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Invest In Rare Earth Minerals With MolyCorp Inc.

220px-Allanite-Quartz-39466A long term investment in Molycorp to diversify your stock portfolio might be a way to diversify your holdings in commodities. Molycorp is an American company that was founded in 2008. The company has seen its stock price decline in early January from close to $6.00 USD (United States Dollar) a share to $4.69 USD as of close of business on May 01, 2014.

In the last year the stock share price of the company has seen a high of $8.06 USD to a low of $4.69 USD. The price has declined $0.24 USD this week alone for a decline of -4.67%. The stock share price decline for this year has been -15.48%. This has been mostly due to rising exports from China and other sources from around the world as well as rising production costs.                                                                                                                                                                                                                     The savvy investor will wait until there is a major market correction later this year, most likely this summer. When the stock is at a low point, most likely below $2.00 USD a share that will be the time to make an investment. It is hard to pinpoint the exact time to make a purchase  stock price so an investor would wish to follow it closely when it is near the bottom.

The Colorado based company is the only rare earth oxide (REO) producer in the Western Hemisphere. Molycorp owns the largest most fully developed rare earth operation outside of China. The company’s major mining operations take place at Mountain Pass in California. The company is an integrated producer of rare earth products. This would include oxides, metals, alloys and magnets.

The many applications for these minerals include multiple high technology purposes. Among them would be fiber optics, lasers and hard disk drives. There are also used in the manufacturing of clean energy technologies that can be found in hybrid and electric vehicles and wind power turbines. In addition, there are multiple defense applications such as guidance and control systems and global positioning devices. Their use in advanced water treatment technology has uses in industrial, military and outdoor recreation applications. The SorbX process in water management for example instituted by Molycorp is highly effective in removing harmful pollutants and other unwanted constituents from drinking supplies.

Molycorp operates through 4 segments which include Resources, Chemicals and Oxides, Magnetic Materials and Alloys and Rare Metals. The Resource sector is the production carried out in the Mountain Pass facilities in California as well as the previously mentioned SorbX water treatment process.

Mining Operations At Mountain Pass

Mining Operations At Mountain Pass

The Chemicals and Oxides engages in the production of REO at Molycorp Silmet. It separates heavy rare earth oxides and other custom engineered materials.

The Magnetic Materials and Alloys segment produces Neo Powders through wholly owned manufacturing facilities in China and Thailand. It also manufacturers magnet alloys and other specialty alloy products. ‘

The Rare Metals segment produces refines and reclaims as well as markets different rare earth metals and their compounds.

Future demand for these rare earth minerals (REM) can be expected to increase given their multiple need in so many manufacturing processes.

World Rare Earth Oxides Production

World Rare Earth Oxides Production

It must be pointed out that over 90% of the present world supply of REM and REO are both from China. There are on going efforts by existing companies in several nations around the globe to diversify their supply. This will ensure that Molycorp will continue to have customers outside the United States.

Japan for example, is the largest importer of REM in the world. The government there has already decided to use Molycorp for part of their industrial needs since the cut off of rare earths from China that occurred in 2010. This sanction by China was the result of a diplomatic disagreement between the two nations. Although it only lasted 2 months it created havoc in Japanese high technology companies. It created the result that industrial and business leaders in concert with the government would look to diversify their supply chain of REM. Japanese businesses looked to companies in the United States and Australia to safeguard future inventory.

It is more difficult for companies that engage in mining and extraction activities in the West including the United States. This is a result of stricter environmental control and procedures as well as much higher labor and equipment costs. It forces existing companies outside China and India to streamline their production and to become much more efficient.

Mountain Pass Site From The Air

Mountain Pass Site From The Air

China has made repeated efforts in the past few years to restrict exports of REM and REO more to maintain higher domestic supplies and thereby lower prices, rather than as a economic and diplomatic weapon, against other nations and companies.

The Chinese claim they are attempting to control pollution and environmental degradation. This explanation cannot be totally discounted. The United States has some impressive reserves of rare earths but fails to develop the resource further because of the impact the industry has on the environment. It must be noted that the United States previously dominated the industry from the 1960’s through the 1980’s until situation costs became too prohibitive.

