In Defense of Molycorp and Rare Earths

Molycorp Inc. (NYSE: MCP) is nothing short of an odd stock in an even more odd industry.  Most investors and most in the public might not even understand what rare earth elements and oxides are, but chances are high that at least some of the products they use daily rely upon a steady flow of rare earth materials.  Molycorp is the king of this ‘rare earths’ sector because it is based in the United States, it is up and running operationally, and it has the largest reserves of any known outfit in America that can be mined at a reasonable price.  And for investors, perhaps the most important issue is that the company is a profitable business.

Gabelli is out with a note that defends the company despite a slight slide after earnings and despite a weak equity market weighing on this position.  What is ironic is that the official rating at Gabelli is a mere “Hold.”  Where the “Hold” rating gets very interesting is that Gabelli maintains something called a private market value.  This is not an official target, but under the right circumstances and in a go-private scenario Gabelli’s private market value is $45.00 per share if you go out to 2013.

Gabelli noted, “During the first quarter, Molycorp achieved several milestones, including the start-up of its new Mill, Flotation Separator, and Paste Tailings Facility at Mountain Pass. In addition, the company announced a 36% increase in its proven and probable rare earth reserves at Mountain Pass. Results were seasonally low due to the impact of the Chinese New Year. Although MCP remains speculative, we believe that the long-term prospects for the company remain attractive and that Molycorp is the best vehicle to gain exposure to the rare earth industry.”

This is where a “hold” rating sounds a lot more like a “buy” rating from a research report.  Just looking at the consensus targets from Thomson Reuters generates forward earnings multiples of about 19-times for 2012 and less than 8-times expected earnings in 2013. The consensus annual revenue targets from analysts are $548.22 million in 2012 and $938.38 million in 2013.  Keep in mind that this is a very thinly followed stock when it comes to analysts but it is very active and is technically a cult stock as far as the investment community is concerned with a $2.4 billion market cap.

Market Vectors Rare Earth/Strategic Metals ETF (AMEX: REMX) has Molycorp ranked as the fourth highest weighing in the ETF that tracks this ‘rare earths’ sector, although it is perhaps the most direct and most visible component of the ETF.

Molycorp is indicated down marginally from its $24.93 close and the 52-week trading range is $23.05 to $66.62. The consensus price target from Thomson Reuters as a price target is $40.40.

JON C. OGG