Molycorp gets downgrade from J.P. Morgan ― and their analysts also tip lower REE prices
Molycorp has just received a triple whammy from J.P. Morgan ― and it’s partly about the miner being left with unsold cerium. The New York-based analyst team has lowered its earnings-per-share forecast for Molycorp, withdrawn its price target, and reduced its net present value from $5.37 a share to $3. And adds this: “While the equity raise should buy MCP some added time, we think the company’s liquidity position will continue to see significant risks from earnings headwinds, high interest payments and still significant capex levels”.
All those and J. P. Morgan adds another whammy, saying the cuts to Molycorp figures reflect its lower rare earth price forecasts. Once Lynas and MCP ramp to their respective Phase 1 capacities of 11,000 tonnes for Lynas (expected by June 2014) and 23,000 tonnes for Molycorp, J.P. Morgan thinks all rare earth prices will once again move lower as significant over-supply develops in a market that is likely smaller than it was in 2011 (total demand 120,000 tonnes) due to the demand erosion from the price spike that year.
Export cerium and lanthanum prices now sit at about $6.70/kg. Contrast that with July 2011 when those prices were $150.55/kg for cerium and $140.05/kg for lanthanum. The analysts say cerium could yet fall lower, possibly even below their $4/kg long-term forecast.
However, and by contrast, neodymium and praseodymium prices have moved off their June/July lows ($59.50/kg for neodymium and $74.50/kg), although there has been a pull-back over the past month. Current prices are $77.50/kg for Nd and $119.50/kg for Pr. But there’s a “however”: “We don’t think the move off the bottom of Nd and Pr prices represent any significant shifts in supply/demand fundamentals for the rare earth market, and we continue to believe all rare earth prices will move meaningfully lower.”
Back to Molycorp in particular, the Morgan analysts say they believe MCP will be unable to sell a significant proportion of its cerium production. They say the company also faces lower production output in conjunction with high operating costs at Mountain Pass.
Then there is what J.P. Morgan calls “the earnings pickle”. They see little opportunity for Molycorp to ease its earnings pressures. “If MCP is able to ramp production through 2014, we believe the added supply will push rare earth prices significantly lower and thus pressure MCP’s earnings,” the report says. “Alternatively, if MCP sees further delays to its production ramp, rare earth prices might not fall as much, but then MCP’s earnings would be pressured by much higher operating costs.”
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Molycorp probably won’t have to raise more money, but the report says that possibility cannot be ruled out. Its September 30 cash position and the recent equity raising should give it total funds around $408 million. The team assumes Molycorp will start generating positive cash flow in the March, 2014, quarter. MCP has raised a total $3.39 billion since and including its July 2010 IPO but now has an enterprise value of $1.96 billion, this situation being the result of capex overruns at Mountain Pass and the acquisition of Neo Minerals. J.P. Morgan says these two factors have forced the company to raise increasingly expensive capital over the past several years.
Then there’s the problem with cerium. The high prices back in 2011 caused the glass polishing industry (one of the main consumers of cerium) to switch to a substitute non-rare earth product. The report says that, while the glass polishers could ultimately switch back to cerium if its price falls further, J. P. Morgan does not expect cerium prices to increase materially as stockpiles of the RE element grow. Cerium now accounts for around 50% of the output of LREE mines around the world. While Molycorp continues to develop its SorbX product ― used in wastewater facilities ― as an alternative use for its cerium, Morgan does not see this product making much difference to the bottom line in the near term.
The analysts expect MCP to sell 500 tonnes of cerium in fiscal 2014, 1,000 tonnes in 2015 and 6,000 tonnes on a long term basis.
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