We're inching closer and closer to Molycorp's (NYSE: MCP) "Project Phoenix" opening, and if rare-earth mineral prices stay this way, we could be in for a profit explosion. Even though its flagship mine is still a year away from full production, the company has already been able to leverage ridiculously high prices to squeeze out a profit.
In the second quarter of 2011, rare-earth oxide sales volume grew 58% from the first quarter, and realized prices rose $91% to $72.10 per kilogram. Revenue grew almost 400% from the first quarter to $99.6 million, driven by higher prices. And when you're able to charge that much and realize a 57% gross margin, you can easily show a profit of $43.5 million, or $0.52 per share.
Molycorp is in such a strong position, in fact, that it was able to renegotiate higher prices with a major lanthanum buyer that was already under contract. But how long can these prices last?
The big question
The question about Molycorp, and rare-earth mineral miners in general, is still about what happens to rare-earth oxide and metal prices once more capacity is online. Lynas is ramping up its production in both Australia and Malaysia and will beat Molycorp to market by more than a year.
For Rare Element Resources (AMEX: REE) and Avalon Rare Metals (AMEX: AVL), that puts an even bigger question mark on their long lead-time production schedules.
China still has a stranglehold on production, but we're not exactly certain what the country will do once competitors start coming online.
For now, if you believe rare-earth oxide and metal prices are going to remain even close to where they are now, Molycorp looks like a screaming buy. It'll take another year or so to figure out exactly where prices are going and whether Molycorp can continue to move higher.
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