Wednesday, April 27, 2011

Molycorp (NYSE:MCP): Morgan Stanley sees $240/share Bull Case

Morgan Stanley is out positive on Molycorp (NYSE:MCP) raising their Bull case to $240/share (prev. $140) & reiterating their Overweight rating on the rare earths miner.

Ok, seems I got your attention. The actual (base case) target is raised to $90 but who cares, we're talking about MCP here. Morgan Stanley notes they have a constructive view of rare earth oxides and of Molycorp’s prospects. REO fundamentals look favorable based on high-growth end markets and tight availability. They believe news flow regarding future Chinese rare earth policies, spot REO prices and advancement of MCP’s Mountain Pass project will be the key determinants of MCP share price until the start of production in mid-2012. MCP’s Mountain Pass mine is one of only two new REO projects (Mt. Weld in Australia being the other) outside China expected to come on line by 2012.

Spot prices continue to respond to tightening supply. Last year, Chinese export quotas declined ~40% from 2009. The basket price for MCP REO output rose 450% in 2H10, following the quota announcement. Prices are up another ~124% since the 1H11 quota announcement in late December. The rise in REO prices has been uneven though. Export cerium and lanthanum prices are ~600% higher than domestic Chinese prices, compared to ~120% higher for neodymium and praseodymium. Morgan Stanley notes they expect 2011 full-year quotas to be down ~20% yoy (base case), and a successful crackdown on illegal exports could drop supply outside China by as much as 40% yoy. While their conservative price deck is in line with consensus, they believe risks to pricing are still skewed to the upside as tightening supply meets rising demand.

Raising total 2011-13 EPS estimates by 67%, driven by a 52% increase in base case REO price to $47/kg. Morgan Stanley has raised their 2011 earnings estimate to $1.55 from $0.14 previously, 2012e to $3.56 from $2.43, and 2013e to $7.00 from $4.69 to reflect their revised REO price deck and higher near-term volumes due to Silmet acquisition. For now, MCP is selling stockpiled REO and real earnings will start in 2012. Their average 2012 realized price at $47/kg is ~68% below average spot price at $146/kg. They have used a constant price profile over life of mine in their earnings estimates.

Key MCP advantages: As REO prices normalize long term, the MCP investment case will be supported by: (i) Higher profit margins. With lower costs and higher recoveries than peers, MCP will be a profit margin leader. (ii) Lower technical risk. MCP’s Mountain Pass mine has 50+ years of operating history. Developing processing capability may be a hurdle for early stage competitor projects. (iii) Downstream focus. Recent acquisitions indicate management’s focus on downstream strategy, which improve exposure to high growth end markets and add stability to earnings.

What’s next: The next catalyst is China’s 2H11 export quota announcement, likely at mid-year. Morgnan Stanley anticipates 2H11 quotas will be flat sequentially. They expect China’s clampdown on illegal mining and exports to continue, keeping supply tight, as demand grows at an 8% CAGR driven by high-tech and clean energy applications.


Notablecalls: The analysts continue chasing rare earth prices as they move higher. MCP is a prime trading vehicle and the good folks at Morgan Stanley have presented us a reason to buy it today.

Can the $240 Bull Case create enough buy interest to push the stock to a new high? Sure, why not!

That would be $76+

I would note that MCP has been a stealthy mover of late, exploding higher 20-30 mins after open. Let's see if that happens again today.

2 comments:

notablecalls said...

Note there's a Gabelli downgrade out this morning. You can probably use it to build a position in the name.

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