Molycorp (MCP): Morgan Stanley Sees $140/share Valuation

Molycorp (NYSE:MCP) is getting blessed by two tier-1 firms this morning:

– J.P. Morgan is upgrading MCP to Overweight from Neutral with a $65 price target (prev. $36).

– Morgan Stanley is reassuming MCP with an Overweight and $63 price target (41% upside) noting they see Bull Case value of $140 per share; it is based on REO prices 90% of spot and suggests a 6:1 risk/reward skew — the most attractive in firm’s coverage universe.

Both of these moves come upon completion of the recent secondary (13.5mm shares sold at $50) and convertible preferred (for $180mm) offerings.

Some details:

– J.P Morgan notes the increase in their price target is to reflect the company’s decision to double its capacity to 40k tonnes starting in 2014, which should enable MCP to sell a greater amount of material, at higher prices, earlier on. Additionally, their expectation for higher medium-term rare earth prices is also pushing their target higher.

(click to enlarge)

Rare earth prices continue to move higher. Rare earth prices have continued to move higher over the past several months and recently took another step up after a pause during the Chinese New Year holiday. JPM thinks this is largely due to two factors. The first is that consumers still see an undersupplied market and are willing to pay even higher prices to guarantee supply. The second is that they believe the Chinese government’s increasing efforts to crack down on illegal mining and exports is reducing supply that had probably been close to 20k tonnes in previous years compared to an export quota of 30k tonnes in 2010.

– Morgan Stanley: Well Positioned in Tight REO Market; Overweight

1. Chinese supply to remain tight. MSCO believes China will continue to restrict exports of REO. They expect 2011 fullyear quotas to be down ~20% yoy (base case). A successful crackdown on illegal exports could cause supply outside of China to fall by as much as 40% yoy. While their conservative price deck is in line with consensus, they think risks to pricing are strongly skewed to the upside as shrinking supply meets rising demand, benefitting from use in electronics and energy efficiency.

2. Post-IPO execution has increased MSCO’s confidence in de-risking. Molycorp has delivered on key milestones including mining permits, financing, and commercial agreements, increasing their confidence that the stock warrants a lower discount rate than investors typically assign to pre-production mining companies.

3. Downstream integration will improve exposure to high-end markets and could add $14/share. Molycorp is pursuing JVs to gain access to intellectual property needed to produce alloys/magnets. MSCO assigns a high likelihood to successful downstream execution, the value of which may be overlooked by the market.

Changes to model. MSCO’s 2011e EPS is $0.14 (previously, they expected a $0.19 loss) due to new company guidance for 33% higher volumes and 100% higher pricing. Their price target was $27. It is now $63 based on higher REO prices and doubling of production plans. MCP is trading at 0.34x their DCF (vs. 0.56x on average since the IPO) and 3.6x 2013 P/E at spot prices.

Notablecalls: The $140 Bull Case target from Morgan Stanley is what gets me going. The JPM upgrade works OK as a trigger but the MSCO call is where the real juice is.

I think many short side operators have been leaning on the space following the secondary induced squeeze (many tried to game it ahead and got killed) & will be looking to cover. After all, you have two of the most influential firms blessing MCP this morning. Short interest stands at 20-25%.

If MCP gets going here it could hit $50 level as soon as today.

The tape is dreck this morning but this is MCP, right? Right?

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