REAL CLIENT MANAGED PORTFOLIOS MEMORANDUM
TO:
FROM:
SUBJECT:
DATE:
Real Client Managed Portfolio Spring 2012 Class
Honglu Liu, Rui (Cindy) Deng, Tianbai Wang, Han Yang
Molycorp, Inc. Investment Recommendation
April 12th, 2012
RECOMMENDATION:
Industry Overview
Rare earth is a critical material which consist 15 lanthanides, plus scandium and yttrium. Rare earths are
moderately abundant in the earth’s crust, some even more abundant than copper, lead, and gold. Rare earth
elements are not concentrated enough to make them easily exploitable economically.
Rare earth can be used in many applications including clean energy technologies, high-tech uses, defense
applications, and advanced water treatment technology.
China owns more than 50% of the rare earth reserves in the world and produce about 97% of world rare earth in
2010. The total production in China is approximately 130,000 tons in 2010. The US does not produce rare earth
and 93% of rare earth is imported from China. Since 2007, China has tightened its rare earth export by reducing
the export quota for both economic and environmental reasons. The export quota has reduced from 600,000
tons/year in 2007 to 300,000 tons/year in 2011. The export quota is expected to remain at current level. In
addition, the regulation has been placed to reduce the illegal exporting.
On the demand side, world demand for rare earth elements is estimated at 136,000 tons per year. The demand is
projected to rise to 185,000 tons annually by 2015. China’s output by 2015 is estimated between 130,000 and
140,000 tons and China’s demand would rise to 111,000 tons. It means that the non-China annual output needs to
be between 45,000 and 70,000 tons in order to meet the global demand. There is a potential rare earth shortfall.
Company Overview
Molycorp, Inc. (MCP) is the only rare earth oxide (REO) producer in the Western hemisphere with experience in
producing rare earth products for more than 59 years. It owns and operates the world’s largest, most fully
developed rare earth mine and oxide manufacturing facility outside of China, located in Mountain Pass, California.
In addition to the Mountain Pass Rare Earth Facility in California, MCP owns Molycorp Silmet and Molycorp
Tolleson. Molycorp Silmet produces high-purity rare earth oxides and metals at its facilities in Sillamae, Estonia.
Molycorp Tolleson produces high-purity rare earth metals and alloys in Tolleson, Arizona. The company
implements the “Mine-to-Magnets” Strategy. Such vertical integration strategy ensures MCP can produce high
quality rare earth materials in all five stages of the rare earth value chain. MCP is currently engaged in Project
Phoenix, which is scheduled to be completed by the end of 2012. The purpose of this project is to modernize and
expand the rare earth mine, mill, and rare earth oxide manufacturing facility at Mountain Pass.
Financial Analysis
Since it is hard for use to find the competitors of MCP, we focus on analyzing the ratios, margins and multiplies
on the company itself. After calculating ROA and ROE, we figure out that the profitability of MCP is keep
increasing; as well we the gross margin, EBIT and NI margins that all grow from negative to positive in recent 3
years. These facts show the firm is performing better and better now. By using its current P/E ratio, 25, we get
8.25 as Graham’s growth rate for 5 to 7 years. The EBIT/TA is 25.94% and EBIT/EV is 6.02% for current year.
Recommendation
We recommend that we purchase 200 shares of MCP at market price. We think the market price is
attractive with great up-side potential.