Molycorp announces $400 million financing deal even as it posts more losses
Molycorp (NYSE: MCP) announced greater than expected losses for the second quarter even as the company urgently needs fresh capital; yet, it has managed to pull a minor miracle in the current commodities market by securing long-awaited funding to the tune of USD$ 400 million. The big ‘risk taker’ in this operation is the lender, Oaktree Capital Management of Los Angeles, which must clearly have been unfazed by concerns surrounding Molycorp’s high cash burn rate and the possibility that new shares would be issued to raise capital under pressure. Oaktree, meanwhile, has confidence that Molycorp is on track to increase production at its Mountain Pass facility in California, which has undergone a thorough repair, in order to increase competitiveness even if Molycorp achieved lower production than expected in the first quarter. Molycorp will also sell some equipment at its Mountain Pass mine, which it will then lease. The 400 million will be split into an financing package of USD$ 250 million, while the remaining $ 150 million will be available until April 30, 2016 so long as Molycorp meets certain financial and operational conditions.
Molycorp less than enviable second quarter results showed a loss of 84 million dollars or $ 0.37 per share, compared to $ 71.2 million or $ 0.44 per share for the same period last year. Sales also fell from USD$ 136.1 million in the second quarter of 2013 to the current USD$ 116.9 million. According to the company, the adjusted loss for the quarter stood at $ 0.29 per share. In both cases, analysts underestimated both sales and losses. In tonnage, Molycorp sold 2,996 tons worth of material, which represents a 15% loss over the first three months of this year. The one optimistic consideration is that the average sales price which was achieved in this period rose 16% to $ 39.02/kg.
It is interesting to compare Molycorp’s performance to that of its closest competitor, Lynas Corp (ASX: LYC). Like Molycorp, Lynas has also been working to increase production at its processing plant in Malaysia (LAMP). Lynas did report rising production and sales in the second quarter; in fact, in tonnage, Lynas announced that 1,882 tons were produced, which is some 73% more than in the previous quarter. Lynas also delivered 1,630 tons or more than twice as much as in the first quarter of 2014. Clearly the outgoing CEO, Eric Noyrez was able to resolve the technical issues that had hampered productivity as the start of LAMP’s operations in late 2012. Lynas has appointed a new CEO, Amanda Lacaze, who has already taken steps to reduce costs and restructure the Company. One of those steps is to relocate Company headquarters to Malaysia, which will reduce overhead by around 50%. Molycorp did not make any such announcements. Lynas’s troubles acted as the trigger for Molycorp’s late December, early January jump. Molycorp and Lynas are essentially competing against each other to gain light rare earths (LREE) production supremacy outside of China. Industry insiders suggest that Molycorp, Lynas and maybe another smaller producer outside of China would be sufficient to meet world demand for LREE’s.
One of the decisive factors will be China’s continued determination to curb illegal mining and smuggling – permanently. By 2017 alone, China plans to spend some USD$ 150 billion on clean energy sources and environmentally friendly vehicles, needing large quantities of strategic raw materials. Nevertheless, Molycorp shares have been rising (6.6%) in the wake of the quarterly results and the financing announcement, gaining back ground after the pre-quarterly presentation jitters. Oddly, most had predicted that only strong earnings would help Molycorp’s stock rebound; instead, they are rising on even worse than expected earnings. JPMorgan downgraded Molycorp last May in view of the First Quarter results but DA Davidson, which has been promoting Molycorp since the start of 2014, suggested that Molycorp will be able to turn toward calmer waters based on increasing production numbers and maintaining a target price of USD$ 7/share, which seems rather like science fiction now that the stock is at about USD$ 2.20/share and there is no substantial news indicating that demand for cerium and lanthanum will increase. Neither one of those metals is used to make magnets. Moreover, one of the few items capable of redeeming Molycorp, the ‘neo’(based on neodymium) powder produced by its Magnequench unit – needed to make bonded neodymium permanent magnets – faces threats from Chinese rare earth companies, which have challenged Magnequench’s patents. Should they win; Chinese producers will certainly challenge Molycorp, producing their own version of the ‘neo’ product, bringing down prices with it.
In the 1960’s and 70’s, lanthanum and cerium drove the demand for rare earths. They were used to make phosphors used in color TV’s, materials for catalytic converters. Now, the focus is on magnets, requiring neodymium or dysprosium. The production of neodymium leaves a large mass of cerium and lanthanum behind. Perhaps, Molycorp die-hard fans are betting on a resumption of research into uses for cerium and lanthanum, which may one day resume their ‘top banana’ role among REE’s. There is some hope. Lanthanum is very useful in alloys used to make superconductors and the industrial field of superconductivity is one of the technologies that are sure to grow in the next decade. Magnetic levitation uses superconductivity. Superconductors are also needed in high-performance smart grids, energy storage, electric motors and magnetic refrigeration. Until superconductivity gets more attention, magnets will rule demand for rare earths, which does not bode well for Molycorp in the short run.
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