han yang, tianbai wang, honglu liu, and rui (cindy) deng april 12, 2012 molycorp (mcp)
TRANSCRIPT
Han Yang, Tianbai Wang, Honglu Liu, and Rui (Cindy) Deng
April 12, 2012
Rare earth elements consisted 17 chemical elements – fifteen lanthanides, plus scandium and yttrium
Source: http://ilookchina.net/tag/rare-earth-minerals/
Rare earths are moderately abundant in the earth’s crust, some even more abundant than copper, lead, and gold
REEs are not concentrated enough to make them easily exploitable economically
Rare earths are critical inputs in many existing and emerging applications including: • Clean energy technologies
hybrid and electric vehicles and wind power turbines • High-tech uses
fiber optics, lasers and hard disk drives• Defense applications
guidance and control systems and global positioning systems
• Advanced water treatment technologyindustrial, military and outdoor recreation applications
China owns more than 50% of the rare earth reserves in the world and produce about 97% of rare earth in 2010.
The total production in china is approximately 130,000 tons in 2010
The US does not produce rare earth and 93% of rare earth is imported from China
China has tightened its exported by reducing the export quota for both economic and environmental reasons
The export quota has reduced from 60,000 tons/ year in 2007 to 30,000 tons/year in 2011
The export quota is expected to remain at current level
Regulation increased to reduce the illegal exporting
Source: Economists
World demand for rare earth elements is estimated at 136,000 tons per year
World demand is projected to rise to 185,000 tons annually by 2015
China’s output by 2015 is estimated between 130,000-140,000 tons and China’s demand would rise to 111,000 tons.
Non-China annual output would need to be between 45,000 to 70,000 tons to meet global demand.
There is potential shortfall.
Molycorp, Inc. is the only rare earth oxide (REO) producer in the Western hemisphere.
It owns and operates the world’s largest, most fully developed rare earth mine and oxide manufacturing facility outside of China, located in Mountain Pass, California.
It has been producing rare earth products for more than 59 years.
Global demand for rare earth elements (REEs) is projected to steadily increase due to Continuing growth in existing applications Increased innovation and development of new
end uses
Holder Name Amount held % OutstandingRESOURCE CAPITAL FUNDS 13,843,863 16.5MOLIBDENOS Y METALES S A 12,500,000 14.9MORGAN STANLEY INVEST MGMT 8,647,566 10.3PEGASUS PARTNERS IV LP 7,970,073 9.5Total 42,961,502 51.2
• Ownership
Source: Bloomberg
• Three operating facilities
Data Source: MCP Website
• Project Phoenix (two expansion phases) Modernizing and expanding the rare earth
mine, mill, and rare earth oxide manufacturing facility at Mountain Pass
Data Source: MCP Website
Vertical integration strategy Ensure MCP can produce high quality rare
earth materials in all five stages of the rare earth value chain
Data Source: MCP Website
2009 2010 2011
Profitability
ROA% -29.27% -10.59% 9.43%
ROE% -38.31% -11.37% 14.00%
Margin Analysis
Gross Margin% -207.13% -6.92% 55.17%
SG&A Margin% 178.84% 135.15% 16.23%
EBIT Margin% -402.85% -145.57% 38.52%
NI Margin% -403.03% -144.42% 29.82%
2009 2010 2011
Asset TurnoverTotal Asset Turnover 0.07 0.07 0.32 Inventory Turnover 0.83 1.87 3.54
A/R Turnover 5.81 2.14 5.61
LiquidityTotal Debt/Total Equity 0.00% 0.64% 0.07%
Cash Ratio 0.73 15.28 2.34
Quick Ratio 0.86 16.07 2.74
Current Ratio 1.94 17.06 3.58
Current P/E Ratio: 25.00 Graham : g = 8.25
GreenBlatt : EBIT/Tangible Assets = 25.94% EBIT/EV = 6.02% PEG Ratio : 0.79
Valuation: Methods
Valuation
P/E Multiple DCF Model
P/E Multiple: Comparable Companies
US Domestic
International
Same Business Similar Business
Molycorp
LYC
AVL ARU
RIO
BHP MLM
P/E Multiple: Comparable Companies
Lynas Corporation Ltd. (Yahoo: LYC.AX)
Avalon Rare Metal Inc. (Yahoo: AVL.TO)
Arafura Resources Ltd. (Yahoo: ARU.AX)
International + Same Business
P/E Multiple: Equivalent P/E
Market Data Center, Wall Street Journal
Equivalent P/E = Original P/E x US Market P/E
AUS Market P/E
Example: Lynas is an Australian Company.
Based onS&P/AUX 200: 13.4
1
2
1
Based on S&P 500: 16.3
Share Market Report, Reserve Bank of Australia2
Data Source:
P/E Multiple: Comparable Companies
Lynas Coporation Ltd. (Yahoo: LYC.AX)
Avalon Rare Metal Inc. (Yahoo: AVL.TO)
Arafura Resources Ltd. (Yahoo: ARU.AX)
International + Same Business
NegativeEPS
P/E Multiple: Comparable Companies
Rio Tinto plc (NYSE: RIO)
BHP Billiton Ltd. (NYSE: BHP)
Martin Marietta Materials Inc. (NYSE: MLM)
US Domestic + Similar Business
12.54
17.62
48.99
P/E (ttm)
Average
$ 33.5
Molycorp EPS $ 1.27
26.4
Valuation: Price Per Share
Current Market Price (Apr 11, 2012)
Data Source: Yahoo! Finance
$ 31.68
DCF Model: Framework
DCF Model
Discount Rate = 15.6% Financial Projection
WACC + 400bp = 15.6% ROE
$ 79.16
$ 23.15
$ 31.68
52 week range
X
$ 30PricePer Share
Data Source: Yahoo! Finance
$ 31.68Mkt.
11.6%
Historical and Projected CAPEX, 2008-2022 (Dollar Amount in Millions)
DCF Model: CAPEX Projection
Data Source: Annual Reports and Students Analysis
Internal Financing
By the end of FY 2011: Cash & Cash Equiv. = $ 419 mil.Additional $ 213 mil. Needed.
Historical and Projected Revenue, 2008-2022 (Dollar Amount in Millions)
DCF Model: Revenue Projection
Data Source: Annual Reports and Students Analysis
Han personally owns 110 shares of MCP. And he will not change the position in next 12 months.
DCF Model: Sensitivity Analysis
Revenue = P X Q
By 2012 Q3: 20,000 mt (Capacity)
By 2012 Year-End: 40,000 mt (Capacity)
2011 : 5,000 mt (Real)
Production
DCF Model: Sensitivity Analysis
DCF Model: Sensitivity Analysis
DCF Model: Sensitivity Analysis
DCF Model: Sensitivity Analysis
Recommendation
Buy 200 Shares At Market Price
Cost = 200 x 30 = $ 6,000
2% of Our Portfolio