Monday morning and the markets have been open for almost 90 minutes. My eyes are on RareMetalStock.com and many rare earth element (REE) companies are showing increases in share price in early morning trading. Molycorp Inc. (NYSE: MCP) shares are trading at USD$ 35.05 and up 3.64%. With a market capitalization of USD$2.93 billion, an article on StreetInsider.com called Molycorp (MCP) Higher on Takeover Speculation,notes that Molycorp shares are trading higher in pre-opening this morning after Bloomberg’s Real M&A column highlighted the stock as an attractive takeover target.
Molycorp’s recent acquisition of Neo Material Technologies Inc. (TSX: NEM) is set to boost Molycorp’s magnet-making capabilities and ultimately creating a global vertically integrated REE company that could protect investors from dramatic price swings stock price Molycorp has seen as a purely commodity-based company. While this acquisition valued at CDN$1.3 billion is being touted as a ‘game changer’ for the REE industry and as transformational for Molycorp, questions also remain about whether the merged company will only serve to reinforce Chin’a dominance of the REE industry. With access to Chinese processing facilities, Neo Material Technologies was indeed an attractive target for Molycorp. And now, with access to Chinese processing facilities under its domain, Molycorp is likely primed as an attractive target for other mining companies such as BHP Billiton Ltd. (NYSE: BHP) or Rio Tinto (NYSE: RTP) two of the world’s largest mining companies.
The title of another article on Bloomberg.com sums it up: Molycorp Seen Too Cheap as Rare Earth Lures Deal Talk: Real M&A. Since acquiring Neo Material Technologies in early March, Molycorp shares have risen 30% and its “gambit to supply Chinese-made magnets to carmakers in Japan is making it one of the mining industry’s most attractive takeover candidates.” Molycorp’s transformation into a magnet maker with Neo Material Technologies’ pedigree gives the company the ability to draw additional profits. In simple terms: magnets sell for more than the raw materials required to make them. Bloomberg data indicates that Molycorp will turn each dollar of sales into 35-cents of net income next year – that’s 40% more than what is anticipated for Inner Mongolia Baotou Steel Rare Earth Hi-Tech Co. (SSE: 600111), China’s biggest producer of rare-earth metals.
As Molycorp boosts its production estimates indicate that its earnings before interest, taxes, depreciation and amortization (EBITDA) will rise of USD$769 million in 2013. That is more than three-times the EBITDA of USD$230 million that analysts are estimating for Molycorp this year. Bloomberg data also suggests that Molycorp stock was cheaper than 9 out of 10 metals and mining companies and one-third less than the industry median. Given this data speculation is rising that BHP Billiton or Rio Tinto will set their mark on Molycorp as an attractive buyout target before earnings surge.
The flip side: Bloomberg data also indicates that Molycorp’s sales will double to USD$1.2 billion in 2013. This is less than 2% of the revenues of BHP Billiton and Rio Tinto are expected to generate next year as both companies have market values of greater than USD$100 billion. Based on these figures other analysts are speculating that though Molycorp is a large player in the REE sector it is too small for BHP Billiton and Rio Tinto to consider buying – team is watching the news wires…
*Prices taken from Yahoo Finance at 11:40 AM EST 2012-04-02