Chinalco Giving U.S. Investors a Way to Play China Rare Earths

BEIJING (TheStreet) -- A Chinese government decision to consolidate mining companies has given U.S. stock investors a rare shot at playing the world’s biggest rare earths mineral sector.

That’s because U.S.-listed Aluminum Corp. of China (Chinalco) (ACH) was named this week to run one of three groups that will eventually handle most if not all the nation’s rare earths extraction, smelting and processing.

Other mining groups formed under an order issued by the Ministry of Industry and Information Technology will be controlled by Baotou Steel Rare Earth and Xiamen Tungsten.

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Baotou and Xiamen are listed on the Shanghai Stock Exchange which is closed to direct trading by foreigners but accessible via funds through the Chinese government’s Qualified Foreign Institutional Investor program. Chinalco, meanwhile, is listed on the New York and Hong Kong markets.

Over the past month, Chinalco’s New York price has risen about 25%, trading late Friday at about $11.20 a share.

The new groups are expected to oversee about 31 companies that today make up China’s rare earths sector which produces about 90% of the global demand for 17, hard-to-find minerals. These minerals are vital for a variety of modern goods including mobile phones, lasers and hybrid cars.

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Some of China's rare earth mining companies are owned by local governments, while a few trade on the Shanghai or Shenzhen stock markets.

China’s decision to create three national groups could put pressure on overseas rare earths extractors such as America’s Molycorp (MCP) and Australia’s Lynas (LYSCF).

Most rare earths dug up in China are shipped to manufacturers based in China, including factories run by multinationals. But the export business is growing and got a boost this week when the World Trade Organization upheld a previous decision by saying  China violated its rules by imposing export limits in 2009.

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The Chinese government tightly controls rare earths output by, for example, setting annual quotas for every mining company. Since 2012, citing environmental concerns, the government has been forcing small mines to close. A current moratorium on opening new mines will last until at least June 2015.

Government moves have apparently helped push down overall prices for rare earths. A Chinese industry trade group said this week that prices in the second half continued a skid that began last August.

A Chinalco statement said its new China Rare Earth company would operate as one of the aluminum company's three main business units, continuing the company's effort to consolidate mining and smelting operations in Sichuan, Shandong and several other provinces that began in 2010. The government’s order followed a Chinalco request to head an industry group that would "play a leading role in the nation’s economy," it said.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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TheStreet Ratings team rates MOLYCORP INC as a Sell with a ratings score of D. TheStreet Ratings Team has this to say about their recommendation:

"We rate MOLYCORP INC (MCP) a SELL. This is driven by several weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its unimpressive growth in net income, weak operating cash flow, generally disappointing historical performance in the stock itself and generally high debt management risk."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Metals & Mining industry. The net income has significantly decreased by 120.8% when compared to the same quarter one year ago, falling from -$38.97 million to -$86.06 million.
  • Net operating cash flow has decreased to -$45.79 million or 25.00% when compared to the same quarter last year. In conjunction, when comparing current results to the industry average, MOLYCORP INC has marginally lower results.
  • The debt-to-equity ratio of 1.10 is relatively high when compared with the industry average, suggesting a need for better debt level management. Regardless of the company's weak debt-to-equity ratio, MCP has managed to keep a strong quick ratio of 2.06, which demonstrates the ability to cover short-term cash needs.
  • Despite any intermediate fluctuations, we have only bad news to report on this stock's performance over the last year: it has tumbled by 71.99%, worse than the S&P 500's performance. Consistent with the plunge in the stock price, the company's earnings per share are down 48.14% compared to the year-earlier quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Metals & Mining industry and the overall market, MOLYCORP INC's return on equity significantly trails that of both the industry average and the S&P 500.

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