Molycorp Second Look: Great Promise, No Hurry (MCP)

Molycorp, Inc. (NYSE: MCP) has only been public three days.  The company’s stock debut was met with much of the same “sell the IPO” reaction by investors who secured shares.  This is of course not a biotech stock as it is a “rare earth” materials and metals stock.  The difference between this IPO and just about every other IPO in the metals and mining sector is that this is a story that goes out to 2012 and beyond before significant operational changes that could reward investors.  It has the same time frame as many biotech stocks which come public.  Still, there may be some huge promise here if you are a long-term investor and if things continue to operate normally in the world.

Molycorp is effectively the only rare earth oxide producer in the Western Hemisphere.  The problem in the “today versus yesterday” scenario is that it generated only $7.1 million of revenue from sales of products manufactured from stockpiled feedstocks in 2009.  That figure for sales was $2.9 million during the first quarter of 2010.  The company stated right up front that the 2009 and current level of revenue is not representative of its planned level of operations after it restarts mining operations.

The “rare earths” are required to make many of the key components in green energy technologies, high tech applications and defense systems.  Companies using these materials today are almost entirely dependent upon China for the materials.  This REO and REE sector applies to components and processes of polished glass, water treatment, “green” vehicles, lasers, alloys, magnets, optics, and on and on.

Here is what the company says in its description:
“…estimate total proven reserves of 88.0 million pounds of REO contained in 0.480 million tons of ore, with an average ore grade of 9.38%, and probable reserves of 2.12 billion pounds of REO contained in 13.108 million tons of ore, with an average ore grade of 8.20%, in each case using a cut-off grade of 5.0%, at our Mountain Pass mine. Based on these estimated reserves and an expected annual production rate of 19,050 mt of REO, our expected mine life is in excess of 30 years. According to Roskill, global REO production in 2008 was about 119,220 mt, of which only approximately 4,220 mt originated from outside of China, with Molycorp producing approximately 1,700 mt from its stockpiles and Russian producers producing approximately 2,500 mt. This contrasts with total demand outside of China in 2008 of approximately 50,000 mt, according to Roskill, with rapid growth expected by industry analysts. Upon completion of our modernization and expansion efforts, we will have the ability to produce 19,050 mt of REO per year to supply this non-Chinese demand and expect to have the capability to increase production to approximately 40,000 mt of REO per year, if warranted by market conditions.”

Also noted:
” At our Mountain Pass facility, we have the ability to mine, crush, mill and separate rare earth ore to produce individual REEs. We hold a 30-year mine plan permit and an associated environmental impact report, both of which were issued in 2004. Since our acquisition of the Mountain Pass facility, we have been producing and selling REOs from stockpiled feedstocks to significantly improve our solvent extraction technologies and capabilities. We are now achieving greater than 98% recovery in our solvent extraction units at commercial scale for lanthanum, didymium and a heavy rare earth concentrate composed of samarium, europium, gadolinium, dysprosium and terbium, or SEG concentrate, which we believe is one of the highest recovery rates in the world. We have also developed the expertise to produce the following REEs in many usable forms: bastnasite concentrate; cerium; lanthanum; neodymium; praseodymium; europium; samarium; gadolinium; dysprosium; and terbium. When used to describe the current recovery rate for our solvent extraction units, the term “commercial scale” means that the solvent extraction units are operating at such a production rate that the scale-up factor required to achieve the desired production rate is less than 10 times the current production rate.”

As noted, this story sounds a lot like an emerging biotech if you forget about the sector and just look at its business plan.

It is preparing to recommence mining operations in late 2010, which is expected to coincide with a process modernization to efficiently produce at a rate of 19,050 metric tonnes of REO per year BY THE END OF 2012.

The company’s prospectus cited a study noting that government and industry officials said it can take from 7 years to 15 years to bring a property fully online, largely due to the time it takes to comply with multiple state and federal regulations.  It goes on to note that its Mountain Pass facility is NOT an early stage rare earth project and should have a significant time line advantage as it has a well-defined ore body, an existing open pit with over 50 years of production history, an existing mine and reclamation plan, proven reserves, substantial permitting, and all the necessary technology to successfully process and separate the rare earth elements at a commercial-scale.

What the company is a rebirth story rather than a true “biotech parallel” in its operations.   Most biotech companies are new.  The last mining campaign at the Mountain Pass, California facility was in 2002 and the mine had been in continuous operation for over 50 years before this was purchased from Chevron.  In some cases this NYSE-listed company is also like an OTC-BB-listed metals and mining company.  That does not mean that management is questionable nor is it meant to be a red flag.  It is just that the company is nowhere near being fully operational now.  It is a story that is about two-years out.  It has much demand for its products and has the possibility of long-term rising demand from the public sector and the government sector.

Here is how it projects demand via an image of the rare earth materials from 2005 out to 2015:

The company’s CEO, Mark Smith, gave a very promising interview this morning to CNBC discussing the past issues of the rare earth materials sector in the U.S.  He notes specifically that rare earth materials are not exactly rare, but they are just not in high enough concentrations to produce in a cost-effective manner.

There the company CEO gave a full production schedule of “by 2012” and notes that global demand is far higher over any concerns of the past.

The company sold 28,125,000 shares at $14.00.  This was under the $15.00 to $17.00 range that had been protected.  The Full Prospectus shows most of the projected prices and the associated risks along with a speculative company like this.

Molycorp has much promise despite its IPO being a busted deal.  The $14.00 price was the high price last Thursday when it came public.  Shares also hit a low of $12.10 on Thursday and $12.18 on Friday, while the trading range so far today is $12.60 to $13.09.

There is a lot of promise here despite the “busted IPO” conditions.  The issue is that there is little hurry to jump in.  Going backwards in time as far as you have until the time its operational ‘expected’ plan is fully running would take you back to the start of the recession.  Little hurry may in fact be no hurry.

There is very little competition as it stands today.  The only other commercial-size operation coming online outside of China is in Australia.  Molycorp has a lot of promise and the returns could be great, particularly if it can secure more capacity and production capabilities and proven reserves.  There is just no hurry here.  In a year you’ll still have more than a year before you get to hear about its ability to deliver goods to a group of industries with insatiable demands.

You can join our free daily email distribution list to hear more about dividend trends, analyst upgrades and downgrades, top day trader and active trader alerts, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG