This Molycorp Acquisition Makes Sense (MCP, REMX)

Molycorp, Inc. (NYSE: MCP) is one of the more odd merger reaction stock cases on the surface.  Usually, acquirers see their shares drop when they make an acquisition.  While they are buying assets and revenues, the acquirer is generally diluting shareholders or is using up a firm’s capital.  When this is a company like Molycorp, making an acquisition is actually the right thing to do. The reaction is powerful enough that the Market Vectors Rare Earth/Strategic Metals ETF (NYSE: REMX) is even being nudged higher with Molycorp.

Molycorp’s Molycorp Minerals, LLC unit has completed the acquisition of a 90.023% controlling stake in AS Silmet, one of only two rare earth processing facilities in Europe.  The newly acquired operations are located in Estonia and employ about 550 workers. The company currently sells to customers in Europe, North and South America, Asia, Russia, and other previous Soviet Union countries.

For $89 million, Molycorp acquired 80% of the outstanding shares of AS Silmet from AS Silmet Grupp.  The group will retain a 9.977% interest going forward.  Molycorp acquired the other 10.023% from Treibacher Industrie AG.

Molycorp is supposed to be the only near-production-scale rare earth materials supplier in the United States.  What this does is gives Molycorp a foothold in Europe, but it also gives it an instant jump into at least some new markets.  The company called it the “first European base of operations.”  Should we assume that there will be more deals in Europe now?  The company also noted that this will effectively double its current rare earth production capacity of about 3,000 tonnes per year to about 6,000 tonnes per year of rare earth oxide.

AS Silmet will immediately begin sourcing rare earth feed stocks for production of its products from Molycorp’s Mountain Pass, California rare earth mine and processing facility.  The company even noted that this will make it the first rare earth oxide and metal producer in Europe that is not dependent on rare earth materials sourced from China.

The main target will be the production of rare earth oxides and metals.  The noted target is didymium metal for rare-earth magnets and these will come from feed stocks supplied by the Mountain Pass facility.  Molycorp also gets to expand its manufacturing capabilities beyond rare earths into the production of the rare metals niobium and tantalum.  Niobium and tantalum are used in electronics, materials manufacture, optics, health care, chemical process equipment, power generation systems, aerospace, superconductive materials, and in other uses.

If this deal was not viewed favorably, then we would not be seeing a gain of this magnitude.  Shares are up 10.8% at $65.66 and shares hit a new all-time high of $66.20 on today’s news.  The market cap is now about $5.4 billion.  Thomson Reuters has estimates of $0.38 EPS in 2011 on almost $151.7 million in revenues, and estimates for 2012 are $2.45 EPS and almost $455 million in revenues.  Few metals companies trade at almost 12-times next year’s expected revenues, but using any form of value metrics used in traditional metals stocks would have resulted in the kiss of death for investors.  Sometimes it is the theme and a secular trend rather than the numbers of just today and tomorrow.

The Market Vectors Rare Earth/Strategic Metals ETF (NYSE: REMX) is also up with Molycorp today.  Its shares are up 2.5% at $27.29 and its shares also hit an all-time high of $27.34 today.

JON C. OGG