Molycorp Field of Dreams

Molycorp Inc. (NYSE: MCP) experienced a trading high of USD $79.16 on May 3, 2011. Yesterday, MCP closed at $9.84 (August 21, 2012).  This is a decrease of 87.57% in 15 months. With their acquisition of Neo Material Technologies Inc. (TSX: NEM) earlier this year, Molycorp is set to become the first vertically integrated rare earth company outside of China.

The $1.3 billion acquisition deal was described as an industry game changer. At Neo Material Technologies’ AGM (May 30, 2012) Mark Smith, CEO of Molycorp requited the term “industrial logic”, which was originally used by Constantine E. Karayannopoulos, Director, President and CEO of Neo Material Technologies to describe the new company. This Company, Molycorp — would have the size, substance and technology to compete anywhere in the world. A week later in a presentation (Slide 14) at the Metals for Energy & Environment 2012 conference (Las Vegas, June 6-8, 2012) Mark referenced the Molycorp-Neo merger as a “highly strategic fit” that:

  • “Combines Molycorp’s world-class rare earth resource with Neo Material’s proven leadership in the production of technologically advanced rare earth products
  • Provides immediate direct exposure to China (~70% of global rare earth consumption)
  • Leverages Neo Material’s existing infrastructure to allow Molycorp the ability to ramp up its overall production, and utilize much of its 40,000 Mtpa capacity by mid-2013
  • Expands capabilities for bonded NdFeB rare earth magnets
  • Expands strategic rare metals portfolio used in advanced electronics, photovoltaic, aerospace, catalytic converters, and lighting industries”

So why the dismal downward trend for what is supposed to be the brass ring of self-sustainability in the US?

Let’s review the timeline. On August 2, 2012, Molycorp warned that it will need to secure additional financing for a substantial portion of its remaining capital expenditures and other capital requirements but did not did not state exactly how much in additional funds they would look to secure (Molycorp Reports Second Quarter 2012 Results). It was less than 24 hours later when CNBC did a piece titled: Molycorp shares hit all-time low on funding woes.

Then the bankers moved in.

August 3, 2012, Molycorp Stock Rating Lowered by Citigroup (MCP)— Citigroup downgrades shares of Molycorp from a Neutral rating to an Underweight . Citigroup now has a $11.50 price target on the stock, down previously from $19.50. JP Morgan, not to be outdone; lowered their rating on Molycorp in wake of its financing announcement. They would reduce the company to Underweight from Neutral and lowered the share price target to $11.50 from $19.50, and then – cut the 2012 per-share earnings estimate to $0.30 from $0.56.

Good news on August 6, 2012, as Molycorp Declares Preferred Dividend provided a reprieve, until August 13, 2012, when the S&P Lowers Molycorp Rating, Places On Watch Developing. This included downgrades from ‘B’ to ‘CCC+’ on liquidity concerns, they would then place Molycorp on CreditWatch noting that cash flow will likely be less than it expected this year due to lower prices and customer destocking. Our editorial team suggested that this may be short-sighted as Molycorp would undoubtedly recover rapidly when funding requirements related to the completion of the Mountain Pass mining operation were met.

Obviously, Morgan Stanley agrees, as they launch coverage, setting an “overweight” rating on the stock (Morgan Stanley Analysts Begin Coverage on Molycorp (MCP). Or, perhaps they were prepping for the inevitable news release on August 17, 2012?

Molycorp directed the next move in a news release titled Molycorp Announces Proposed Offerings of Convertible Senior Notes and Common Stock (August 16, 2012). In this announcement highlights include that Molycorp may raise as much as $517.5 million selling shares and convertible bonds to help fund construction at its Mountain Pass mine in California. It also reassured investors that Molycorp’s largest shareholders, Resource Capital Fund (which has been with them from the start, is represented on the Board) and Chile’s Molibdenos y Metales SA (MOLYMET), have agreed to buy $35 million and $25 million of stock respectively if Molycorp requests it but that this request would not be utilized if the offering of convertible notes is successful (read more).

August 17, 2012, Molycorp releases more news with Molycorp Prices Offerings of Convertible Senior Notes and Common Stock announcing that they have “…entered into a share lending agreement with Morgan Stanley Capital Services LLC (“MSCS”), an affiliate of Morgan Stanley, under which it has agreed to loan to MSCS up to 13,800,000 shares of Common Stock (the “Borrowed Shares”), of which 7,500,000 shares of Common Stock were offered through Morgan Stanley at a price per share of $10.00 (the “Borrowed Shares Offering”) in a registered public offering.”

Dahlman Rose & Co. responds, cutting its Molycorp recommendation to Hold from Buy following Molycorp’s decision to sell bonds and stock according to the story Molycorp Slumps 12% After Dahlman Rose Downgrade On Fundraising. Worse, Molycorp shares slide to $9.84 at the close in New York, the lowest since the company’s July 2010 initial public offering (read more).

August 20, 2012,  Rumor of Chinese Rare Earth Export Quota System Removal May Serve as a Warning as the China Daily reports that recommendations have been made to the Chinese government to scrap the export quota system (read more). Is this how the next shoe drops? The implied justification perhaps in the news story Rare-earth giant suffers profit drop? Reports indicate that Inner-Mongolia Baotou Steel Rare-Earth (Group) Hi-Tech Co, China’s largest rare-earth producer has announced that its net profit fell more than 20% in the first half of 2012 compared to the same period in 2011. Baotou Steel Rare-Earth, industry giant asks subsidiaries to cut or even suspend production to stabilize prices.

JP Morgan Chase cuts price target on Molycorp from $11.50 to $8.50 (JPMorgan Chase Cuts Price Target on Molycorp (MCP) — August 21, 2012), placing an “underweight” rating on the stock.

Today, August 22, 2012; our inboxes are full in response to the media story China Increases Rare Earth Export Allocations to 3-Year High. This means we anticipate a suggested market interpretation that perhaps the price flood gate has been opened. This was the catalyst for us to  reiterate our position on self sustainability concerns in a  piece previously writtent titled Rare Earth Elements and Made in the USA — A Presidential Debate.

“If you build it, he will come” – Field of Dreams