North America Equity Research

22 February 2011

▲ Overweight
Molycorp
Previous: Neutral
MCP, MCP US
Price: $44.63
Raising PT to $65 and upgrading to OW; higher
▲ Price Target: $65.00
medium-term pricing and expansion driving NPV Previous: $36.00
higher
Upon completion of the recent secondary and convertible preferred offerings, we North America Metals & Mining
are raising our price target for MCP to $65 from $36 and upgrading the stock to AC
Michael F. Gambardella
OW from N. The increase in our price target is to reflect the company’s decision (1-212) 622-6446
to double its capacity to 40k tonnes starting in 2014, which should enable MCP to michael.gambardella@jpmorgan.com
sell a greater amount of material, at higher prices, earlier on. Additionally, our
Tyler J. Langton
expectation for higher medium-term rare earth prices is also pushing our target (1-212) 622-5234
higher. tyler.j.langton@jpmorgan.com

• Increased production should benefit MCP. MCP recently announced that it Brian P. Ossenbeck, CFA
would double its production rate to 40k tonnes starting in 2014 and is still on (1-212) 622-1023
track to reach a rate of roughly 20k tonnes by the beginning of 2013. We brian.p.ossenbeck@jpmorgan.com

believe this expansion should benefit the company's NPV purely from a time J.P. Morgan Securities LLC
value of money perspective, especially as prices should remain elevated over
Price Performance
the next several years as supply remains constrained. Over this time frame, we
70
also think MCP will be cautious in bringing too much supply on too quickly,
which should also benefit pricing in the near term. However, ultimately we 50
think elevated pricing and attractive margins will bring on new supply seeking $
30
to benefit from the high returns the industry can offer producers.
10
• Rare earth prices continue to move higher. Rare earth prices have continued
Jul-10 Oct-10 Jan-11
to move higher over the past several months and recently took another step up
after a pause during the Chinese New Year holiday. We think this is largely due YTD 1m 3m 12m
to two factors. The first is that consumers still see an undersupplied market and Abs -22.4% -5.8% 57.1% 218.8%
are willing to pay even higher prices to guarantee supply. The second is that we
believe the Chinese government's increasing efforts to crack down on illegal
mining and exports is reducing supply that had probably been close to 20k
tonnes in previous years compared to an export quota of 30k tonnes in 2010.
• Raising PT to $65. We are increasing our PT to $65 from $36. Our new price
target is based on an NPV of $65, which assumes pricing at current spot levels
for the next several years, gradually decreasing from the current basket price of
$67/lb to a long-term average price of $18/lb for MCP’s basket starting in 2019
(a long-term price that we believe will generate attractive enough returns to
allow new projects to eventually come on line). The NPV also assumes the
company's planned expansion to 40k tonnes starting in 2014, the costs outlined
in MCP's engineering study, and a 12.5% discount rate.

Molycorp, Inc. (MCP;MCP US)

2010E 2010E 2011E 2011E 2012E 2012E Com pany Data
(Old) (New) (Old) (New) (Old) (New) Price ($) 44.63
EPS Reported FY ($) (0.23) (0.35) (0.47) 0.34 3.16 8.56 Date Of Price 18 Feb 11
Source: Company data, Bloomberg, J.P. Morgan estimates. 52-week Range ($) 62.80 - 12.10
Mkt Cap ($ mn) 3,670.98
Fiscal Year End Dec
Shares O/S (mn) 82
Price Target ($) 65.00
Price Target End Date 31 Dec 11

See page 7 for analyst certification and important disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
Michael F. Gambardella North America Equity Research
(1-212) 622-6446 22 February 2011
michael.gambardella@jpmorgan.com

Investment Thesis
Upon completion of the recent secondary (13.5mm shares sold at $50) and
convertible preferred (for $180mm) offerings, we are raising our price target for
MCP to $65 from $36 and upgrading the stock to OW from N. The increase in our
price target is to reflect the impact of our expectations for higher medium-term rare
earth prices. Additionally, the company’s decision to double its capacity to 40k
tonnes starting in 2014 should enable MCP to sell a greater amount of material, at
higher prices, earlier on. The tables below show our life-of-mine EBITDA and EPS
forecasts for MCP.

