Molycorp IPO: Tough Sell on Wall Street

By IPOfinancial.com

For those investors looking for a long-term investment Molycorp (MCP) is the deal for you; however, the esoteric characteristics that encompass this offering, will be a major obstacle for Morgan Stanley to overcome, as the highly technical aspects of this deal can be somewhat difficult to understand.

Given the fragile state of the broader markets, its the deals that are less complex that typically work during this type of cycle. MCP is not that type of offering.

MCP is the only rare earth oxide (REO) producer in the Western hemisphere, as it owns one of the world's largest, most fully developed rare earth projects outside of China -- Mountain Pass. Small-scale production at this mine began in 1952, but closed in 2002 due to the low production costs in China, but more directly because of radioactive leakage in a nearby desert.

In 2008, Chevron(CVX) sold most of these assets to Molycorp Minerals (Molycorp didn't acquire the wastewater pipeline or the evaporation ponds in the transaction, as these assets still remain the responsibility of Chevron), with the primary objective to restore operations at the mine.

For those of you unfamiliar with this portion of the periodic table, rare metals have become a hot commodity, as these components are 'critical inputs' in current and emerging applications including but not limited to hybrid and electric vehicles and wind power turbines, fiber optics lasers defense applications and advanced water treatment technology.

Global demand for rare earth elements (REEs) is expected to rise due to the growth in these aforementioned applications. However, China has dominated the global supply of REOs for the last 10 years, with recent restrictions being implemented in China putting the supply of these elements at risk.

Molycorp -- MCP
• Lead Underwriter -- Morgan Stanley
• 28.125 million shares
• Current Price Range $15 to $17
• Deal size to the mid-range -- $450 million
• Market cap to the mid-range -- $1,300 million
• Sector -- Metals - Diversified

Of particular note, China has announced export quotas, increased export tariffs and introduced a mining quotas policy that will impose production quotas, while limiting the issuance of new licenses for rare earth exploration. Additionally, the IMCOA issued a plan to reduce the production of separated rare earths by 7% in 2009.

Furthermore, China proposed a ban on 5 of the 17 rare earth elements, but to date this ban has yet to be implemented. To combat this declining supply, several countries are implementing a national stockpile program -- China, South Korea and Japan. Studies being conducted in the U.S. are examining whether or not such actions should be undertaken stateside. A global deficit for REEs is expected to begin in 2011.