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Molycorp, Inc. (NYSE:MCP)

Q4 2012 Earnings Conference Call

March 14, 2013 16:30 ET

Executives

Constantine Karayannopoulos - President and Chief Executive Officer

Michael Doolan - Executive Vice President and Chief Financial Officer

Analysts

Brian Lee - Goldman Sachs

Jeff Kramer - Morgan Stanley

Chris Kovacs - Robert W. Baird

Paretosh Misra - Morgan Stanley

Zach Zolnierz - GMP Securities

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Fiscal Year 2012 Molycorp Earnings Conference Call. My name is Derrick, and I will be your operator for today. At this time, all participants are in a listen-only mode. We shall facilitate a question-and-answer session at the end of the conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Brian Blackman, Senior Manager of Investor Relations. Please proceed.

Brian Blackman - Senior Manager, Investor Relations

Thank you, operator and good day everyone. Thank you for joining us on today’s call. As you all know, we just released our financial and operating results for the fourth quarter and year end 2012. Our press release is posted on the Investor Relations section of our website under molycorp.com. This call is being webcast and a replay as well as a transcript will be archived on the company’s website. For those of you dialed into the call, a slideshow that accompanies our prepared remarks is available on the Investor page Molycorp’s website as well. For those of you listening by webcast, the slides will be presented in your webcast player, where you advance the slides on your own.

During the course of this call, we will make forward-looking statements and I direct you to slide number 2 for our disclaimers. All statements that address expectations or projections about the future are forward-looking statements. Although they reflect our current expectations, these statements are not guarantees of future performance, but involve a number of risks and assumptions. We urge you to review Molycorp’s SEC filings for disclosure of some of the risk factors that could cause actual results to differ materially. We will also refer to non-GAAP measures and request that you review the reconciliations to the GAAP statements provided with our earnings news release on our website. We will also refer to non-GAAP financial measures and you can find reconciliations to those most directly comparable GAAP financial measures in our earnings release also posted on our website.

As you can see on slide three, joining us today is Molycorp’s President and Chief Executive Officer, Constantine Karayannopoulos, and our Executive Vice President and Chief Financial Officer, Michael Doolan. I would now like to turn the call over to Constantine.

Constantine Karayannopoulos - President and Chief Executive Officer

Thanks, Brian and hello everyone. Let me begin with slide four. 2012 was a year of significant change for Molycorp. First, we successfully transitioned from what was largely a development company to what is now a global operations and production company. Molycorp is the world’s only fully integrated global solution for reliable rare earth supply. By combining the world’s best rare earth resource at Mountain Pass with the world’s best rare earth processing capabilities from Molycorp Canada and Silmet, we are now vertically integrated on a global scale from a world-class upstream rare earth resource to some of the world’s most advanced downstream rare earth processing facilities. Second, we have now completed the construction and commissioning of all key production assets in our new state-of-the-art Mountain Pass facility and we are ramping up to full scale commercial operations and delivering feedstock to our value-added downstream processing centers.

Third, we secured additional capital, including January’s equity and convertible debt raise and we believe that we are now sufficiently capitalized to complete our ramp up to our initial production run rate of 19,050 metric tons at Mountain Pass and to operate in 2013 with a reasonable cash cushion. Fourth, we accomplished all of these things in over the past 15 months while growing market share in several areas and navigating through some pretty challenging headwinds in the global rare earth markets.

Now, my goal going forward for this company is to sharpen our focus on building greater value for our shareholders. Our priorities in this effort will be to instill greater discipline and accountability across the company, improve performance across all business units, and make sure we achieve our cost savings – our cost savings goals, which will involve reductions in overhead spending and headcount. All across the Molycorp enterprise, our people are going to run this business as owners rather than managers. I will provide investors on today’s call with an update on the progress we are making at Mountain Pass and on global market trends we are seeing across our business segments. But first let me have Michael provide details on our Q4 and full years 2012 financial performance. Michael?

