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Molycorp Crushes Expectations. What’s Next?

On an adjusted basis, Molycorp (NASDAQOTH: MCPIQ  ) crushed analyst expectations, beating on both earnings and revenues. Despite favorable comments from the company regarding the duration of 2013, analysts have maintained a grim view of the stock for the rest of the year. This didn't prevent the stock from surging nearly 25% in after-hours trading – although this push pulled back a bit, seeing shares trade up about 17% during Friday morning trading. The question for investors now is where do shares actually go given the sharp disconnection between the company's message and that of analysts.

By the numbers
Molycorp reported adjusted EPS of $0.15 on revenues of $146.4 million. While this represents an EPS slide from the $0.07 achieved a year ago, revenues rose and both EPS and revenues were significantly above consensus estimates. Analysts had been expecting a loss of $0.31 per share on revenues of $135.6 million. Shares have been under constant pressure since the rare-earth element sector came under pressure, so any positive news can serve as a major catalyst.

In the earnings call, President and CEO Constantine Karayannopoulos gave a positive outlook:

We are however beginning to see signs of demand returning to more normal levels across several segments. Customers appear to be working down inventories that were built up in 2011 and 2012 and we are starting to return to more normal purchasing patterns. Our production ramp up of Mountain Pass is progressing well.

The statement contains several critical factors for Molycorp, and the entire industry, for which Molycorp has become the standard-bearer. Specific to the company, progress at the Mountain Pass location is a critical step as it represents one of the few significant operations outside of China.

The broader comments are a boon for the industry, explaining why competitors like Avalon Rare Metals (NASDAQOTH: AVLNF  ) traded up nearly 10% and Rare Earth Elements (NYSEMKT: REE  ) surged over 12% on the news. If industrial demand for rare-earth elements is stabilizing and beginning to build, then all three of these companies will benefit. High inventories in the hands of customers have been a major drag on prices for an extended period, and If this trend is reversing, Molycorp should see continuing strength in the later part of the year.

Looking ahead
It will be instructive to see if the better-than-expected report and positive commentary will alter expectations for the rest of the year. Analysts have been hard on the industry, which has seen huge losses for most shares after rare-earth metal prices cratered. The original explosion in rare-earth elements was a reaction to China, the primary controller of these materials, tightening export laws and greatly squeezing supply. As that issue played out, prices fell.

Even with this recent surge, on a long-term basis, shares still look fairly cheap. Rare-earth materials have critical industrial applications that are not likely to disappear in the foreseeable future. As supply and demand find a more sustainable equilibrium, the company should be able to benefit in a sustainable way. Molycorp remains at the speculative end of the spectrum, but it may be a risk worth taking.

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