Mackowski: The Molycorp Position
Yesterday, Molycorp Inc. (NYSE: MCP) (“Molycorp” or the “Company”) announced the successful close of its previously announced $400 million financing arrangement with certain investment vehicles affiliated with Oaktree Capital Management, L. P. (collectively “Oaktree”). Under the arrangement, Oaktree will provide Molycorp and certain of the Company’s subsidiaries with up to $400 million in secured financing through credit facilities and the sale and leaseback of certain equipment at the Company’s Mountain Pass facility (the “Financing”).
$250 million of the Financings has now been funded, with the remaining $150 million available until April 30, 2016 if Molycorp achieves consolidated adjusted EBITDA of not less than $20.0 million per quarter for two consecutive fiscal quarters, and production volume at its Mountain Pass facility of at least 4,000 metric tons per quarter for two consecutive fiscal quarters.
The Financings are secured by certain Molycorp assets of the Company’s subsidiaries, guaranteed by most of the Company’s subsidiaries, and will mature in five years, subject to certain springing maturity dates dependent on the Company’s repayment of certain outstanding debt, beginning on April 30, 2016.
In connection with the financings, Molycorp issued to Oaktree warrants to purchase up to an aggregate of 24,477,395 shares of the Company’s common stock. Warrants to purchase up to an aggregate of 18,358,019 shares of common stock have an exercise price of $0.01 per share, and warrants to purchase up to 6,119,340 shares of common stock have an exercise price of $2.04 per share. Additional details of the Financing are included in the Company’s Current Report on Form 8-K filed today with the U.S. Securities and Exchange Commission.
What does this mean to Molycorp? Before we look at that question, for reference, the following quote is from the Molycorp web site (www.molycorp.com): About Molycorp, Inc.
Molycorp is the only advanced material manufacturer in the world that both controls a world-class rare earth resource and can produce high-purity, custom engineered rare earth products to meet increasingly demanding customer specifications. With 25 locations across 10 countries, the Company produces a wide variety of specialized products from 13 different rare earths (lights and heavies), the transition metal yttrium, and five rare metals (gallium, indium, rhenium, tantalum and niobium). The Company produces rare earth magnetic materials through its Molycorp Magnaquench subsidiary, including neodymium-iron-boron (NdFeB) magnet powders, used to manufacture bonded NdFeB permanent rare earth magnets. Through its joint venture with Daido Steel and the Mitsubishi Corporation, Molycorp manufactures next-generation, sintered NdFeB permanent rare earth magnets. The Company also markets and sells a line of rare earth-based water treatment products.
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Also for reference is a quote from the Molycorp web site: About Oaktree
Oaktree is a leader among global investment managers specializing in alternative investments, with $91.1 billion in assets under management as of June 30, 2014. The firm emphasizes an opportunistic, value-orientated and risk controlled approach to investments. Headquartered in Los Angeles, the firm has over 850 employees and offices in 16 cities, worldwide. For additional information, please visit Oaktree’s web site at www.oaktreecapital.com.
What does this mean to Molycorp? Well firstly, it resolves the pending debt problem facing Molycorp as the CAPEX costs of the Mountain Pass facility exceeded budgeted expectation. It also resolves the current cash flow problem caused by the extended commissioning and ramp up of the new Mountain Pass facility. So this is a good news story going forward providing the Mountain Pass facility can produce at capacity and at operating costs that can generate profit. Both of these financial measures have been included in the condition of the financing. This financing package is a testament to the Molycorp team in that in these very trying times, repackaging of debt can be a very onerous task and conditions are generally tough. What is most important now is where will the money be spent?
Recent commentary notes that the Mountain Pass facility is approaching break even capacity. To achieve this position a number of technical challenges must have been faced, solved and implemented. The key challenge in complex chemical plants is the integration of all of the circuits into a single productive unit. It is not good enough that each part has been successfully commissioned; they must run in unison. The recycle of reagents was a critical part of the new circuitry. A very difficult task and I look forward to future papers by Molycorp on their success here. So if the plant is running at break even capacity the funds are not required to supplement cash flow.
It should be noted that certain plants utilize facilities provided by others to reduce CAPEX. So another party may build the sulphuric acid capacity and supply acid on a usage basis. This reduces CAPEX for the developer. This is in essence what the sale and leaseback arrangement of certain equipment in the Financings achieves. In Australia, it is very common to have BOO (Build Own and Operate) or BOOT (Build Own Operate and Transfer) arrangements in larger type developments. Molycorp have achieved the same end point but by doing it post construction rather than pre.
I am yet to answer the “what to do with money” question. I will develop an argument that may assist anyone who is faced with commissioning and ramp up. I’ll go out on a limb – All start ups face problems. Tonnage rates are not as expected, cost per unit of production suffers, but what does meet budget is the gross operating expenditure. So you are spending at a rate that should produce design capacity, but capacity is down, so costs per kilogram are too high. Do not try to tackle all three issue separately. An attack on cost per kilogram produced is a disaster waiting to happen. You must tackle the throughput in isolation. Get the tonnes then worry about the dollars. And the way to do that is only focus on the 1 or 2 causal problems that are occurring. It may look like you have 100 problems to solve but most of them are as a result of those 1 or 2. Key message: trust your flow sheet, trust your chemistry, focus on throughput and the $s per kilo of product will come into expectations. So Molycorp must focus the Financing on achieving capacity at Mountain Pass. They also face another capacity challenge. The Chinese located plants that have been providing feed stock to Magnaquench must also produce at capacity. These value add opportunities have the synergistic benefits of covering any short term finance issues at Mountain Pass. Efforts must be expended on ensuring adequate feed stocks are available for those Chinese plants.
The Financing hurdles of 4,000 metric tons per quarter for two consecutive fiscal quarters and EBITDA of $20 million per quarter for two consecutive fiscal quarters present clear KPIs for Molycorp. I will hope to provide more pleasing commentary as their team achieves its milestones.
Mr Mackowski is a qualified engineer in mineral processing with over 30 years technical and operational experience in rare earths, uranium, industrial minerals, nickel, kaolin ... <Read more about Steve Mackowski>