Figure 1: MCP EBITDA Forecast Figure 2: MCP EPS Forecast

$ in mm $/share
$3,000 $25

$2,500 2,396 19.61

$20
2,032 16.79
$2,000
1,542 $15 12.83
$1,500 1,376 11.19
1,204 1,183 10.10 10.00
1,028 1,024 1,025 1,029 1,031 1,031 1,031 1,033 1,035 1,035 $10 8.56 8.71 8.76 8.85 8.96 9.06 9.13 9.20 9.29 9.36 9.25
$1,000 809

$5
$500
80 0.34
$0 $0

Source: Company reports and J.P. Morgan estimates. Source: Company reports and J.P. Morgan estimates.

Rare earth prices continue to move higher

Since last publishing on Molycorp, rare earth prices have continued to move higher
despite an increase in Chinese export quotas from 2H10 to 1H11, as shown in Table
1 below, with neodymium and praseodymium growing at slightly higher rates than
cerium and lanthanum, which spiked more quickly earlier on. While domestic
Chinese prices have inched modestly higher, they remain well below export prices.
Domestic Chinese prices for cerium and lanthanum are roughly 8% of the export
prices, while neodymium and praseodymium are about 40%. We expect Chinese
prices to rise and export prices to decline over the long term.

2
Michael F. Gambardella North America Equity Research
(1-212) 622-6446 22 February 2011
michael.gambardella@jpmorgan.com

Table 1: Rare Earth Export Prices, FOB China

FY FY FY FY Q1 Q2 Q3 Q4 Jan Current
Prices ($/lb) 2006 2007 2008 2009 2010 2010 2010 2010 2011 2010
Oxides
Cerium 0.74 1.37 1.94 1.56 2.03 2.90 10.75 24.18 29.61 31.77
Lanthanum 0.97 1.55 3.51 2.09 2.75 3.39 11.02 24.05 28.49 31.77
Neodymium 7.05 13.69 11.84 6.90 12.54 14.95 25.46 37.03 45.86 56.59
Praseodymium 6.63 13.10 11.12 6.52 11.93 14.89 24.73 35.84 43.87 52.28
Samarium 1.13 1.61 2.11 1.56 1.52 1.52 7.90 16.70 26.14 31.32
Europium 110.71 144.04 214.19 216.89 228.59 232.89 261.63 273.07 285.38 290.24

Metals
Lanthanum 1.89 2.64 5.52 3.98 4.68 5.34 12.17 22.47 29.79 34.15
Neodymium 9.23 17.77 16.41 9.32 16.66 19.67 29.55 43.83 59.92 85.94
Praseodymium 8.95 16.90 15.47 8.86 16.66 20.19 30.14 45.82 65.96 88.66
Samarium 5.19 5.87 10.10 8.65 8.50 8.65 13.96 23.04 31.96 50.23

Alloys
NdFeB 16.00 19.52 25.00 35.52 38.26
SmCo 23.00 24.61 31.50 30.00 31.45
Source: Asian metal and company reports.

The crackdown on illegal mining
in China could have an equally
important impact on ROW
supply as changes to Chinese
export quotas.
Export quotas and crackdown on illegal mining keeping market very tight
While we had believed that the sequential increase (1H11 vs. 2H10) in Chinese
export quotas could lead to some easing of pricing as more material became
available, prices, as mentioned above, have in fact moved higher since the quotas
were announced in late December. We think this is largely due to two factors. The
first is that consumers still see an undersupplied market and are willing to pay even
higher prices to guarantee supply. The second is that we believe the Chinese
government's increasing efforts to crack down on illegal mining is reducing supply
that had probably been close to 20k tonnes in previous years compared to an export
quota of 30k tonnes in 2010.

Table 2: The dramatic cut in China export quotas has led to a sharp increase in rare earth prices
tonnes
Domestic Foreign
Year Companies Companies Total Y/Y Change
2005 48,040 17,659 65,609 0%
2006 45,752 16,069 61,821 -6%
2007 43,574 16,069 59,643 -4%
2008 40,987 15,834 56,939 -5%
1H09 15,043 6,685 21,728 NA
2H09 18,257 10,160 28,417 NA
2009 33,300 16,845 50,145 -12%
1H10 16,304 5,978 22,282 3%
2H10 6,208 1,768 7,976 -72%
2010 22,512 7,746 30,258 -40%
1H11 10,889 3,557 14,446 -35%
2H11E 10,889 3,557 14,446 81%
2011E 21,778 7,114 28,892 -5%
Source: Company reports and IMCOA. Note: 2H11 and 2011 estimates are based on holding 1H11 levels constant in 2H11. We also
estimate that 1H11 quotas contain about 2,000-3,000 tonnes of material not included in prior years quotas.

