UPDATE 3-Neo Material profits rise, but lower prices ahead

Thu Nov 10, 2011 5:02pm EST

* Q3 profit $0.57/share v. street view $0.51/share

* Revenue more than doubles to $248 million

* Company sees lower rare earth prices going forward

By Julie Gordon

Nov 10 (Reuters) - Neo Material Technologies reported a record third-quarter profit on Thursday, beating market expectations, but said rare earth prices had eased from recent highs and may keep falling in the fourth quarter.

Neo Material said volumes fell in the quarter to Sept. 30, as customers shied away from buying material in the pricey market. It expects sales volumes to stay at similar levels for the rest of 2011. But income rose five-fold as record rare earth prices boosted revenues.

Shares rose as much as 7 percent early in the day, but later turned negative, closing down 1.8 percent at C$8.05.

This came as the company warned that lower rare earth prices coupled with stagnant volumes would result in lower revenues in the fourth quarter compared to the third quarter.

Mackie Research Capital analyst Matt Gowing noted that Neo's customers, who need rare earth products to make high-powered magnets for technology applications, will buy again as inventory volumes fall.

"There's only so long that these manufacturers can delay purchases," he said. "Eventually they'll have to come back to the market and resume their regularly scheduled purchases."

Rare earths are used in products as diverse as Apple's iPhone and Toyota's Prius. China, which produces some 95 percent of world supply, has repeatedly clamped down on exports, sending prices soaring.

This has prompted some users outside of China to run down stocks as they wait for lower prices, creating an artificial supply-demand dynamic, said chief executive Constantine Karayannopoulos.

"Until those inventories get whittled down a little bit, we will not see apparent demand get back to the point where it reflects real demand," he told Reuters.

Karayannopoulos noted that while prices have fallen off the July peak, they are, on average, four times higher so far in the fourth quarter then they were in the same quarter of 2010.

"Prices are not dropping as fast they were dropping maybe a month ago," he said. "But they are still drifting a little lower."

Karayannopoulos said he expects prices for common rare earths like cerium and lanthanum to fall further, as new supply outside China comes into production.

Neo Material owns rare earth and minor metal processing facilities in China focuses on producing advanced rare earth products like magnetic powders.

RECORD EARNINGS

The company reported its 10th consecutive quarter of revenue growth. Net income rose to $78.9 million, or 57 cents a share, from $15.2 million, or 13 cents a share, a year ago.

Analysts on average were expecting earnings of 51 cents a share, on revenue of $216.2 million, according to Thomson Reuters I/B/E/S.

Revenue jumped to $248 million from $91 million in the year-earlier period, as the prices of the individual rare earth oxides and metals hit peak levels in July.

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