It was just on April 13 that we noted how rare earths had become the new crack and meth for Wall Street and Main Street investors and speculators. Actually, all investors at this point are speculators in rare earths… This morning we saw a timely research call from Gabelli & Co. as it downgraded the king of rare earths… Gabelli downgraded Molycorp, Inc. (NYSE: MCP) to “Hold” from “Buy” in a research note this morning. This call will also offer more and more insight into Market Vectors Rare Earth/Strategic Metals ETF (NYSE: REMX), Rare Element Resources Ltd. (AMEX: REE), and Avalon Rare Metals Inc. (AMEX: AVL).
After the analyst day and mine visit, Gabelli noted, “Although MCP is speculative, we continue to believe that Molycorp is the best vehicle to gain exposure to the rare earth industry. However, due to speculation by momentum investors we feel that the stock does not provide enough margin of safety at the current price and are changing our recommendation for MCP to a Hold.”
At the analyst day, Molycorp’s CEO stressed that there are few viable acquisition targets outside of China in the downstream metals/alloys/magnets areas, and while it tracks an extensive list of junior miners it has yet to come across anything of interest and noted that most deposits contain ore grades that are too low for MCP to consider acquiring.
Japan may have caused a temporary reduction in demand, but its shipments to Japan were not delayed and stockpiling is believed to be the case. Gabelli also noted that the CEO highlighted that in his discussions with Baotou, the largest global rare earth producer, and high-ranking Chinese officials in February, that the Chinese want new rare earth mines to come online so that they can consume production internally.
Another group of issues noted were quotas, higher taxes, stricter environmental laws, and an “increased focus on closing illegal mines should contribute to lower production coming out of China at higher production costs, thus highlighting the need for alternative suppliers.”
Gabelli also relays that the construction at Mountain Pass facility remains either on or ahead of schedule on various facilities. The company has even moved phase-2 for a $280 million Department of Energy loan application and is in the process of negotiating a term sheet. If Molycorp completes the Sumitomo financing deal, it has a $100 million in remaining capital it needs to raise to become fully funded, and the DOE loan will cover this and then some.
More positives are in this call, yet it is still a downgrade, but highlights were on Molycorp having low production costs (one-half production cost of China), a lower use of reagents and Xsorbx water treatment. Gabelli also assumed that Phase 1 production will start in the second-half of 2012 and Phase-2 production will start in the second half 2013.
Molycorp was given some long-term financial outlook and projections as well out to 2015….
- 2011: $104 million in revenues; net income of $30 million
- 2012: $1.109 billion in revenues; net income of $593 million
- 2013: $1.578 billion in revenues; net income of $832 million
- 2014: $2.572 billion in revenues; net income of $1.295 billion
- 2015: $2.397 billion in revenues; net income of $1.175 billion
Gabelli does not exactly issue a single price target in many of its research calls. It has what is a ‘private market value’ and that was put at $73 for 2011, $82 for 2012, and $98 for 2013. On our April 14 call published at the closing bell, Molycorp shares closed at $73.37. The lowest close since then was $68.24 and the highest close was $75.18. The problem in identifying a bubble is that you never know just how strong the balloon is that keeps it from popping. Picking an exact top or an exact bottom has become a game and even the best long-term investors out there will tell you that you just have to catch that sweet 60% of any major move and you get rich.
No one ever really knows ahead of time what the exact top or bottom price of any stock or any market happens to be. When we saw this downgrade in our email this morning, we would have just assumed that Molycorp would be trading lower. It turns out that the valuations don’t matter, at least so far this morning, as Molycorp shares are actually trading up 2.3% at $73.48 against a post-IPO range of $12.10 to $76.22. The current market cap is now right around $6 billion. That means you are paying about 2.5-times a blended 2014 to 2015 revenue multiple today. On the other hand, this is also trading at only about 10-times a projected 2012 earnings estimate if Gabelli is correct.
Market Vectors Rare Earth/Strategic Metals ETF (NYSE: REMX) is down 0.5% at $27.65 against a 52-week range (less than 6 moths actually) of $19.25 to $28.91.
Rare Element Resources Ltd. (AMEX: REE) is up 3.2% at $14.52 against a 52-week range of $1.15 to $17.92.
Avalon Rare Metals Inc. (AMEX: AVL) is up 0.5% at $9.07 against a 52-week range of $1.09 to $10.11.
JON C. OGG
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