Michael Doolan - Executive Vice President and Chief Financial Officer

Okay, thanks Constantine, and again good afternoon to everyone. Excuse me, first a quick summary of the full year on slide six. We reported net revenue of $528.9 million, a 33% increase over revenues in 2011 of $396.8 million. That included of course approximately six months of new revenue from the Molycorp Canada acquisition. And during the year we sold more than 9,200 metric tons of products. Our gross margins for the full year across all segments compressed to 3.3%. Our EBITDA contribution was negative for the year. However, on an adjusted basis EBITDA was a positive $111 million. And we also reported a full year net loss attributable to common stockholders of $460.9 million or a loss of $4.31 per share. Adjusted non-GAAP net loss was $39.2 million or an adjusted loss of $0.37 per share.

Please note that the non-cash goodwill impairment of $258.3 million and the impairment charges on other long lived assets had a negative impact of $2.51 per share. Moving over to our current liquidity planning, during the fourth quarter we continued our annual budgeting process including a detailed review of capital spend and near-term cash forecast. Unfortunately, many of the cost mitigation efforts we have undertook in mid-2012 were not as successful as we had hoped. And at the turn of the year we completed our liquidity analysis as detailed in the 8-K filed last month and summarized on slide seven.

The total capital budget for the Mountain Pass facility is approximately $1.45 billion. And as of December 31st, we had incurred $1.05 billion this budget spent to-date. The remaining spend on the project as of year end is $400 million. Although we view approximately $60 million of this as discretionary as it is related to the further expansion of Mountain Pass capacity beyond our initial – excuse me initial annual target production rate of 19,050 metric tons. This decision to expand will be based on business conditions and we will update you as we progress. In addition we are planning for approximately $50 million of other maintenance and expansion capital projects during 2013 across all other business units, for a total of cash CapEx forecast during 2013 of up to $450 million.

As at December 31st, we maintained $227.8 million of cash and cash equivalents on the balance sheet. And we moved forward with the recommendation for additional financing in the form of primary common stock and new convertible notes in January 2013. We raised $414.2 million net of underwriting discounts and commissions in the aggregate from these offerings which we believe will provide sufficient liquidity under our current business plan for the remainder of the year. While we are comfortable with our liquidity positions, we remain cognizant of our needs to conserve cash. I have recommended to the – our management team to curtail all discretionary investments, implement additional procedures to improve our capital allocation decision making and develop a more rigorous framework to best ensure that investments undertaken provide an adequate return for shareholders. Also we have begun the planning process to improve the long-term health of our balance sheet which includes putting in place a credit revolver facility as discussed on prior calls. While there is no quick fix, we believe that our business is more effectively managed by reducing leverage. And we are focused on ensuring that we achieve our financial and operating goals this year and into the future.

Moving to our detailed financial performance our operating segment results begin on slide eight with the Resources segment. Sales volumes out of Mountain Pass for the full year declined as compared to 2011. And as a reminder the spot transaction market for rare earth was exceptionally strong during the prior year and then the counterbalance of slower demand showing up through 2012. The slower demand had an impact on both volumes and prices within the Resources segment. We continue to observe de-stocking inventories within the supply chain, although it is unknown as to how much material remains in key customer stocks. Nevertheless, we are cautiously optimistic for the returning levels of demand in certain key product applications including catalyst.

On slide nine, our Chemicals and Oxides segment sold 4,631,000 metric tons during the year. And please note that the full year numbers represent a partial year of contribution from Molycorp Canada. Sales volumes out of our Asian operations remain quite resilient and we are observing favorable ordering trends out of Zibo and Jiangyin. Sales volumes out of the European operations were weaker. Chemicals and Oxides volumes were down 10.5% in the fourth quarter as compared to the third quarter of 2012 largely a result of weakness within China. This was offset by strong demand for catalyst products.

On slide 10, our magnetic business sold 3,115 metric tons of bonded magnetic powders and alloys during the year. Although the partial year contribution shows an operating loss, the underlying fundamentals of this business remain favorable. And we are proud of the stability and anticipated EBITDA contribution from this business.

Within our Rare Metals segment on slide 11, we sold 366 metric tons during the year for $78.9 million in revenues. Fourth quarter metals volumes increased 5% as compared to the third quarter and we continue to maintain a healthy balance of critical metals with an toward incremental margin expansion as a result of recent operational initiatives. We also believe our rare metals business is well positioned to grow in step with continued adoption of LED lighting during 2013 which provides diversification from certain rare earth phosphor markets.

