Molycorp – Inflexion Point?

The reputed statement of Mark Twain to the effect that “Reports of my death have been greatly exaggerated” comes to mind when the oft-repeated reading of the eulogies for Molycorp takes place. Once again we have a funeral scene for Molycorp with a preacher, mourners and some pall-bearers. Over to the side, Soprano-like, with dark glasses and bulky suits are the hedge fund mavens who represent the shorters, hoping that this time that their bullet has found its mark.

The news that has prompted the latest ructions at Molycorp does not emanate from the halls of power in Beijing, where all matters of Rare Earths are really decided, but rather from the canyons of mid-town Manhattan where destinies are decided (so they think) by the great and good of the financing world. In this case the kerfuffle is sourced in the news that the mighty hedge fund, Apollo Global Management LLC, has added to its holdings of Molycorp Inc. bonds, supposedly positioning Leon Black’s investment firm to control the Rare Earth miner/processor in case it seeks to restructure its $1.5 billion of debt. Apollo bought $8.5 million of Molycorp’s $230 million line of 3.25% convertible notes due 2016 in the three months ended March 31 and added to that amount last quarter, according to a story on Bloomberg, which also said that Apollo, as of March 31, held at least 22% of that class of securities.

The fixed income market scuttlebutt was that Apollo is betting holders of the convertible notes won’t receive a full recovery in a default, putting those lenders in control of a restructuring and in line to take over the company’s equity. With Moody’s having cut Molycorp’s credit rating in June to Caa2, the 3.25% convertible notes were last traded at 76.3 cents on the dollar (representing a yield of 18.1%). However, if there was a serious threat of default then we would have expected the bonds to be trading even lower than where they are now, with a much higher yield. While it is junk-like debt at this point it’s not in the shredder but any means!

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Apollo is not one of the more aggressive funds around in the distressed debt space and we suspect this is more of a canny bottom-fishing operation than a grab for power. After all they own (if these reports are correct) around $44mn out of $1.5bn in debt outstanding. This scarcely makes them the wolf at Molycorp’s door. The chattering classes in the media have never really “got” the symbiotic relationship between Molycorp and the US “industrial-military” complex. A key issue to look at is the transaction that we discussed here a few months back when The Carlyle Group, the par excellence denizens of Washington’s halls of power took control of Traxys, Molycorp’s largest shareholder from Resource Capital, another of Molycorp’s most important holders of recent times. This, in our interpretation, was not just an opportunistic bargain-buy but part of a bigger strategy of achieving by corporate means what could not be achieved by the endless dithering of the House and Senate on the issue of security of supply of strategic metals for the US military and economy. In one fell swoop the best access (i.e Traxys) to specialty metals trading in the US and globally (and indirectly REEs via its Molycorp stake) moved under the sway of The Carlyle Group, the “by appointment” private equity group to Washington’s “deep-state”. Does anyone who understands this dynamic seriously think that Molycorp is going to be allowed to go bust, be dismembered and put on the sale block to the highest bidder?

Lynas – the Ghost at the Feast

The subject that cannot be ignored in all this matter is Lynas. The company announced in recent weeks that it was moving its head office to Malaysia and shrinking its Australian footprint. To us this looked less like an economy measure and more like positioning itself to be bought by an Asian party. The most logical outcome would be a Japanese trading house picking it up to improve the leverage of Japanese end-users in the Rare Earth space. However the more Machiavellian outcome could be the Chinese buying an asset they essentially neither want nor need with the sole purpose of neutralizing Lynas in the Rare Earth market. This is not unprecedented because it should be remembered that in the Antimony space (where China also dominates) a Chinese entity bought the Beaverbrook mine in Newfoundland two years ago and promptly shut it down citing some rather bogus rationalisations. This always struck us as an attempt to remove a swing producer that could go rogue and spoil their Antimony dominance.

Why the move to Malaysia? This makes most sense to us if it is to remove Lynas from the tender mercies of Australia’s Foreign Investment Review Board in the event of a bid appearing for the company from China.

