Shares of rare earth player MolyCorp are up nicely thanks to a big, bullish report from JPMorgan.The gist: the stock has traded pretty flat, despite a major surge in the price of the underlying rare earth commodities:
Rare earth prices moving higher again… After treading sideways for most of January and early February, rare earth prices have taken a significant step higher, with cerium, lanthanum, and neodymium all up around 45% since mid February. We think this increase is due to several factors. One is that consumers still see an undersupplied market and are willing to pay even higher prices to guarantee supply. A second is that we believe theChinese government’s increasing efforts to crack down on illegal mining is reducing a once significant supply source. Finally, despite a sequential (1H11 over 2H10) increase in Chinese rare earth export quotas, we think some producers in China may be holding back on exporting material to keep prices elevated and opt for pricing over volumes.
…but MCP’s stock price has lagged. MCP’s stock has largely traded sideways since its secondary offering in mid February despite the strong surge in rare earth prices since then. We think this flat performance in the stock has been driven by some investors being unaware of the recent increase and by a belief from others that these prices are not sustainable in the long-term due to the risk that high prices will cause too much new supply and/or substitution from other technologies. However, we are already assuming a 66% reduction from current spot rare earth prices in our model used to derive our target price. In fact, if we assumed current rare earth prices just stayed flat, MCP’s NPV would be $215/share and our 2014 EPS would be $38.