To continue with our P&L on slide 12, consolidated gross margin for the full year fell to 3.3% largely as a result of selling prices falling faster than we could process and convert higher priced raw materials. In our Resources segment this reduction was the result of higher processing costs within our legacy infrastructure as well as higher variable costs. Within Chemicals and Oxides and our magnetics units we had somewhat higher cost inventories as we have been traditionally reliant upon third party supplier for these raw material feedstocks.

The impact on cost was also compounded by Molycorp Canada acquisition in which we had to step up the inventory value at the time of the acquisition in a mark to market fashion. As an example we stepped up inventory within our Chemicals and Oxides unit by $22.8 million at the time of the acquisition. And most of that had flowed through cost of goods sold by the end of the year. Across the consolidated company we had a total of $120 million hit the cost of goods relating to LCM adjustments, abnormal costs i.e. unabsorbed overheads and the impact of the purchase accounting.

While we are not immune to pricing changes in the market our ability to secure reliable low cost material at Mountain Pass will help alleviate a substantial portion of this risk on a going forward basis. There remain substantial improvements to be made in our cost structure. However, our progress to becoming the world’s lowest cost producer of rare earth products remains on track. And one of the easiest ways for us to reduce our material costs is to supply rare earth carbonate to our downstream facilities for Mountain Pass. We are targeting up to 5,000 metric tons of rare earth carbonate to be sold to our downstream segments during 2013 and into the next year.

For the full year, we incurred an operating loss of $436.3 million compared to $152.9 million during 2011. Selling, general and administrative expenses totaled $113.7 million during the year while R&D came in at $27.8 million or a 5.3% as a percentage of net sales. We also noticed we recorded a non-cash goodwill impairment charge of $258.3 million in the fourth quarter. This was primarily derived from the Molycorp Canada acquisition. With $145 million being attributable to the Chemicals and Oxides segment, $96 million under the Magnetic Materials and Alloys segment and the balance to the rare metals business unit. Some of the circumstances that have negatively impacted our fair value estimates included consequences of software pricing environment, delays in ramping up the Mountain Pass facility that deferred our ability to start negotiating longer term contracts. Our effective tax rate for the full year was just over 10% which provided a tax benefit of $54.1 million. And on an adjusted basis our tax rate would have been approximately 25%.

Our net loss attributable to common stockholders for the year was $449.6 million or a loss of $4.31 per share. Again $2.51 of this loss was attributable to the goodwill impairment charges. On an adjusted non-GAAP basis we reported the full year net loss of $39.2 million or an adjusted $0.37 loss per share. Adjusted figures take into account operational expansion items out of ordinary business expenses and certain non-cash items including non-cash goodwill impairment.

Moving to slide 13, for the fourth quarter reported total revenue of $134.3 million and a gross loss of $20.5 million or a gross margin of negative 15%. The gross loss during the quarter was driven by unfavorable product mix at our Resources segment and lower pricing and lower volumes at our rare earth and magnetic operations. Net loss attributable to the common stockholders was $362.4 million or a loss of $2.91 per share. On an adjusted basis, net loss was $55.6 million or an adjusted loss of $0.45 per share.

Our cash CapEx spend during 2012 was $791.5 million and during the year we used $89.6 million of net cash in our operations. The most efficient way for us to generate significant cash flow is to ultimately move molecules from Mountain Pass to both external customers and into our downstream segments. This remains our number one operational priority. After January’s capital raise, we believe that we have the liquidity and that’s necessary to complete our project and begin to leverage the sound economics of our vertically integrated model. We remain cautiously optimistic in the near-term and as we now move beyond the Lunar New Year holiday. And I look forward to reporting our progress throughout the year.

Now, let me turn it back to Constantine.

Constantine Karayannopoulos - President and Chief Executive Officer

Thank you, Michael. Let’s look a how things are progressing within our Resources segment beginning of slide 15. Our current operational ramp at Mountain Pass is proceeding well. There are always issues to be addressed when scaling up rare earth separations plant especially one of this complexity. However, I do not expect any significant technical hurdles at this point that will prevent us from achieving our initial full scale run rates by mid year.