MCP’s supply increase should benefit the company

Combined, Lynas and Molycorp
will add about 62k tonnes of rare
earth capacity by 2014.
At the same time that MCP announced its secondary and convertible offerings, the
company also announced that it intended to double its production to 40,000k tonnes
per year by 2014, with MCP still expecting to produce at a run-rate of 19,050 tonnes
by the end of 2012. We believe this expansion should benefit the company's NPV
purely from a time value of money perspective, especially as prices should remain

3
Michael F. Gambardella North America Equity Research
(1-212) 622-6446 22 February 2011
michael.gambardella@jpmorgan.com

elevated earlier on as supply remains constrained. In the shorter term, we also think
MCP will be cautious in bringing too much supply on too quickly, which should also
benefit pricing in the near term. However, ultimately we think elevated pricing and
attractive margins will bring on new supply seeking to benefit from the high returns
the industry can offer producers.

Funding gap should not be an issue

MCP expects the expansion to require an additional $250mm of capital, bringing the
total capital spend to $781mm for both Phase 1 and Phase 2, with the company
having already spent roughly $50mm and having cash on hand of about $350mm,
thus requiring the company to raise an additional $381mm in funding. This gap will
also be also reduced by MCP's $180mm convertible offering, plus the $130mm
pending financing agreement ($100 mm in equity and $30mm in low-cost debt
financing) that MCP has announced with Sumitomo, which is expected to close in
March. We believe the company will be able to fund the $70mm remaining gap
relatively easily and note that MCP has applied for a DOE loan for as much as
$280mm and expects a decision on this loan to be made sometime in Q2.

Valuation
In deriving our valuation for MCP, we have focused on determining a long-term
price for MCP’s basket of rare earth oxides, metals, and alloys (which we
acknowledge is a more complicated task than calculating a basket if MCP were just
to produce oxides) that could be realized once the rare earth market becomes more in
balance. To calculate these prices, we looked at a price that would enable a project of
similar scope to MCP’s to achieve a satisfactory return. More specifically, we
assumed a capital cost of $1 billion, which is higher than MCP's expected cost of
$781 million. However, we believe the higher cost is appropriate as MCP's mine was
already mostly developed and has ready access to infrastructure given its location.
We also assumed an oxide cost of $2.50/lb, higher than MCP's expected cost of
under $1.40/lb, but closer to levels of Chinese producers and those expected by
Lynas. To achieve a roughly 45% IRR on such a project, a hurdle rate that we think
most investors would require given the inherent risks, the project would have to
realize a price of a little above $15/lb over the life of production.

As shown in Figure 3 below, we have used a $18/lb as a long-term average realized

price for MCP starting in 2019 (as it takes roughly 5-8 years to permit and build a
mine) when we believe the market could potentially be in balance, and have kept
individual pricing for the oxides, metals, and alloys MCP will sell in line with their
supply/demand prospects and in relation to historic levels. The long-term price we
use for MCP of roughly $18/lb is a couple dollars higher than the $15/lb referenced
above to reflect the benefits of MCP's XSORBX product. We have kept prices closer
to spot over the next several years and then have them gradually declining as Lynas’
Phase 1 (11k tonnes) and Phase 2 (total of 22k tonnes) and MCP's Phase 1 (19k
tonnes) and Phase 2 (total of 40k tonnes) come on line. We also note that even with a
long-term price of over $15/lb, MCP would still generate EBITDA margins of 64%
while a producer with a higher production cost of $2.50/lb would generate EBITDA
margins of roughly 55%. In this scenario and using a 12.5% WACC, we arrive at an
NPV of $65/share for MCP, on which our price target is based. Additionally, Table 3
below shows the sensitivity of our NPV to both discount rates as well price
movements above or below our long-term assumptions starting in 2019.

4
Michael F. Gambardella North America Equity Research
(1-212) 622-6446 22 February 2011
michael.gambardella@jpmorgan.com

Figure 3: MCP Volume and Price Forecasts

$75 45

$65 40
35
$55
30
$45 25
$35 20
15
$25
10
$15 5
$5 0

2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
2026E
2027E
2028E
1Q10
2Q10
3Q10
Current

Avg. realized price ($/ lb) Volumes (000s tonnes)

Source: Company reports and J.P. Morgan estimates.

