This morning Molycorp (NYSE:MCP) announced a proposed offering of $200 million of common stock and $100 million convertible senior notes due 2018. The company plans to use the proceeds to fund capital needs and 2013 cash requirements, including capital expenditures at its Mountain Pass Facility. Morgan Stanley is underwriting the share offering. In pre-market trading the stock was down $1.13 (12.80%) on the news.
Less than a week ago, in my article "Molycorp: Is Another 'Dilutive Event' Imminent?" I predicted the capital raise almost to the dollar:
In its Jan. 10, press release, management intimated that due to weak prices and production delays, Molycorp's 2013 revenue and cash flows would fall short of expectations. The company confirmed it was on track to produce 19,050 metric tons annually at its Mountain Pass mine by June 2013. However, it decided to delay Phase II of its $1.25 billion modernization and expansion of Mountain Pass until rare-earth conditions improve.
However, what I heard was, 'Molycorp is going to use the $450 million in capital it raised in August 2012 to fund future negative cash flows...' Given Molycorp's current market capitalization of about $1.2 billion, a common equity offering of $200-$300 million could dilute current shareholders by another 15%-25%.
That said, I still have the following questions/observations pursuant to the capital raise.
As rare-earth prices have declined, so have Molycorp's revenues and cash flows. For the nine months ended Sept. 30, 2012, Molycorp's cash flows from operations were -$41.3 million -- i.e., it was a net user of cash. As part of its capital raise, management also announced it may have a 2013 cash shortfall of as much as $250 million. Including the capital raise, how long can the company continue to fund negative flows before it taps into its revolving credit facility?
The fact that management announced the capital raise less than a month before its 2012 fourth-quarter earnings announcement seems a bit inauspicious. My guess is that the earnings report is going to be negative and the company wants to raise the funds while it still has a modicum of goodwill left with shareholders. Once capital is raised, management will deliver additional bad news that will drive the shares down further. There is at least one big negative announcement on the horizon, which I plan to discuss in a future article.
In any event, by going to market now, the company has the best chance to raise the capital. By waiting, it risks having to raise capital at a lower share price and thus further dilution -- and/or risks not completing the capital raise due to lack of demand.
Mountain Pass Expansion
In its Jan. 10 press release, management stated it was postponing Phase II of its Project Phoenix Mountain Pass expansion and modernization. Will the capital raise be used to fund Phase I or Phase II of Project Phoenix? Given its cash flow needs, would it be best to postpone all expansionary capital expenditure projects until the company can rightsize its operating expenses?
Just How Dilutive?
At yesterday's close of $8.83/share, Molycorp's market capitalization was approximately $1.22 billion. Based on a rudimentary calculation, a $300 million equity raise (assumes the convertible note holders convert) could dilute the stock from 15%-25%.
However, after the announcement of the capital raise and $250 million cash flow shortfall, the stock was down almost 13% in pre-market trading. Where the shares will trade just prior to the capital raise is unknown. However, the potential for dilution could be difficult to stomach, even for long-term holders of the stock.
I like the capital raise. It is also another example of how Molycorp's quality management team is willing to make unpopular decisions for the long-term viability of the company. However, I think speculative investors will eventually trade out of the stock, driving the price down further. That, coupled with the potential for more negative news from management, I would recommend investors wait on the sidelines in order to snap up shares at a cheaper price.