EDITOR: | August 8th, 2014 | 19 Comments

Molycorp – Die Another Day?

| August 08, 2014 | 19 Comments
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clockwise-orangeAs 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.

Solvency Restored

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.

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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Comments

  • Jack Lifton

    Chris,

    An excellent commentary as usual, and one that gets to the very heart of the matter.

    I wonder though if the Pentagon is the fairy godmother of this last minute diaper change by mama Oaktree. It seems more likely to me that Oaktree’s perception of such an interest is all that would have been needed. I personally hear about the critical importance of rare earths to the US military almost every day from somewhere in the institutional investment galaxy but only rarely from the DoD itself.

    Oh well. Someone else’s money has once again come to the rescue, and the crew of the Titanic has found yet another large wad of chewing gum to stave off the water leaking into the lifeboat. Now if they can only get to dry land before the chewing gum gives out.

    I can think of more pithy mixed metaphors, but this is a family blog.

    Please keep writing, Chris, you always brighten my day.

    August 8, 2014 - 9:31 AM

  • u4eah

    – Chris; perhaps both sides of congress can come to terms with your sobering assessment; “With rising global tensions, the US being self-sufficient in oil and natgas and now REEs is a major advance”.
    – Let’s also hope that the “eagle-eye of the Pentagon” , shall rule the day; …and REEs fall back into favour; so that Many-of-us might live the “Happy-Ending” after-all !
    – Good “eagle-eye” there Chris !

    August 8, 2014 - 10:43 AM

  • Aat Oskam

    Chris, “plane Jane” Lynas will produce (besides the Ce- and La-carbonates): Nd / Pr oxide, Nd oxide and Pr oxide 5,400 tons
    SEG + Heavy Rare Earths 960 tons IF they reach their 22K tons fase 2 production. So even if they reach half of that by the end of this year, I do not see why Lynas could not make it?

    Source: https://www.lynascorp.com/Presentations/2014/Lynas%20Investor%20Presentation%20050514_final%201326317.pdf

    August 8, 2014 - 2:03 PM

    • Bob

      That is correct Aat Oskam. Lynas has certainly got a superior mix of REE. Maybe Mr Ecclestone can enlighten us further as to what he means by “MCP has at least part of the array of other REEs in its mix.”
      Molycorp are unable to sell all Ce produced at phase 1 capacity where as Lynas has no such issues with phase 1 production underpinned by of take agreements with Solvay and BASEF.

      August 9, 2014 - 3:52 AM

  • Joe o

    Lynas debt is very high and they’re very diluted. Just like mcp
    They both may make it. But shareholders take a bath

    August 8, 2014 - 2:33 PM

  • Michael Roat

    When will prices increase? Prices in China have reached a minimum and will likely move higher in the near term given the new tax laws and national stockpile. The result of the WTO case is potentially a 40% decline in ROW prices, although if prices increase now it won’t matter. The market is global though with many companies buying rare earths in China, Europe, North America etc.

    August 10, 2014 - 5:57 PM

  • Michael Roat

    Well it will matter because lanthanum could reach $21 and not $30, but it’s more accurate to say it won’t affect the timing of the price rise..

    August 10, 2014 - 6:01 PM

  • Michael Roat

    That is if the market recovers now. If one looks at the effect of the SRB purchase of germanium there was a lack of material available for export. If the same applies for rare earths ROW prices could begin increasing and companies could not afford to wait for China’s implementation of policy in accordance with WTO rules. Of course though when will La prices diverge from cerium. Lots of uncertainty in the rare earth space. Molycorp’s production volumes should continue to improve and the financing allows them to wait for a price increase.

    August 10, 2014 - 6:13 PM

  • Steve Mackowski

    Close examination of the fundamentals behind Lynas and Molycorp show clear differences that allow quantification of which one has the best “success factors”. Caveat emptor, however. Just like the Oscar Awards for the best movie of the year, this rating does not make it a good movie. Both companies have very high debt to service and what would appear to be too low annual revenue to service that debt. If their fundamentals are examined, there are ways for both of these businesses to succeed.

    August 10, 2014 - 8:41 PM

    • Tracy Weslosky

      Great comment Steve, thank you. I suspect Oaktree wanted this challenge, and believed they could do it! I look forward to seeing how they maneuver the fiscal part of the MCP machine towards success,

      August 11, 2014 - 9:03 AM

  • Fred

    If you look at all of the degrees of control that Molycorp has over the parameters that can lead to success, it has the most ability to affect the sales of end products that use its LREEs. Its a matter of getting its message out to stodgy municipal bureaucracies to market water treatment products such as SorbX-100 and PhosFIX.

    It may sound funny, but perhaps Molycorp can offer net-1 year terms to water departments (who often have no immediate budget for this) to jump start sales of their products. While it wouldn’t put much immediate cash into Molycorp’s pockets, it would provide them with receivables. If they search the capital markets, they may find firms willing to advance cash to them based upon targeted receivables, and not necessarily at high interest rates.

    August 11, 2014 - 11:17 AM

    • Christopher Ecclestone

      Thanks Fred for those thoughts.. I think you are onto something there… indeed it is maybe the genesis of a whole new story altogether!

      August 11, 2014 - 11:23 AM

    • hackenzac

      I wonder if the Toledo water department uses SorbX? Molycorp should work on an EPA registration for broadcast application right into Lake Erie. It’s a pretty serious emergency out that way and that stuff could be effective in controlling algae blooms.

      August 11, 2014 - 12:01 PM

  • JOE O

    If I remember correctly I think jack Lifton doesn’t think that sorbx is works any better or more cost efficient than any other water treatment product. If it actually did than I would be stunned if MCP wouldn’t be moving more aggressively on it and pushing Univar to distribute it How does that deal seem to be working out?

    August 11, 2014 - 1:56 PM

    • hackenzac
      August 11, 2014 - 2:29 PM

    • Gareth Hatch

      I have heard first-hand (albeit anecdotal) comments directly from water-treatment engineers, who indicate that SorbX is an effective product. Recent information published on the SorbX Web site would also indicate that the product is technically superior to other compounds in the same market place.

      Like any new product, it takes time for new chemicals to be evaluated and qualified by municipalities and other potential customers, especially for “mission critical” system like water treatment / purification.

      August 11, 2014 - 4:11 PM

  • Joe o

    As a shareholder of mcp I would love in sorbx can make a dent in mcp cerium stockpile. Question would what’s the market, markup and can mcp sell it b4they run out of cash. Cause I don’t know if they ever can go back to the well and not totally slaughter common stockholders

    August 12, 2014 - 1:15 AM

  • Michael

    In summary, customers will likely continue to buy from hand to mouth until prices increase or China removes the tariffs. Really the goal is calling a minimum in prices. They’ve certainly reached that level within China but the WTO case is the question mark over the international market. Although, like I said, most of these companies purchase rare earths in China and in other countries, so they pay both prices and it’s one global market rather rather than two. If prices begin increasing though, companies will probably make the choice of restocking now. International prices can decline 40%, unless companies see prices increasing 40% before then. Any thoughts? Also, prices usually rise in q3 or they did in 2013 all through August, so still waiting on that. Hopefully if demand improves this month it is a true rebound and prices will continue increasing through q4 rather than falling back.

    August 12, 2014 - 12:39 PM

  • Steve Mackowski

    The use of lanthanides in water treatment is not new. What is new is attempts to commercialize. The issue is what price cerium? Difficult to see a downstream industry being created when the long term price and availability of raw materials is so unclear.
    However, should the long term cerium issue be such that Molycorp can write a 10 year contract at operating cost pricing, then its a start.

    August 12, 2014 - 7:49 PM

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