Surprise Molycorp financing hits share price

Shares of Molycorp (MCP-N) plunged 7.5% to US$11.16 per share — a 52-week low — on the day the U.S.-based rare earth company said it would raise US$450 million in convertible senior notes and common equity.

The company is developing its Mountain Pass rare-earth mine in California, and the money will be used for operating expenses, working capital, capital expenditures and other cash requirements for 2012 and 2013.

Analysts at New York-based Dahlman Rose said in a research note that they were “surprised by the size of the dilutive capital raise,” and had expected that the company would pursue lines of credit instead. Of the US$450 million, US$150 million will be common stock and US$300 million will be senior notes due in 2017.

“The size of the capital offering raises questions whether this project will be completed on time and whether the previous operating cost metrics can be achieved in a timely fashion,” they commented, adding that they are skeptical that Molycorp can produce rare earth oxides “at anywhere near the US$2.77 per kg price that management has forecast.”

The analysts reason that Molycorp’s shares “will languish for some time, as the company will likely experience operational challenges at the Mountain Pass mine as it ramps up production.”

Prior to news of the capital raise Dahlman Rose had forecast the company would generate US$1.70 and US$3.50 per share in 2012 and 2013, respectively, but have cut that to US80¢ and US$1.20, respectively.

Earlier this month the company reported that its Phoenix project remains on time and on track to ramp-up production at Mountain Pass to a phase-one rate of 19,050 tonnes per year in the fourth quarter of 2012, and to mechanically complete its phase-two capacity of 40,000 tonnes by year-end.

After closing its US$1.3-billion acquisition of Neo Materials (now called “Molycorp Canada”) in June, Molycorp now produces rare-earth magnetic materials in addition to high-purity, custom-engineered products from 13 different rare earths. These include light and heavy rare earths, five rare metals (gallium, indium, rhenium, tantalum and niobium), and transition metals yttrium and zirconium. The company also produces bonded magnet alloy powders from Molycorp Magnequench, and owns an ultra-pure advanced-material facility in China, which was given the green light in July for full permitting by the Chinese Ministry of Environmental Protection.

On Aug. 2 the company reported disappointing second-quarter financial results. While net sales for the quarter rose 5% year-on-year to US$104.6 million, the company posted a gross loss of US$4.1 million compared to a gross profit of US$56.7 million during the same quarter in 2011. Molycorp attributed the loss to a variety of factors, including lower product volumes shipped, lower prices, increased production costs and transaction costs related to its acquisition of Molycorp Canada. The quarter was also negatively impacted by US$30.4 million of expenses related to inventory writedowns, purchase accounting and stock-based compensation in cost of sales, among other costs.

Capital expenditures for phase one and two of Project Phoenix, commissioning and start-up and other capital projects at Mountain Pass are estimated to come in at US$289 million for the remainder of 2012. All other capital expenditures for the rest of this year — including for Molycorp Canada — are forecast to reach US$17 million.

Looking ahead, the company forecasts annual production of rare earth oxide-equivalent products this year will be in the range of 8,000 tonnes to 10,000 tonnes, not including production from Molycorp Canada.

Matthew Gibson and Ian Parkinson of CIBC’s institutional equity research believe the financing “gives the company plenty of cushion to absorb any bumps in the road during the ramp-up phase at Mountain Pass,” and have a 12- to 18-month target price on the stock of US$30 per share.

The analysts also note that any excess cash could be used to refurbish Molycorp’s Silmet facility, continue expansion at its operations in China or build out alloy capacity at Tolleson.

“The size of the deal does perhaps point to management’s confidence in the ramp-up at Mountain Pass,” they write in an Aug. 19 research note. “Should production not meet our conservative assumptions. The company could have less than the $230-million cash cushion we are forecasting through 2013.”

At press time Molycorp traded at US$10.04 per share, crashing through its 52-week low of US$11 per share. Over the last year the company’s shares have traded as high as US$58.74.