Special Report: Rare Earth Elements

Rare Earths Special Report

Molycorp and the Rare Earth Industry

Question #1: Have you heard of rare earth elements and know what they are used for?
Question #2: Did you know any of this a year ago?
The answer to the first question is likely to be yes, considering the high level of publicity and discussion surrounding the rare industry in the past year, or less. Despite they are strategic and economic importance, however, many people had never heard of these elements just a few months ago.
In the past, rare earth prices didn’t apparently warrant the attention of the US and other developed nations which allowed China to take a dominating role in the industry. Today, China accounts for as much as 97% of the world’s output of these critical periods.
The prices of rare earth oxides have risen dramatically, however, in the past year or so. Manufacturers have driven prices as they accelerate production of hybrid vehicles, wind turbines, and the most high tech applications of which many sophisticated investors are unaware of the link to rare earth elements. Simply put, producers need the rare earth ore and are willing to pay for it on the world markets.
One of the great demands for rare earths has coming from manufacturers of hybrid cars. Toyota and Honda, in order to develop new fuel efficient vehicles, require a large amount of rare earths. Prices for Toyota’s Prius have climbed recently in direct response to soaring prices for neodymium, which each vehicle produced uses at least 1kg of neodymium. These new hybrid models are driving sales for these manufacturers and one can be sure that they will continue to seek secure supplies for several years to come.
The recent commodity correction caused the rare earth sector to decline, but what we are really seeing is a transition of players from weak holders on margin, who jumped into the market seeking short-term gains, to strong holders with cash who are buying for the long haul. Many of the rare earth stocks, including Molycorp (MCP), are down more than 30% from their highs. This is quite normal for highly speculative mining investments.

Molycorp, Inc. is a Colorado-based producer of rare earth minerals. The Company produces rare earth products, including oxides, metals, alloys and magnets for a variety of applications including clean energy technologies, technology, and defense applications. Molycorp is rated one of the five best-performing initial public offerings of the past year in terms of share-price increase. The shares were offered at $14 and recently traded at $59.36, for a return of more than 317%.  In the past 52 weeks, shares of Molycorp have traded between a low of $12.10 and a high of $79.16. In the last five trading sessions, the 50-day moving average has climbed 1.63%, while the 200-day the moving average has risen 2.8%.

On May 10, 2011 Molycorp reported a loss of $0.05 per share on sales of $26.3 million, missing EPS estimates by $0.13 and missing revenue estimates by $15.4 million. Since the report, shares have slipped more than 10%, which some have seen as a great buying opportunity. After all, this is a company that is still in its infancy stage of production; no one should have expected any different.
Shares of Molycorp have always reflected a speculative increase in future demand and prices for rare earth metals. The company is currently valued at $4.83 billion despite a forecast of $380 million in revenue for 2011. In the past few months  Molycorp’s projected earnings for 2011 have gone from $-.08 to $1.81 per share, mostly due to an extreme rise in the price of rare earth metals in that time period. During that period, Lanthanum climbed over 200%, Cerium Oxide over 300%, and Neodymium over 100%.

One factor limiting Molycorp’s ability to capitalize on rising rare earth prices is the fact that WR Grace has already bought Molycorp’s rare earth supply through 2012 and a price ceiling was included in the deal. WR Grace is a producer and seller of a variety of specialty materials. Over the long run, however, this should prove to be a good move as the company continues to ramp up production and wire other assets in the industry.
In our view, the many critical industrial uses for rare earth elements could make them considerably more valuable than gold and silver.
There is likely to be some volatility ahead for Molycorp and other companies in the rare earth sector, but this has always been a long-term play and not just a short-term speculative grab. As long as iPads, iPhones, hybrid cars, wind energy, and guided missiles continue to be important factors in our daily lives, then Molycorp should offer a good long term opportunity.

Source: Yahoo Finance