JP Morgan Chase, the same bank that brought you the “surprise $2 billion loss by one of its trading groups” trying to pass it off to the investment public as “the result of a sloppy but well-intentioned strategy to manage financial risk”, appears not to have learned much from the 2008 financial crisis. That this error came just three years after similar mismanagement of risk, exposure and quite simply ‘analysis’ almost put the financial industry to sleep ‘with the fishes’ suggests that, investors, should take financial analysts’ calls and ratings with several grains of salt. Indeed, a salt shaker would have been handy when taking in reports about Molycorp this morning, many of which commented negatively on Molycorp 2012 second quarter announcement.
Shares of Molycorp (NYSE: MCP) suffered on the day after the second quarter results announcement, dropping over 5% to hit just over USD$ 20 after a year of prices ranging from a low of USD$19.11 to a high of USD$66.62. Admittedly, Molycorp’s earnings were below expectations and the CEO, Mark Smith, said that the company may have to raise more capital. JP Morgan and other analysts have chosen to punish Molycorp for being honest, failing to recognize the key, and positive, indicator, which was that revenue has increased to over USD$ 100 million. The lower profits were due to investments, both those that have taken place in the recent past, such as the acquisition of Molycorp Canada, formerly known as Neo Materials, last spring. Molycorp also has ambitious growth plans for the future; announcing that it needs capital for this should not be seen as a problem. In capitalism, it is not incongruent to be seeking additional capital and Molycorp appears to have chosen the debt instrument method rather than issuing more shares; some would call it a conservative strategy, but it was not conservatism did not lead Wall Street to the edge of the precipice not so many months ago. As a final note on the reliability of Wall Street target price predictions, consider that JP Morgan suggested that Molycorp would hit over USD$ 100/share while others were dumping it.
Surely, the price of rare earths, as just about the price of everything else due to reasons well beyond the mining sector itself, has suffered in 2012. The economy has not recovered amid continuing uncertainty in Europe, and Chinese rare earth export restrictions have not made a big impression on the market – or should that be not yet made an impression? The fact remains that rare earths are seeing new applications every day. Hybrid and electric vehicles are a market reality and faster charging systems will make them a serious market contender; as a fan of the internal combustion engine, I have to agree with those who predict the end of petroleum powered transportation within the next fifty years. Consumer electronics, batteries, electric motors, nanotechnology and GPS systems all need rare earths and the market for such items is growing. Moreover, the US defense industry requires rare earths to make missile guidance systems, avionics, space exploration equipment and a long list of other sophisticated hardware.
Molycorp is well positioned to take advantage of this ‘big picture’, which will be materializing in the near future. Molycorp has big plans; it wants to vastly increase its share of the rare earth market and Chinese restrictions and export quotas, as well as potential Chinese stockpiling of rare earths, have made the production of ‘lanthanides’, along with some strictly non rare earths (as far as the atomic number is concerned, such as yttrium, scandium and rhenium) a matter of national security in the United States.
Rare earths are not going away and Chinese regulations are only helping Molycorp and other rare earth producers and explorers. Through its Neo Material Technologies purchase, Molycorp has also boosted its downstream market potential, acquiring magnet technologies such as the patented Magnequench bonded neo powder (neodymium, iron and boron alloy) in demand for many applications using bonded neo magnets used in many products. Wall Street appears to have missed that fact that Molycorp can extract rare earths and also make its own special magnets destined for cars, mobile phones, wind turbines, radars, and far beyond. Let us also consider the possibility that some of mining’s giants from BHP Billiton to Rio Tinto may be interested in Molycorp, given the importance of rare earths