencies.

     

    Why is the valuation of Lynas (LYC AU) 90% of Molycorp?

     

    MCP is now trading at about 3.3 times 2013 cash flow numbers (Using published analyst forecasts). Some analysts temper future valuations and multiples by using a NPV and selling and prices 50% lower than present selling prices moving back to 2010 price levels. They state new supply and substitution as the main reasons for the lower prices.

     

    My main problem with this type of analysis is that it differs from how they value other miners which are valued by either a multiple of free cash flow or a PE ratio.

     

    There are two upside wild cards. Firstly, the U.S., Germany and Japan want to establish stable supply and stockpiles of these strategic elements. Secondly, China has stated that they want to clean up the environmental nightmare that their rare earth mining has created. Part of the processing of these elements leaves a residue of radioactive materials, which Molycorp has addressed.

     

    If China does reduce production to truly address their environmental problems could they become a net importer?
    These elements are useful and presently plentiful, but difficult to safely process and refine.

     

    I am long MCP from its IPO, MCP Preferred, MCP Calls, UCU CN, ARU AU, DSM CN, and sold LYC AU last month.
    And I will continue to buy and sell all!
    AHS
    28 Dec 2011, 11:36 AM Reply Like
  • Michael Bryant
    , contributor
    Comments (5585) | Send Message
     
    "JPMorgan...sees "additional pressure" on rare earth prices off a small Y/Y increase in quota levels. "

     

    Isn't that a good thing for Molycorp (MCP)? If quotas increase, rare earth prices rise. MCP mines rare earths.
    29 Dec 2011, 08:54 AM Reply Like
  • asles
    , contributor
    Comments (115) | Send Message
     
    China quota level are at best an good estimate. How they will react is anyone guess. I just wonder when we will see all this new supply coming from and will it really effect pricing.

     

    I am long MCP from its IPO, MCP Preferred, MCP Calls, UCU CN, ARU AU, DSM CN, and Short REE
    19 Mar 2012, 11:34 AM Reply Like
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