Table 3: NPV Sensitivity

NPV ($/share)
Pricing change to J.P. Morgan long-term price assumptions
$65.67 -25% -15% -5% 0% 5% 15% 25%
10.0% $69.45 $72.60 $75.74 $77.31 $78.89 $82.03 $85.18
11.0% $65.26 $68.09 $70.93 $72.34 $73.76 $76.59 $79.42
12.0% $61.41 $63.97 $66.52 $67.80 $69.07 $71.63 $74.18
WACC

12.5% $59.60 $62.03 $64.46 $65.67 $66.88 $69.31 $71.74

13.0% $57.87 $60.17 $62.48 $63.64 $64.79 $67.10 $69.41
14.0% $54.59 $56.68 $58.77 $59.81 $60.86 $62.95 $65.04
15.0% $51.56 $53.45 $55.35 $56.30 $57.24 $59.14 $61.04
Source: Company reports and J.P. Morgan estimates.

Risks to our Rating

The key risks to our Overweight rating include:

• Supply discipline from China. China has taken actions to restrict the supply
growth of rare earths (e.g., export quotas, production quotas, restriction of mining
licenses, and the crackdown on illegal mining). However, if the government were
to reverse these actions, rare earth prices could fall below our expectations.
Conversely, if China further tightened supplies, then prices could exceed our
expectations.
• On-time, on-budget completion of integrated project. Our earnings estimates
and valuation for Molycorp are dependent on the on-time, on-budget completion
of Phase 1 of its fully integrated (oxides, metals and alloys) Mountain Pass
project in late 2012, with Phase 2 by the beginning of 2014. If it takes longer, if
the company is unable to secure the additional funding its needs, or if MCP is
unable to move downstream into metals and alloys, than our earnings estimates
and valuation could prove to be too high. However, if MCP were to complete the
project faster and at a lower cost than expected or decided to produce at a higher
rate, than our estimates and valuation could prove to be too low.

5
Michael F. Gambardella North America Equity Research
(1-212) 622-6446 22 February 2011
michael.gambardella@jpmorgan.com

• Demand growth from key end markets. Demand growth for rare earths is being
driven by the increased adoption of new technologies, such as hybrid vehicles. If
these technologies do not grow as quickly as forecasted or are supplanted by
alternate ones that do not rely on rare earths, prices for rare earths could come in
below our estimates. Higher than expected demand, however, could cause prices
to exceed or forecasts.
• Key management, one mine. Given that Molycorp is a relatively small and
specialized mining company (it currently consists of just the Mountain Pass
mine), the departure of key members of the executive team or disruption at the
Mountain Pass facility could impact the company's ability to meet sales and
earnings expectations.

6
Michael F. Gambardella North America Equity Research
(1-212) 622-6446 22 February 2011
michael.gambardella@jpmorgan.com

Molycorp: Summary Of Financials

Income Statement - Annual FY09A FY10E FY11E FY12E Income Statement - Quarterly 1Q10A 2Q10A 3Q10A 4Q10E

Revenues 7 37 105 894 Revenues - - - -

Cost of products sold (ex. D&A) 22 29 18 78 Cost of products sold (ex. D&A) - - - -
Gross profit (15) 7 87 816 Gross profit - - - -

SG&A 13 33 8 8 SG&A - - - -
D&A 0 0 45 57 D&A - - - -
Operating Income (29) (27) 34 751 Operating Income - - - -

EBITDA (28) (27) 80 809 EBITDA - - - -

Net interest income / (expense) 0 (0) 6 13 Net interest income / (expense) - - - -

Other income / (expense) (0) (0) 0 0 Other income / (expense) - - - -
Pre-tax income (29) (27) 29 738 Pre-tax income - - - -

Income taxes 0 0 0 17 Income taxes - - - -

Net income - GAAP - - - - Net income - GAAP - - - -
Net income - recurring (29) (27) 29 721 Net income - recurring - - - -

Diluted shares outstanding 81 76 84 84 Diluted shares outstanding - - - -

EPS - recurring (0.35) (0.35) 0.34 8.56 EPS - recurring - - - -

Balance Sheet and Cash Flow Data FY09A FY10E FY11E FY12E Ratio Analysis FY09A FY10E FY11E FY12E

