JPMorgan has upgraded shares of rare earth specialist Molycorp, and raised its price target from $36 to $65.
Analyst Michael F. Gambardella cites the company’s fundraising and decision to double its capacity, along with higher prices.
The nut: “We are increasing our PT to $65 from $36. Our new price target is based on an NPV of $65, which assumes pricing at current spot levels for the next several years, gradually decreasing from the current basket price of $67/lb to a long-term average price of $18/lb for MCP’s basket starting in 2019 (a long-term price that we believe will generate attractive enough returns to allow new projects to eventually come on line). The NPV also assumes the company’s planned expansion to 40k tonnes starting in 2014, the costs outlined in MCP’s engineering study, and a 12.5% discount rate.”
Because Molycorp has one mine site, JPM is confident it can basically model out the life of the company.
Basically the company has a few gravy years coming out, and then a steady stream of predictable profits.
But even beyond the company, the pricing of rare earths looks similar. A few really big years, and then a price collapse once more mines come online.
That rare earth prices will collapse in the coming years shouldn’t be too much of a surprise.
Remember, rare earths aren’t all that rare. Thanks to environmental restrictions and lack of investment (coupled with China’s export restriction threats) prices have shot up. But once the investment has been made, there’s plenty out there to mine.