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!
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.
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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.
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.
Christopher Ecclestone is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten & Company in New York in 2003 ... <Read more about Christopher Ecclestone>