Cash and cash equivalents 7 277 589 402 Sales growth - 418.1% 185.7% 751.4%
Accounts receivable 1 13 17 241 EBIT growth - (5.6%) (227.4%) 2,084.6%
Inventories 9 23 10 77 EPS growth - (0.6%) (197.6%) 2,406.6%
Other current assets 2 19 26 440
Current assets 19 332 643 1,160 Gross margin - 20.2% 83.1% 91.9%
PP&E 66 115 407 679 EBIT margin - (73.4%) 32.7% 84.0%
Total assets 98 477 1,079 1,869 EBITDA margin - (72.5%) 76.0% 91.3%
Tax rate - 0.0% 0.0% 2.3%
Total debt 0 5 315 315 Net margin - (72.4%) 27.2% 80.6%
Total liabilities 23 33 334 402
Shareholders' equity 75 444 745 1,466 Net Debt / EBITDA - 10.2 (3.4) (0.1)
Net Debt / Capital - (61.3%) (36.8%) (5.9%)
Net Income (including charges) (29) (46) 29 721 Return on assets (ROA) - (5.6%) 2.6% 38.6%
D&A 0 0 45 57 Return on equity (ROE) - (6.0%) 3.8% 49.2%
Change in Working Capital (8) (37) (8) (637) Return on invested capital (ROIC) - (3.7%) 2.1% 33.6%
Other - - - -
Cash flow from operations (22) (55) 66 142 Enterprise value / sales - - - -
Enterprise value / EBITDA - (143.1) 47.8 4.7
Capex (7) (53) (337) (329) Free cash flow yield - - - -
Free cash flow (15) (2) 403 471 P/E NM NM 130.7 5.2
Book value - - - -
Cash flow from investing activities 2 (73) (337) (329) Enterprise value - 3,811 3,811 3,811
Cash flow from financing activities 25 399 582 0
Dividends per share - - - -
Dividend yield - - - -
Special dividend - - - -
Share buybacks - - - -

Source: Company reports and J.P. Morgan estimates.

Note: $ in millions. FY ends Dec

7
Michael F. Gambardella North America Equity Research
(1-212) 622-6446 22 February 2011
michael.gambardella@jpmorgan.com

Analyst Certification:
The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily
responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with
respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report
accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research
analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the
research analyst(s) in this report.
Important Disclosures

• Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Molycorp
within the past 12 months.
• Client of the Firm: Molycorp is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the
company investment banking services.
• Investment Banking (past 12 months): J.P. Morgan received, in the past 12 months, compensation for investment banking services
from Molycorp.
• Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking
services in the next three months from Molycorp.
• Non-Investment Banking Compensation: An affiliate of JPMS has received compensation in the past 12 months for products or
services other than investment banking from Molycorp.

Molycorp (MCP) Price Chart

Date Rating Share Price Price Target

100 ($) ($)
07-Sep-10 OW 19.50 26.50
N $36 29-Oct-10 N 33.89 36.00
80

OW $26.5
60
Price($)

40

20

0
Jul Jul Aug Sep Oct Nov Dec Jan Feb
10 10 10 10 10 10 10 11 11

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Sep 07, 2010. This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst
may or may not have covered it over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:

J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] J.P. Morgan Cazenove’s UK Small/Mid-Cap dedicated research
analysts use the same rating categories; however, each stock’s expected total return is compared to the expected total return of the FTSE
All Share Index, not to those analysts’ coverage universe. A list of these analysts is available on request. The analyst or analyst’s team’s
coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying
analyst(s) coverage universe.

Coverage Universe: Michael F. Gambardella: AK Steel (AKS), Alcoa (AA), Allegheny Technologies (ATI), Arcelor
Mittal (MT), Carpenter Technology (CRS), Century Aluminum Company (CENX), Cliffs Natural Resources (CLF),
Commercial Metals (CMC), Dynamic Materials (BOOM), Freeport-McMoRan Copper & Gold (FCX), Globe Specialty

8
Michael F. Gambardella North America Equity Research
(1-212) 622-6446 22 February 2011
michael.gambardella@jpmorgan.com

Metals (GSM), GrafTech International (GTI), Haynes International (HAYN), Metals USA (MUSA), Molycorp (MCP),
Nucor Corp. (NUE), Reliance Steel & Aluminum (RS), Steel Dynamics, Inc. (STLD), Teck Resources (TCKb.TO),
Thompson Creek Metals (TC), U.S. Steel Corp (X), Worthington Industries (WOR)

J.P. Morgan Equity Research Ratings Distribution, as of December 31, 2010

Overweight Neutral Underweight
(buy) (hold) (sell)
J.P. Morgan Global Equity Research Coverage 46% 42% 12%
IB clients* 53% 50% 38%
JPMS Equity Research Coverage 43% 49% 8%
IB clients* 71% 63% 59%
*Percentage of investment banking clients in each rating category.
For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category.

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Michael F. Gambardella North America Equity Research
(1-212) 622-6446 22 February 2011
michael.gambardella@jpmorgan.com

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Michael F. Gambardella North America Equity Research
(1-212) 622-6446 22 February 2011
michael.gambardella@jpmorgan.com

Copyright 2011 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or
redistributed without the written consent of J.P. Morgan.#$J&098$#*P

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