Molycorp – Die Another Day?
As the comedian, John Cleese (of Monty Python fame) said in the film Clockwise, “it’s not the despair that gets you, it’s the hope”. Never a truer word was said of Molycorp for just when you think the end is nigh and the towel should be thrown in, then the company pulls a rabbit (admittedly a bedraggled one) out of its hat and gets a new lease of life. So it was this week, with a combo on a sizeable asset-secured financing from a new name in the MCP cast of characters and some results which ostensibly looked feeble but in fact held some hope that a turn in fortunes is now a distinct possibility.
Concurrent with its results this week, Molycorp announced a US$400 million financing arrangement with Oaktree Capital Management through credit facilities and the sale and leaseback of certain equipment at the Mountain Pass complex. The deal was extremely timely as the results announcement WITHOUT a deal like this would have been like lifeboat drill on the Titanic.
Oaktree Capital Management (NYSE:OAK) is not a household name in the mining space. It’s a global asset management firm specializing in alternative investment strategies. The focus is on distressed debt, corporate debt (including high yield debt and senior loans), control-investing, convertible securities, real estate and listed equities. The firm had its origins in a team that left the avant-garde Trust Company of the West back in that firm’s glory days. As of December 31, 2012, the company managed $77.1 billion, primarily on behalf of pension funds, foundations, endowments, and sovereign wealth funds.
The surprising thing is that the financing will be secured by Molycorp assets and guaranteed with the assets of its subsidiaries for a period of five years we would have thought that some (or all) of the previous financings would already have resulted in liens on the goods and chattels of MCP that were worth anything.
The deal also promises to add a further shareholder to the already complicated mix of chunky “core” shareholders with Molycorp issuing to Oaktree warrants for shares of the company’s common stock equal to 10% of Molycorp’s common shares.
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The Latest Results – Vague Sightings of a Silver Lining
Meanwhile, Molycorp also released its 2Q14 financial results with a 48% increase in production volume (to 1,639mt of REO) over the first quarter of this year, as well as a 39% decrease in production cash costs. Those two metrics alone would count as major leaps forward in any company.
However, the sloppy pricing environment in the REE space came home to roost with lower prices in the Magnetic Materials & Alloys segment (inherited from Neomaterials/Silmet) which prompted a 20% decline in revenues. While on-going travails in the Rare Metals segment caused a 34% decline in revenues for the second quarter. In a further welcome sign though this was partially offset by a 31% increase in net revenues in the Chemicals and Oxides segment.
As a result first half revenues showed an 11% decrease in the Magnetic Materials & Alloys segment and a 28% decline in the Rare Metals segment. Molycorp’s Resources Segments increased sales to downstream processing facilities by 117% during the same period as net revenues in the Chemicals and Oxides segment also increased by 2%, but then again that would seem to be sales to itself across divisions.
Molycorp reported a second-quarter 2014 net loss attributable to stockholders of $84 million or 37-cents per share, compared with a net loss of $71.175 million or 44-cents per share for the second quarter of last year.
Adjusted net loss was $64.51 million or 29-cents per share for the second-quarter 2014, compared to an adjusted net loss of $57.1 million or 34-cents per share for the second-quarter 2013.
Molycorp lost $172.81 million or 78-cents per share during the first half of this year, compared to a net loss of $110.15 million or 72-cents per share during the same period of last year. This is clearly unsustainable and fears along these lines had prompted the share price rout last month. However shorters lost their shirts there as the stock bottomed and made a fairly good rally.
The REE Race – no need for seatbelts
In comparisons of Molycorp to Lynas the fabled analogy of the hare and the tortoise comes to mind and then is dismissed as being a race between a tortoise and another tortoise. As they both crawl towards whatever the end-game may be one is reminded less of gallivanting reptiles than of watching paint dry. Progress is glacial to say the least. The irony of Rare Earths being the go-go sector at the end of the last decade to being one of the least progressing in this decade is evident.
Given one’s druthers the preferred state of the industry (if designing the ideal REE mousetrap) would consist of maybe four/five small producers scattered globally with a balanced production of light and heavy rare earths from a variety of mineralisations. Instead we ended up with two behemoths that are producing with a distinct bias to the least desirable Lanthanum and Cerium. Certainly the construction of smaller mines and facilities might have led to less headaches and more nimbleness on the part of the players. What might have been a race of velociraptors (to mix metaphors) ended up as two brontosauri lumbering along and all the smaller fauna left squashed in their clumsy wake.
Both of the industry leaders are somewhat impervious to change as they were built on such a grand scale than implementing Jack Lifton’s dictum of “right-sizing” in the REE space is no longer possible, at least for these two. They are NOT downscalable. And curiously their highly negative vibrations have stymied the evolution of smaller forms of life in the space by making financing so much more difficult (while also destroying the viability of pricing in the Lanthanum and Cerium space. The one company that has been able to pull ahead of this pack is UCore, where the Alaskan government giving loan guarantees has short-circuited the usual cycle of begging/dilution that most other REE players face entering into if they stand any chance of reaching production.
Molycorp however has managed to pull another death-defying stunt. Its financing from Oaktree staves off the evil day and maybe gives it a lease of life until the much awaited turn in the REE space arrives. As I stated several weeks ago MCP has friends in high places in Washington and to some extent shorters were “playing against the bank” in casino terms. So far I have been proven right. Who knows what machinations are behind Oaktree stepping up to save the day.
Breaking the cycle of China-dependency
Molycorp is more than just Mountain Pass and as such has a distinct advantage over the “Plain Jane” Lynas. Even if La and Ce don’t fire up in the short term, MCP has at least part of the array of other REEs in its mix but more importantly has the advanced processing and distribution assets that were once, in their standalone forms, Neomaterials and Silmet. Molycorp for better or worse is the soup to nuts REE machine and no number of smaller fry will be able to replicate that feat. The creation of Molycorp out of these disparate pieces has taken the US, at least, from long being a nothing in the REE space as vulnerable to the Chinese machinations as anyone else and made it almost self-sufficient. With rising global tensions, the US being self-sufficient in oil, natgas and now REEs is a major advance. As I pointed out in the Beryllium study a few weeks back the US can dominate some spaces and chiefly it is under the eagle-eye of the Pentagon that the most rational decisions on what is in the US best interest are made, rather than in the querulous halls of Congress. Molycorp has found itself yet another protector in the form of Oaktree. More is better than less.
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