Molycorp Inc (MCP)’s Expansion at the Mercy of a Wary Market

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The leading American player in the rare earths mining sector, Molycorp Inc (NYSE:MCP has revealed an intention to sell $200 million in stock and $100 million in convertible senior notes (due in 2018) to fund its latest capital expenditure, which includes development work at its Mountain Pass, California  rare-earths mining facility. The news caused an 8.7% dip in the company’s shares in premarket trading; piling on a company whose shares had already fallen more than 60% in 2012.

Bearish options active on Molycorp Inc (MCP) as shares nosediveMolycorp has been hailed as the company that could end the dominance of China in the global rare earth element (REE) industry, They are the 17 elements from Group III of the Periodic Table — the Lanthanides plus Lanthanum, Yttrium and Scandium — that form the beginning of the supply chain for a great deal of high tech equipment. US Army contractors need it to manufacture night vision goggles; Japanese vehicle manufacturers such as Toyota Motor Corporation (NYSE:TM) and Nissan use it in hybrid cars; solar panel manufacturers require it in high efficiency solar cells; high efficiency magnets are made from Neodymium; Chinese and Taiwanese contract manufacturers of mobile devices use it in LCDs. Both the U.S and Japan are among the biggest buyers in this industry whose supply has been 95% controlled by China until recently. More details on the Chinese rare earths sector can be found in my previous article.

Molycorp has a $1.42 billion plan to ramp up the Mountain Pass complex, a figure that is more than its current market cap of $1.10 billion.  The cost of the project has exceeded Molycorp’s expectation, hence the stock offering. An additional $40 million of the common stock will be given to Morgan Stanley (NYSE:MS) in exchange for the lending fee, while Morgan Stanley will be the book runner for the sale.  The business now expects the facility to produce an output of 19,050 tons by mid-2013. Moreover, the initial plan to produce 40,000 tons of rare-earth minerals by the end of 2013 has been deferred due to the weak pricing.

Ultimately, rare earths are a bit of a misnomer. They are not rare like the space metals (Rhenium, Iridium, Osmium) but rather are evenly and finely dispersed throughout the earth’s crust, making few deposits of them economically viable.  The discovery of a major deposit off the coast of one of Japan’s islands – a projected 220 year supply at current usage rates – hasn’t helped a market that has seen its price bubble burst in the past year.

According to its last quarterly statement, Molycorp has about $436 million in cash reserves.  With prices of REE’s falling back to near 2010 levels, Molycorp will only find investors if it can produce at these prices.  Earlier this month, it warned its shareholders that the cost blowout at Mountain Pass, coupled with the falling prices of rare-earths, would result in lower than expected revenues in the first half of the current year and a cash shortfall of $250 million. The note and stock offering is going to cover this.

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