Published on Tuesday June 21 2011 (AEST)
J.P. Morgan is out with a very positive note raising their estimates and price target on the Rare Earths miner. Firm’s new price tag is $105 (prev. $87) to reflect the continued rise in rare earth prices and their belief that MCP can operate significantly below its planned capacity and still realize sharp increases in shareholder value.
In fact, the firm estimates MCP could operate at 50% of capacity and see current spot prices drop 40% and still generate an NPV of $105/share. They think the stock will start to move higher as four misconceptions about MCP and the sector are ultimately dispelled: 1) MCP is struggling to achieve market prices, 2) ramping production from MCP will bring on too much supply post 2014, 3) China will ultimately reverse its production and export tightening measures, and 4) new supply outside of China will chase prices and eventually bring on too much supply.
Raising EPS. JPM is raising their EPS estimates (2012 to $5.93 from $5.25, 2013 to $14.48 from $12.51, and 2014 to $27.01 from $22.45) to reflect the continued increase in rare earth prices. In just the last month, average oxide export prices are up 22% and 195% YTD. In China over the last month, average domestic oxide prices are up 81% and 472% YTD.
- Piper Jaffray is upgrading MCP to Overweight from Neutral with a $73 price target (unch) following the stock’s ~40% correction since early May.
Piper believes the pullback overly discounts the risk that rare earth prices will fall precipitously – which they believe is unlikely to occur over the next 6-12 months. They maintain their $73 price target and view continued restrictive policy actions from China, positive 2Q results, and progress on the funded capital project as potential catalysts for the stock. Less conservative pricing assumptions in our model could present upside north of $100/share.
Recent pullback creates an attractive entry point. MCP remains a highly controversial stock, fueled by the sharp run-up in rare earth pricing over the past year and uncertainty around Chinese policy on quotas and tariffs. Piper fully expects rare earth prices to fall in the future as additional supply comes online – they have incorporated an average price reduction of 60% by 2013 in their model – but looking out over the next 6-12 months, they see little change to industry fundamentals. At current valuations, they believe the market is pricing in 1) more severe price cuts in the 70%+ range AND 2) no additional volume from Phase II of the company’s project plan which will double production capacity in 2014. Piper believes these assumptions are overly pessimistic in at least the near term.
Near-term catalysts present potential for upside. In the next several weeks, China will unveil its quota policy for 2H11. They expect the rare earth quota level for 2H11 to be set consistent with 1H11 levels, which will continue to strain global supply. Piper believes the release of the quota policy will once again revive fears of China’s restrictive policies on rare earths, which will support near-term pricing. Additionally, they believe MCP is poised to report strong 2Q results with production levels showing a healthy q/q increase and pricing expectations on Lanthanum have been set more appropriately following the 1Q confusion.