20121216-高盛-Unearthing_potential_value_but_costs_need_clarity__Initiate_at_Neutral_37页_686kb

Molycorp, Inc. (MCP) Summary

Core Content

Molycorp, Inc. is a vertically integrated, US-based rare earths producer that is expected to gain market share as global demand for rare earths shifts away from China. The company is initiating coverage with a Neutral rating and a $11 price target, implying a 9% upside over the next 12 months. The stock has historically correlated closely with commodity rare earths pricing, but the firm sees potential value in its growing focus on higher-value downstream products, which are expected to account for 65% of earnings in 2013E.

Investment View

• Rating: Neutral
• Price Target: $11 (12-month)
• Upside: 9%
• Key Catalysts:
  • Operational progress at Mountain Pass
  • Production cost improvements
  • Demand visibility and new offtake agreements

Core Drivers of Growth

• Market Position: As the sole US-based rare earths supplier, Molycorp is well positioned to gain share from Chinese producers.
• Phase I Expansion: Expected to be operational by 4Q12, with annual production of 19,050mt.
• Downstream Strategy: Focus on higher-value products such as rare earth alloys and magnets, which have more stable pricing and higher margins.
• Demand Exposure: Robust demand for magnets (NdPr) and contracts for lanthanum (La) provide near-term stability.

Risks to the Investment Case

• Execution Risk: Uncertainty around the capacity ramp at Mountain Pass.
• Cost Uncertainty: Current production costs are higher than Chinese producers ($25–30 per kg vs. $12–15 per kg).
• Pricing Volatility: Rare earths prices are highly volatile due to Chinese export quotas and policy changes.
• SEC Investigation: A pending SEC investigation into the accuracy of public disclosures could affect investor confidence.
• Management Uncertainty: Lack of clarity around management decisions and strategy.

Valuation

• 12-Month Target: $11
• Valuation Methodology:
  • DCF-based value: $10 (85% weight)
  • M&A value: $15 (15% weight)
• EV/EBITDA multiple: 12X for 2014E

Financial Highlights

Industry Context

Rare earths are essential for a wide range of industries, including:

• Catalysts (La, Ce, Pr, Nd, Y)
• Glass and Ceramics (La, Ce, Pr, Nd, Y, Er)
• Polishing (La, Ce, Pr)
• Metallurgy (La, Ce, Pr, Nd, Y)
• Magnets (Pr, Nd, Sm, Gd, Tb, Dy, Ho, Ib)
• Phosphors (La, Ce, Eu, Gd, Tb, U)

China dominates both production and demand, accounting for 86% of global REO production and 68% of global REO demand in 2012E. The firm also notes that 80% of China's consumption is driven by multinational firms.

Key Financial Model Insights

• Gross Margin: Expected to improve from 13.9% in 2013E to 30.6% in 2014E.
• EBITDA Margin: Projected to increase from 19.8% in 2013E to 20.1% in 2014E.
• EBIT: Expected to rise from $100.2mn in 2013E to $158.8mn in 2014E.
• Pretax Profits: Projected to increase from $16.7mn in 2013E to $74.7mn in 2014E.
• Leverage: Expected to rise from 2.1X in 2013E to 2.2X in 2014E.

Strategic Positioning

• Downstream Focus: The company's strategy to move from commodity REO to downstream products is expected to reduce exposure to volatile pricing.
• Key Products:
  • Lanthanum (La): 34% of capacity, supported by offtake agreements.
  • NdPr: 50% of production, with strong demand for magnets.
  • Cerium (Ce): 49% of capacity, with potential for market share gains.
• Phase II: Expected to increase capacity to 40,000mt annually by late 2013, but oversupply risk is a concern for certain elements like cerium.

Summary of Key Risks

• SEC Investigation: A major near-term risk with no clear timeline for resolution.
• Cost Curve Uncertainty: The company's cost structure is currently higher than Chinese producers.
• Execution Risk: Uncertainty around the successful ramp-up of production at Mountain Pass.
• Pricing Volatility: Continued fluctuations in rare earths prices due to Chinese policy and supply dynamics.
• Management Clarity: The firm emphasizes the need for clear management direction.

Analyst Contributors

• Brian Lee, CFA: (917) 343-3110 | brian.k.lee@gs.com
• Thomas Daniels, CFA: (212) 902-7494 | thomas.daniels@gs.com
• Britt Boril: (801) 741-5748 | britt.boril@gs.com

Conclusion

Molycorp is positioned to benefit from the global shift in rare earths demand away from China, and its vertical integration offers a hedge against commodity price swings. However, the firm's Neutral rating reflects concerns about execution risk, cost uncertainty, and the ongoing SEC investigation. The company's downstream strategy and strategic partnerships are seen as key strengths, but oversupply risks in certain segments, such as cerium, may limit upside potential.