By the Chinese grabbing Lynas they would get at least half of the Cerium/Lanthanum overhang under their control. Molycorp they could never have, but Molycorp at least they could live with. A perpetually financially distressed Lynas, on the other hand, could be a long term spoiler of prices in the Ce/La marketplace. This is NOT though a Buy signal for Lynas because if the Chinese goal is to buy Lynas to shutter it (or at least severely constrain its output) then they are not very likely to pay up to get their hands on it.

Conclusion

The way the planets are aligning looks better for Molycorp, rather than worse. Fixed income traders that rarely come up from navel-gazing have gotten the wrong idea on Molycorp and inflated Apollo’s opportunistic accumulation of Molycorp debt into a fully-flown asset grab. Things are definitely not rosy around at Molycorp on the earnings front but the stock (though not the stock-price) seems to have a political forcefield around it that is impervious to mindless static heard down the “hoot-n-hollers” on Wall Street’s trading desks.

The dream scenario for Molycorp is the sidelining of Lynas. The defanging of the Malaysian producer as a “force for ill” in the pricing of the not-rare REEs, Lanthanum and Cerium, would go a long way towards instilling some discipline in REE pricing. In the meantime, the global economic recovery and the improving vibes towards specialty metals (as evidenced by graphite and lithium as first movers) should make Molycorp a buying target for those not persuaded by the Apocalypse Now mutterings propagated by the short position holders in the stock.


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This entry was posted in Rare Earth & Technology Metals Intel and tagged , , , by Christopher Ecclestone. Bookmark the permalink.
Christopher Ecclestone

About Christopher Ecclestone

Christopher Ecclestone is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten & Company in New York in2003 he was the head of research at an economic thinktank in New Jersey which he had joined in 2001. Before moving to the U.S., he was the founder and head of research at the esteemed Argentine Equity research firm, Buenos Aires Trust Company, from 1991 until 2001. He worked in London from 1985-1991 as a corporate finance and equities analyst and as a freelance consultant on the restructuring of the securities industry.
  1. Only thing I can say to that Chris is the market sure as hell ain’t buying your fantasy piece ATM – Moly off another 8.5% at $1.73.

  2. Thanks for your article Chris.
    I was a little disappointed that your analysis of Lynas was based on it moving its head office to Malaysia and nothing else.
    I’m not aware that Lynas has ceased to be an Australian company, listed on the ASX and filing its reports (tax and otherwise) in Australia.
    Could you please inform me how the relocation makes the slightest difference to your (frankly wild) speculations such as “This makes most sense to us if it is to remove Lynas from the tender mercies of Australia’s Foreign Investment Review Board in the event of a bid appearing for the company from China”.
    I’m not aware of any basis in fact or law that supports this claim or several others you make.

  3. In response to the Lynas issue I would note that Australian mining companies have operations all over the world and it is VERY rare that, with their listing on the ASX, they up sticks moving their HQ from Australia and decamp to the country where their processing plant is.. Can you name me a few examples? Next step it will apply for a listing in KL or on Singapore… or maybe the mine will go next… a repeat of what happened at Galaxy, maybe?

    • OK so there’s no legal basis for your claim: thanks for confirming that it’s nothing but speculation.
      Lynas ARE still an Australian company and subject to the FIRB.
      Operationally, the focus for Lynas IS in Malaysia so their priorities are a bit different than the typical Australian miner. A head office in Malaysia makes operational sense.
      “Next step it will apply for a listing in KL or on Singapore”: I find the WILL particularly speculative. Particularly given the share registry is loaded with Australian owners. How many of them are likely to approve a move from the ASX??
      I think your assumption that Lynas and its shareholders will leap into the jaws of foreign ownership via a voluntary listing offshore is naïve at best and more likely disingenuous (that’s the nice word for it).

