MCP/ Rare earth 09/16/11

TOP down approach:

1. SPY direction: unknown, still dont know if Greece bk is priced in
2. Earn Earth sector:
3. Specific company:

Data:

• "Molycorp projects to be able to produce 5,411mt's of rare earths in quarters 3 and 4 of 2011. In the 1st quarter of 2011 Molycorp sold its rare earths for an average of $37.73/kg, that figure rose 91% to $72.10/kg in the 2nd quarter of 2011."

• the lowest production estimates that Molycorp has given for quarters 3 and 4 (1428mt's and 1468mt's, respectively)
• past revenue: 22, 26 , 100...4Q10,1Q11, 2Q11
• low estimation of production:
• no growth in price in 3Q . Using 72.1/ KG * 1428 mt = 102 mil sales
• 10% price raise in 3Q= 72.1 * 110% * 1.428 = 113 million
  
• 2Q11, earning .52
• Projected 3Q11...0.68 (0.6 to 0.86) 30% growth

• Projected 4Q11...0.75 (0.6 to 1.1) 10% growth from 3Q
• Forward P/E is around 20. No industry/ competitior data avaliable
• Revenue YTY growth is 314%
• 
  

KEY PT:

• is other company looking for alternative to replace rare earth
• China policy= effect price
• Price is the key to the profit.

GOOD:

• High profit margin. 50% last quarter.
• only sideway chop while SPY dumps. Positive divergence
• rising price give profit a big boost.
• On August 15th the CEO exercised an option to acquire 4,200 shares around $59 per share, significantly above current market prices.
• carries about $1 million of goodwill and other intangibles on its balance sheet, but Molycorp’s tangible book value is $815 million, so no yellow flag here. Ratio is considered as low...even compare to FCX

Bad:

• Recently invest in a wind power comapny that will not help expand mineral production. Fishy
• On August 15th the CEO exercised an option to acquire 4,200 shares around $59 per share, significantly above current market prices.

question:

• Need to research who is the main user of rare earth
• Do they have a few big contracts to support their life?