Mining Rare Earths In China

Mining Rare Earths In China

The government of China has attempted to force a consolidation of the industry to enhance efficiency and allow greater government control. The plunge in revenues and profits from the preferred lead player there has complicated efforts there at integration.

Examples of past efforts of Chinese government control were seen when 31 private processors of REM where ordered to shut down for 3 months just a few years ago. Earlier this year the nation’s REM producers were told to consolidate themselves into 6 groups with the government chosen company Inner Mongolia Baotou Steel Rare Earth Group. A total of 9 REM companies were acquired in the Inner Mongolia region. The government promoted company was given a 51% share of these companies at no cost.

Despite of these aforementioned efforts Inner Mongolia Baotou Steel Rare Earth Group reported a sales decline of 53% in the first quarter of 2014. The decline lead to a 72% plunge in profits from a year ago bringing a major shock to the industry not only in China but worldwide. The company attempted to blame its poor performance on the ruling made by the World Trade Organization (WTO). The ruling held that China’s export quotas violate global trade regulations.

Rare Earth Mineral

Rare Earth Mineral

The ruling of the WTO will put a downward pressure on prices. It is estimated that China contains anywhere from ¼ to ½ of world deposits of REM. China’s present export limits are still above quotas set for the last few years but it must be noted that they are still well below exports of Chinese REM in 2009. This WTO ruling explains the decline in Molycorp profitability at this time and the resulting diminution of its stock share price.

China has announced that it will appeal the WTO ruling but in reality export controls over the long term are not sustainable if the industry is to survive in China given the present profitability parameters. Chinese attempts to keep domestic REM prices lower to help their manufacturers maintain competitive advantage is not something that makes sense either if China is interested in avoiding further international sanction.

Another difficulty for the company is the overabundance of just 2 of the metals which are among the least valuable among the 17 different rare earth elements. These would be cerium and lanthanum. The company is getting closer to the break even point which will force greater efficiency and cost controlling measures. An example of this was the addition of the chlor-alkalai plant the company has set up to lower the costs of production.

Illegal mining in China, India, and elsewhere continues to be a problem as well.

Rare Earth Mining In The United States Is In California

Rare Earth Mining In The United States Is In California

The earnings growth for Molycorp (NYSE:MCP) last year was +48.72%. Earnings growth this year stands at +75.68%. The earnings forecast for the next five years are projected to be +15%. Revenue growth as a result of higher costs and lower prices was only +4.82% last year. Market capitalization is $1.2 billion USD. The average volume of trading stands at 4,354,779 over the last few months.

Financials for the company are as follows. Annual revenue for last year was $554.4M USD. Annual profit for last year stood at -$374.4M USD. This lead to net a profit margin of -66.37% for the year. The next reporting date is May 08, 2014.

Despite the present negative business environment for Molycorp I am recommending a small percentage of an investor’s overall portfolio to be made in the company. The REM industry despite the present glut in supply will have increasing demand in the long term. In the short term, which is where the focus might be for many investors any interruption in supply or threatened interruption will cause a major spike in world prices. Not only for the commodity itself but in the share prices of the companies involved in the industry.

It is important to remember that shares in the company reached close to $75.00 USD between 2011 and 2012. This was all due to supply concerns and the resulting speculation. One only has to wait for the next international incident to see concerns raised for a number of commodities including rare earths. If the crisis involves China the price for REM and REO originating elsewhere will be in great demand. The stock price for Molycorp would skyrocket.                                                                                                                                                                                                                                                                                                                                                                                                                       Once the stock share price goes below $2.00 USD a share, a timely investment would allow an investor to take advantage of a future upswing in the price of rare earths. It will also allow one to be in the position to take advantage of a possible corporate takeover, which is increasingly likely given the present move towards consolidation in the mining sector.

Another important point to make it that unlike China, the United States and a number of other nations have made little or no attempt to stockpile REM and REO. It is true that only a small percentage of the total used in the United States is employed in the defense industries but an interruption in supplies would have a major impact on American manufacturing especially in high technology.

 

2 Comments

  1. Jeff, what is the rational for buying at $4.70 vs waiting for $2 or $0.50, how are you valuing the stock? What is replacement cost / normalized ROIC / run-rate EV / EBITDA? I think a conversation about valuation would help frame the debate.

    1. I am making a fundamental analysis of this company’s prospects at this time not a technical analysis in this case.

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