    • Chris, you are very free to speculate as you wish but I’d think most readers would be well above the lite weight fantasy you conjure in defence of Molymess.
      I note your diatribe casting Lynas as the “Evil Witch” reveals no analysis of the respective business plans, regardless of the fact Lynas was writing foundation offtakes while Moly was just a twinkle in a VC’s eye. Go check the record, and the cash out.
      Your attempt to cast Lynas as the prostitute of the RE space again shows a complete lack of comprehension of the respective business plans. If Molymess had a future I would expect it’s proponents to be able to outline a cohesive strategy, your spiel is bereft of anything close to rational..
      As to Lynas, simple enquiry will show the company majority Australian owned, FIRB is all about Mt Weld as a strategic Oz asset, Malaysia is the operational centre of the business, both production & marketing, any decision to change that firstly needs to be made by the Australian domiciled Board and then put to a SH vote, yet you dare to “speculate”? There is an Australian colloquialism for DH’s likes like you, but I won’t invoke it here.
      Re “Asian TO”, are you remotely aware of the responsibilities of mounting an effort? First flag 5%, market may start to focus on broader consensus of generally accepted NPV $1.20, aka $2.4B.
      If you’re trying to substantiate Molymess maybe focus on their plans to make a buck rather than get down in the gutter.

        • Lol JJ, can anybody define Molymess beyond the marketing hype?
          Someone please spell out the business plan behind a $1.7B development with a capacity of 38ktpa producing 83% Ce/La with no defined markets?
          Please don’t trot out Mark Smith’s very tired “Mines to Magnets” BS with a legacy costing of $1.3B from the very peak of the market.
          Long Molymess, trot out a credible business plan across both the up and downstream businesses that justifies an adequate return on capital invested, post VC realisation.

          • Obvious extension, anyone care to define the Lynas business plan?
            Pre & post 2012?

          • Beyond Chris’s “Wicked Witch” from the West.
            Painted lady in the gutter?
            Asian whore for sale?

  4. You haven’t given me a single example of a company decamping.. until I hear some credible examples I am sticking with my line of thinking…

    • Your line of thinking has no credibility: Lynas’s actions make sense for an Australian miner whose operations are mostly in Malaysia.
      I really don’t care about precedents or lack thereof. You have made many unsubstantiated claims about this company with absolutely no evidence. I really think the ball is in your court regarding credibility.

  5. I wish Molycorp well. Only Apollo can say what their intentions are. But they must have a well thought out strategy for “in the event of …”.

    Ask Cliffs Natural Resources or Argentina just how small an investment can be to make life hell for them.

    As per US interests, I point to World War II. Japan had grabbed much of the best of China, and held it for years. Germany had conquered Holland, Belgium, Norway, and France, was pushing towards Moscow, and had intimidated other European countries to be on its side. Britain had lost many thousands of lives to German bombing. At this time, the US public was overwhelming against getting involved in the war. Only after Japan bombed Pearl Harbor did America go to war.

    The US government keep Molycorp alive? Anything’s possible. Likely? Alaska is helping REE mining, maybe other states will join in. There’s a few million dollars here and there from the military, a stockpile of strategic materials. But a billion dollars to keep Molycorp afloat? Even the City of Detroit is down for the count. If ISIS (the caliphate) in Iraq starts using some of its recently captured nuclear materials and nerve gases on US soil, we may see a change of attitude, but not until an event of this type happens.

    China wasting its money? They would consider billions of dollars to be pocket change if they thought it could be used to truly control strategic materials. China thinks long term, while American politicians rarely look past the next election cycle.

    This being said, I agree that Molycorp is far from being dead. But the vultures are circling, and they’re the only ones seriously willing to help. Sad for the stockholders. A marvelous buying opportunity, if you can afford to lose the rent money.

  6. Tim… your stridency makes me think you were one of those shorting at $1.61 and the transaction is stuck in your craw… Your comments are so all over the place that I wonder if you have even read my original article? You have conflated my reading of the move to Malaysia as some sort of act of extreme deviancy and unnatural practices…. cover your short and move on…

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