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