EDITOR: | October 28th, 2013 | 9 Comments

Molycorp gets downgrade from J.P. Morgan ― and their analysts also tip lower REE prices

| October 28, 2013 | 9 Comments
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iqDsbp1CK12AMolycorp 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 The New York-based analyst team has lowered its earnings-per-share forecast for Molycorp, withdrawn its price target, and reduced its net present value from $5.37 a share to $3.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.”

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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Comments

  • Brianna

    You need to mention the differentiation between LREEs and HREEs. Because it appears that this is a LREEs problem.

    October 28, 2013 - 9:09 PM

    • Robin Bromby

      As the report focuses on the problems with cerium (also with mentions of La, Nd and Pr) I thought it would be obvious to anyone with a passing knowledge of REE.

      The differences in market situations between the lights and heavies have been covered exhaustively on this website.

      Anyway, the JPM report discusses only the lights and with passing reference to the medium REE

      October 29, 2013 - 1:47 AM

  • Tim Ainsworth

    LRE v HRE argument is well overdone IMO, particularly with the divergence in forecasts from respective commentators, i.e. Dudley Kingsnorth forecasting Dy demand 800t v 1000t supply 2016, leaving a shortfall of some 100t in Tb for the two commercial heavies.
    More about delivering a balanced suite in the desired combinations to the respective middle supply chains in the most economic state.
    Moly has the lowest basket value of all but one on the TMR index which is indicative of the suites poor balance to market. Their effort to paper (debt) over this basic reality is wearing thin. Note from the last QR no Nd/Pr had been supplied downstream to Neo to date.

    October 29, 2013 - 9:45 AM

  • Aat Oskam

    How things can change….MCP’s 2nd major shareholder (after #1 Molibdenos y Metales SA (MolyMet)) RCF Management LLC: “MolyCorp Looks Like One Of The Greatest Private Equity Deals Ever (March 5, 2011)”
    A bad thing for all those private shareholders who believed in Moly, neither a good sign for those of Lynas, including me…

    October 29, 2013 - 10:49 AM

  • Nick Outram

    Effectively Cerium and Lanthanum are not worth much more than the ore that they are extracted from -i.e. you can think of them as “rubble”. In fact since its probably costing good money to extract these elements they are a drag on profit… BUT! you can’t get to the ‘good stuff’ without mining a huge amount of ore/Ce/La. I don’t think anyone that looked into this thought that Ce and La prices where going to remain over a few 10s of Dollars very long though, those were ‘fools Gold’ prices…

    October 29, 2013 - 5:32 PM

    • Tim Ainsworth

      Mistake to lump La in with Ce, demand dynamics quite different and supply approx 50%, a divergence in pricing will become apparent shortly.

      November 3, 2013 - 5:58 AM

  • Robin Bromby

    By way of a postscript, these are J P Morgan’s forecasts for 2014 prices (all per kg):

    Cerium – $4.88
    Lanthanum – $5.50
    Neodymium – $60.50
    Praseodymium – $67.50
    Samarium – $7.00
    Europium – $800

    October 29, 2013 - 6:51 PM

  • David Mortimer

    Heavy rare earths are what China produce and they are running out so they soon will be a net importer of Heavy REE in the near future which should be good for Heavy rare earth mines outside of China.

    October 29, 2013 - 7:22 PM

  • Robin Bromby

    Just a postscript. Australian brokerage Bell Potter has just put out a note on the last quarterly report from Lynas Corp. (The report is posted on the Australian Securities Exchange for those who want the full details.)

    Bell Potter notes that Lynas has again reported weak quarterly production impacted by ongoing work in the cracking and leaching units of the LAMP. LYC shipped 218 tonnes at an average price of $22.70/kg. The analyst has lowered the forecast for December production to 250 tonnes and now assumes an annual 10,000 tonne rate by the end of June 2014. “In our view, uncertainty around the success of the ongoing work programs creates risk to our forecast production and earnings profile,” the note states. “Moreover, even if operates are capable of producing at the nameplate rate, LYC is likely to deliver sales only if market demand is there to support it.”

    Bell Potter maintained its neutral rating on Lynas “due to poor visibility on both the rare earth price formation process and the potential production and sales volume over the next 12 months”. Lynas finished the quarter with cash of A$101 million and debt of A$450 million.

    November 3, 2013 - 11:46 PM

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