Molycorp: Attractive for 2012, With Some Risks at Stake (MCP, AVL, REMX)

Molycorp, Inc. (NYSE: MCP) is a stock that we started to really pan when the stock went up into the $60s and even into the $70s. It was a bubble that felt like the Internet Stock Bubble of 1999 into 2000. There are big risks, and we think that the analyst community is way too optimistic here. Still, in all fairness, it looks like the stock being under $30.00 makes for an interesting position for 2012.

The company’s stock has risen from lows again because China is slowing some exports of the rare earths metals needed by technology, medical and high-tech companies. The reason is due to environmental issues. Avalon Rare Metals Inc. (NYSE: AVL) is the far more speculative outfit, with no real history. And then there is the diversified but still speculative ETF called the Market Vectors Rare Earth/Strategic Metals ETF (NYSE: REMX).

Molycorp is not exactly a cheap stock. If you are basing the operations of today and the trailing 12-month period as the key, then it is even very expensive. What the company currently has is a near-monopoly in U.S. domestic assets for rare earth metals and minerals already in development. At $28.70, the 52-week trading range is $25.60 to $79.16. If any serious news were to come out that helps rare earths again or any positive income acquisitions were made, then we can easily see Molycorp rising on a wave of momentum into the $40s. As long as no bad news comes out, its downside in a stable equity market might only be in the low-$20s or mid-$20s.

No warning will be well-received, and it is very possible that Molycorp could settle lower if the rare earths hopes do not live up to par. Still, it is now fully funded and it effectively has its production capacity close to fully ordered.

Our biggest concern is that Thomson Reuters still has a consensus price target of $64.50. Our take is that this is far too high. We think it could easily run into the $40s, and if the news is sustainable then perhaps a tad higher … but nowhere close to $64.50. That high of a consensus price target might even be the result of some figures not being included or updated. This gives more room for analysts to downgrade the stock and/or to significantly lower expectations.

This trades at 19-times expected 2011 earnings, but only 9-times expected 2012 estimates. Dahlman Rose has said that rare earth prices will come down in 2012, so even if you take $2.50 EPS as a lower number, then Molycorp still only trades at 11.5-times expected 2012 earnings. It still trades at about 3-times book value, but we would expect that to improve a bit in the next year or two.

JON C. OGG