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Molycorp (MCP)

Molycorp (MCP). Han Yang, Tianbai Wang, Honglu Liu, and Rui (Cindy) Deng April 12, 2012. Intro - What is rare earth?. Rare earth elements consisted 17 chemical elements – fifteen lanthanides, plus scandium and yttrium. Source: http://ilookchina.net/tag/rare-earth-minerals/.

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Molycorp (MCP)

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  1. Molycorp (MCP) Han Yang, Tianbai Wang, Honglu Liu, and Rui (Cindy) Deng April 12, 2012

  2. Intro - What is rare earth? • Rare earth elements consisted 17 chemical elements – fifteen lanthanides, plus scandium and yttrium Source: http://ilookchina.net/tag/rare-earth-minerals/

  3. Intro - What is rare earth • Rare earths are moderately abundant in the earth’s crust, some even more abundant than copper, lead, and gold • REEs are not concentrated enough to make them easily exploitable economically

  4. Uses and applications • Rare earths are critical inputs in many existing and emerging applications including:  • Clean energy technologies • hybrid and electric vehicles and wind power turbines  • High-tech uses • fiber optics, lasers and hard disk drives • Defense applications • guidance and control systems and global positioning systems  • Advanced water treatment technology • industrial, military and outdoor recreation applications

  5. Supply & Production • China owns more than 50% of the rare earth reserves in the world and produce about 97% of 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

  6. Export control in China • China has tightened its exported by reducing the export quota for both economic and environmental reasons • The export quota has reduced from 60,000 tons/ year in 2007 to 30,000 tons/year in 2011 • The export quota is expected to remain at current level • Regulation increased to reduce the illegal exporting

  7. China’sRole in Rare Earth Supply Source: Economists

  8. Rare earth demand • World demand for rare earth elements is estimated at 136,000 tons per year • World demand is projected to rise to 185,000 tons annually by 2015 • China’s output by 2015 is estimated between 130,000-140,000 tons and China’s demand would rise to 111,000 tons. • Non-China annual output would need to be between 45,000 to 70,000 tons to meet global demand. • There is potential shortfall.

  9. Company Overview • Molycorp, Inc. is the only rare earth oxide (REO) producer in the Western hemisphere. • 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. • It has been producing rare earth products for more than 59 years.

  10. Company Overview • Global demand for rare earth elements (REEs) is projected to steadily increase due to • Continuing growth in existing applications • Increased innovation and development of new end uses

  11. Company Overview • Ownership Source: Bloomberg

  12. Company Overview • Three operating facilities

  13. Company Overview Data Source: MCP Website

  14. Company Overview • Project Phoenix (two expansion phases) • Modernizing and expanding the rare earth mine, mill, and rare earth oxide manufacturing facility at Mountain Pass

  15. Company Overview Data Source: MCP Website

  16. “Mine-to-Magnets” Strategy Data Source: MCP Website Vertical integration strategy Ensure MCP can produce high quality rare earth materials in all five stages of the rare earth value chain

  17. “Mine-to-Magnets” Strategy

  18. Financial Analysis

  19. Financial Analysis

  20. Financial Analysis • Current P/E Ratio: 25.00 • Graham : g = 8.25 • GreenBlatt : EBIT/Tangible Assets = 25.94% EBIT/EV = 6.02% • PEG Ratio : 0.79

  21. Valuation: Methods Valuation P/E Multiple DCF Model

  22. P/E Multiple: Comparable Companies Same Business Similar Business RIO US Domestic Molycorp MLM BHP LYC International AVL ARU

  23. P/E Multiple: Comparable Companies International + Same Business Lynas Corporation Ltd. (Yahoo: LYC.AX) Avalon Rare Metal Inc. (Yahoo: AVL.TO) Arafura Resources Ltd. (Yahoo: ARU.AX)

  24. P/E Multiple: Equivalent P/E Example: Lynas is an Australian Company. US Market P/E Based on S&P 500: 16.3 Equivalent P/E = Original P/E x 1 AUS Market P/E Based on S&P/AUX 200: 13.4 2 Data Source: 1 Market Data Center, Wall Street Journal 2 Share Market Report, Reserve Bank of Australia

  25. P/E Multiple: Comparable Companies International + Same Business Negative EPS Lynas Coporation Ltd. (Yahoo: LYC.AX) Avalon Rare Metal Inc. (Yahoo: AVL.TO) Arafura Resources Ltd. (Yahoo: ARU.AX)

  26. P/E Multiple: Comparable Companies US Domestic + Similar Business P/E (ttm) BHP Billiton Ltd. (NYSE: BHP) 12.54 Rio Tinto plc (NYSE: RIO) 17.62 Martin Marietta Materials Inc. (NYSE: MLM) 48.99 Average 26.4 Molycorp EPS $ 1.27 $ 33.5 Valuation: Price Per Share Current Market Price (Apr 11, 2012) $ 31.68 Data Source: Yahoo! Finance

  27. DCF Model: Framework Price Per Share $ 30 DCF Model Mkt. $ 31.68 Discount Rate = 15.6% Financial Projection 11.6% $ 79.16 X WACC + 400bp = 15.6% ROE $ 31.68 Data Source: Yahoo! Finance $ 23.15 52 week range

  28. DCF Model: CAPEX Projection Historical and Projected CAPEX, 2008-2022 (Dollar Amount in Millions) Internal Financing By the end of FY 2011: Cash & Cash Equiv. = $ 419 mil. Additional $ 213 mil. Needed. Data Source: Annual Reports and Students Analysis

  29. DCF Model: Revenue Projection Historical and Projected Revenue, 2008-2022 (Dollar Amount in Millions) Data Source: Annual Reports and Students Analysis

  30. Disclosure • Han personally owns 110 shares of MCP. And he will not change the position in next 12 months.

  31. DCF Model: Sensitivity Analysis Revenue = P X Q Production 2011 : 5,000 mt (Real) By 2012 Q3: 20,000 mt (Capacity) By 2012 Year-End: 40,000 mt (Capacity)

  32. DCF Model: Sensitivity Analysis

  33. DCF Model: Sensitivity Analysis

  34. DCF Model: Sensitivity Analysis

  35. DCF Model: Sensitivity Analysis

  36. Recommendation Buy 200 Shares At Market Price Cost = 200 x 30 = $ 6,000 2% of Our Portfolio

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