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Molycorp shares were off over 20% yesterday, after JPMorgan cut its estimates for the company. Morgan Stanley published a note yesterday saying the sell-off was hasty and it recommended buying the weakness.Now, Dahlman Rose has come out to say that Molycorp, owner of the world’s largest rare-earth deposit outside China, has substantial earnings power to support higher share price. They argue the recent sell-off created a buying opportunity:
“We believe that several factors have recently pushed rare earth prices lower including: destocking by traders, slower economic growth, and some substitution. While the speed of the decrease in rare earth pricing has been dramatic, prices remain 65% above our long-term forecast. While the steep fall in pricing has been painful, we believe that it sets the stage for a more healthy long-term demand environment for rare earth elements.
While Molycorp produces a basket of rare earth prices, it appears that the shares are currently pricing in a 75% decline for cerium and lanthanum, which make up more than half of the forecasted revenue the company should generate when production commences. Conversely, the current share price points toward a 33% decrease from our long-term price forecast. Therefore, in our opinion, the shares should find significant downside support, if management is able to execute upon its plan of completing production by mid-year 2012 and producing at capacity in 2013.”
The firm did warn of certain risks to Molycorp which include delays to projects like Mountain Press that are still in pre-production, and the company may not be able to enter joint ventures to develop oxides or magnets.
It also points out risks to rare earth investment in general. If China were to remove all export restrictions, prices could plummet; if prices trend higher, companies may opt to substitute rare earths for other materials, and if government’s choose to build rare earth inventories then mining could be subsidized and put pressure on prices.
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