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Molycorp and Lynas

|Includes: iQIYI, Inc (IQ), LYSCF
Much has been written about both Molycorp and Lynas in the rare earths space often comparing the two companies. My overall view is that both must be owned, but trading issues should determine when investors add to either position.
I think Molycorp's valuations are high right now considering the company will not have it's full capacity and new facilities up and running till the end of 2012. I very much respect their achievements with XSORBX. And their plans to process more REO from less ore mined at half the cost of China or Lynas is innovative and a major stock driver. The vertical integration plan is also a big stock driver in the form of big margins. And while Moly is expensive it is very obvious the rare earth "experts" in this field are largely ignoring this huge part of the story.
XSORBX is already providing a clear solution to the potential Cerium overproduction concerns. This product is patented and in commercial use. Moly used it's current 3,000 ton production from stock piles to establish it's commercial use. Considering Molycorps new processing plant (when completed in 2012) would be able to process additional ore sources and use the excess Cerium in their XSORBX market, the growth here is impressive. Note also that both of these stocks should benifit from this new technology and consumption of Cerium.
Molycorps efficiency and cost curve are also major price drivers for the stock. If the savings and ore extraction efficiency are realized by their new processing system, this could be a real home run. These actions would give Moly the best margins and would further boost the credibility of an already impressive management team. These factors would make Molycorp "Best of Breed" and would give them a powerful long term investment thesis. These characteristics would also be very acreative long term to the stock.
Molycorp has an impressive integrated mine to magnets business model as well. This integration expands their margins; makes them a play on the entire China dominated rare earths value chain; And it makes them the best company to address the governments desire to have mineral and manufacturing independence in green technology. This strategic position could be very helpful to Molycorp in the future.
It is also impressive that Molycorp explains that they can achieve these qualities in a fairly straightforward and environmentally sensible manner. And the fact that they reuse their water and have dual power sources is important from a cost AND statewide political basis. These factor help address the ever present California political environment. Mining in the very environmental state of California can be a tough mix. And Sacramento is no stranger to using water and energy in it's political fights. Moylcorp's innovation not only adds to it's bottom line, it serves as a defense towards potential political intrusion.
So that's an impressive list of drivers for a stock. It's a good narrative that the so called experts and "bubble heads" seem to be missing much of it. The concern here is that some of this is still theoretical. It's a lot less theoretical than any junior miner's story, but until the new commercial processing is in full production there is at least some risk that these achievements will be less then promised. This is not a knock on Molycorp, but any experienced investor in miners learns to question these things. My end conclusion is to believe and follow Molycorps company, but to monitor it's progress before adding to any position. As Ronald Reagan use to say "Trust but verify".

Lynas Corp
Lynas Corp's Mount Weld mine will be the first large non-Chinese mine producing. It is a large and rich ore body. The TREO at Mount Weld is over 8% and the initial mine development has proven 13% TREO portions. It has a rich ore body that includes more heavy rare earths than Moly's Mountain Pass. Mount Weld is accessible with a balanced group of Lanthanides. Recently they increased their mine size and there is good reason to believe further increases are possible. Bottom line, mine to mine it is the best proven mine outside of China when you consider size, development, TREO and Lanthanide portfolio.
Furthermore, Lynas' mining and processing techniques are proven in the rare earth business. The Lynas Advanced Materials Plant is progressing and should be in production in the Summer of 2011. It will produce rare earth oxide and should capture fantastic prices. Lynas will be the first cash flow positive stock of the rare earth mining stocks. It's LAMP will be capable of processing ore from other mines as well.
Currently, Lynas is already enjoying important "First Mover" advantages. They have several production contracts and will likely continue to sign additional contracts throughout 2011. They have been aggressive in acquiring a 9+% stake in Northern Urainium and are developing the Kangankunde project as well. They appear to be well on there way to developing a complete portfolio of rare earth products under their Rare Earth Direct brand.
This could allow Lynas to rapidly expand and be a one stop shop in the rare earth market. Their first mover advantage could allow them to buy the best junior projects and to grow much faster than other late arriving hopefuls. With this clear advantage Lynas is certain to be one of the top companies (if not the top company) in the rare earth industry.
Lynas also enjoys minimal risk to over production. Their production will be sold and under long term supply (not price) based contracts long before others can enter the market. This is enormous in mining. And this advantage is amplified by the rapid demand increases in the current market. Proof of this point has already been illustrated by Lynas' average comp price for Mount Weld that is posted on it's website. This information can be an effective tool in developing and updating a base case for Lynas' stock. I'll leave you to your due diligence here, but the current numbers are nothing short of eye popping.
This story may sound somewhat BHP like (one stop shop, dominate player, ect.). And the fact that Olympic Dam has impressive rare earth totals is also interesting. That said Lynas has repeatedly said they wish to be independent and their growth model seems to support this position.
Lynas also has a lengthy story. The planning and development of their company has been a long term approach supported by many of the most experienced people in the rare earths business. These people have been on time and in budget with their project throughout their process. This is a massive project that is only about nine months from scheduled completion. The progress has been consistent and reliable. The plan is proven and yet ambitious. If the project completes as scheduled and on budget (a generally likely result IMO) these guys will be the gold standard in practical application of rare earth knowledge.
The management team already is highly regarded. But completing Mount Weld and the LAMP will be an impressive modern engineering achievement that could pay off with many further benefits into the future.
Lynas also appears to be undervalued relative to it's peers. It trades on the pink sheets and has a Level I ADR. It seems inevitable that the Lynas ADR will graduate to a Level II or III which would allow it to trade on the AMEX or NYSE. This listing has allowed Molycorp to trade at better than ten times book (although at current REE prices book should be much higher). Rare Earth Elements trades at twelve times book in part due to it's listing. And Avalon has rocketed up since it's listing in late December.
I think some of this is based on a stock squeeze. The rare earth story is growing very fast and the stocks and industry is very small. This leads to too many investors looking for too little stock on the exchanges. If Lynas' ADR lists they will be a top story with great reliability. They will be proven with a large market cap. It is very likely that Lynas would see additional interest from several funds that require a listing to invest. And later on when Lynas is cash flow positive there should be further fund investment interest as well.

Investment Strategy
So how do I play this? I think you have to own both and use catalysts and pull backs to determine which to add to and when. For example:
Molycorp's lock up period ends Jan 21. This will pressure the stock for the next few weeks. If a dip materializes it could be a buying opportunity.
Meanwhile Lynas remains on the pink sheets undervalued. Therefore Lynas seems like a good buy right now. Overall, Lynas' catalysts (new production contracts, updates towards project completion, earnings estimates and metal price increases as the rare earth bottleneck persists) all seem more near term and should make 2011 a banner year for Lynas.
Meanwhile I'd watch Molycorp's progress and rotate some money towards Molycorp if Lynas valuations are not supported by metal prices and the catalysts mature. Most likely, these two stocks will continue to go up together. That's fine. In such a case I'd add to each as they pull back.
That's my thoughts. I am not an expert in this field and none of my thoughts should be construed as an investment recommendation. I am merely saying what I as an individual investor will be doing. I only manage my own money and have no desire to tell anyone what to do with their money.
So do due diligence, seek expert advice on your own and feel free to comment or disagree as much as you like. This is a free for all instablog and nothing more. Your comments are welcome.

Disclosure: I am long MCP, OTCPK:LYSCF.