Two Big Brokers Pound the Table On Rare Earth Super Stock Molycorp (MCP)

Rare earth super stock Molycorp (NYSE: MCP) is one of the few stocks higher today after two tier-one brokers issued positive ratings on the company.

Morgan Stanley resumed coverage on Molycorp with an Overweight rating and JPMorgan upgraded shares to Overweight.

Morgan Stanley - Resume Overweight:
Morgan Stanley said they see "strong potential upside based on persistent favorable supply-demand for rare earth oxides (REOs), steadily lower execution risk, and opportunities to increase margins through downstream integration." The firm calculates a price target of $63 per share, which offers 41% upside and is based on REO prices at 38% of spot. The firm makes a bull case which would value shares at $140, which is based on REO prices at 90% of spot.

Morgan Stanley cited three key investment themes for Molycorp:
1. Chinese supply to remain tight: The firm believes China will continue to restrict exports of REO. They expect 2011 full year quotas to be down ~20% yoy under a base case scenario. Also a crackdown on illegal exports could cause
supply outside of China to fall by as much as 40% yoy.

2. Post-IPO execution has increased our confidence in de-risking: "Molycorp has delivered on key milestones including mining permits, financing, and commercial agreements, increasing our 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: The firm notes the company is pursuing JVs to gain access to intellectual property needed to produce alloys/magnets. Morgan Stanley sees a high likelihood to successful downstream execution, however the value may be overlooked by the market.

JP Morgan - Upgrade to Overweight:
Upon completion of the recent secondary and convertible preferred offerings, JP Morgan is upgrading shares from Neutral to Overweight and raised their price target from $36 to 65.

"The increase in our 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, our expectation for higher medium-term rare earth prices is also pushing our target higher."

JP Morgan notes:
Increased production should benefit MCP: The firm notes that MCP has plans to double its production rate to 40k tonnes starting in 2014 and is still on track to reach a rate of roughly 20k tonnes by the beginning of 2013. "We believe this expansion should benefit the company's NPV purely from a time value of money perspective, especially as prices should remain elevated over the next several years as supply remains constrained. Over this time frame, we also think MCP will be cautious in bringing too much supply on too quickly, which should also benefit pricing in the near term."

Rare earth prices continue to move higher Rare earth prices have continued to move higher as consumers still see an undersupplied market and are willing to pay even higher prices to guarantee supply. In addition, the Chinese government's increasing efforts to crack down on illegal mining and exports is reducing supply.

Shares of Molycorp are up 3.6% to $46.23.

SI Note: Both Morgan Stanley and JPMorgan were lead underwriters in the recent mandatory convertible preferred and secondary common stock offering and the company's July 2010 IPO.

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