In addition to increasing throughput at Mountain Pass, we are also gradually increasing the amount of rare earth feedstock being send to our downstream facilities for processing into value added custom engineered products. When we execute in the final aspects of bringing this new facility online and into full production, we expect to achieve production costs in the $6 to $7 per kilogram range, which would make us one of the lowest costs, if not the low costs rare producer in the world.

With your indulgence, let me give you a bit more color on my last statement. I can tell you from experience that the three most important cost drivers in any rare earth production operation are in order of decreasing magnitude: first, raw materials, second, reagents primarily hydrochloric acid and caustic, and third, utilities power and steam. I have mentioned before that in my view and this is a view I have held for over a decade the Mountain Pass deposit is the best rare earth ore body in the world. I base this on the full criteria we have historically used to evaluate all the ore bodies we have taken an interest in: first, tonnage, second, grade, third, mineralogy, and fourth, thorium, uranium, and other impurities content. This ore body coupled with our front end mill and flotation circuits give us a very high grade mineral concentrate of recoveries, that if not the highest, they are among the highest in the world.

Our cogeneration facility utilizing some of the lowest natural gas prices in the world is producing power and steam at costs that are significantly lower than any other rare earth producers including producers in China. Natural gas prices are boding very well for a general manufacturing renaissance in the United States. Finally, low costs power when coupled with our Chlor-Alkali plant under construction, will produce hydrochloric acid and caustic soda at costs that will be a fraction of what other rare earth procedures have to pay around the world. In addition, the Chlor-Alkali plant will allow for the recycling of our wastewater making Mountain Pass the most environmentally advanced rare earth operations of its kind.

You can see various photographs on slide 16 through 23 of our new facilities which were taken recently. All the main process units are operational with the exception of our Chlor-Alkali plant which is expected to achieve full-scale operation later this year. As you click through these slides, let me say this at the risk of repeating myself. I have seen quite a few rare earth processing facilities over my career. This facility is by far the most complex and ambitious rare earth processing facility ever constructed. The efficiency with which it will operate, its enhanced recovery rates, its reduced environmental impact, these and other advancements will combine to make this facility one of the best and lowest cost rare earth production operations in the world. Ultimately we have to prove ourselves. Maybe proceeding more slowly than was originally anticipated over the last couple of years, but that’s allowing us to deal more efficiently with the inevitable challenges that a plant startup always entails.

Moving to slide 24, let’s touch on some highlights for our Chemicals and Oxides segment. Given that we actively sell into a variety of markets through the segment I thought I would provide investors with some increased visibility on downstream customer trends. For example, automotive catalyst demand remains strong and we successfully grew our market share in this sector during 2012. This market continues to show signs of robust demand going forward. The fluid cracking catalysts or FCC market is another strong sector for us. Our lanthanum remained sold out to our customers in this segment and we have good visibility into larger commercial volumes. In the multi-layer ceramic capacitor or MLCC market, we continue to see customers with persistent inventories. This along with the decreasing size of MLCCs has limited near-term growth in this segment. However, we believe demand will improve as early as the second half of the year.

Demand remained strong in the battery sector both in automotive and smaller battery applications. Suppliers to large consumers of batteries in the automotive space remained particularly busy. In the neo magnet space, a fair amount of buildup inventory remains in the pipeline, primarily in the sintered magnet area. Thus we do not expect improvement in this segment until the second half of this year.

In glass polishing markets, we saw demand erosion during the pricing peak of 2011. To-date, that demand has been slow to return, but it is returning. With rare earth prices well off their 2011 highs, we are seeing renewed interest and expect to see things pickup over the next several quarters. We are not assuming any increase there, however, in our internal models until at least 2014. In the near-term, we expect downward pressure on rare earth volumes prices and raw material costs to continue. Longer term, however, we expect global demand for rare earths to increase, and I believe the company is well-positioned to take advantage of any global market recovery driven by increased uses of our products in energy efficient lighting, hybrid electric cars, and micro motors for energy-efficient devices.

Turning to slide 25 let me give some highlights from our Magnetic Materials and Alloys segment. Demand during the fourth quarter for neo powders produced by our Magnequench business was softer than normal. This was a direct result of lower than typical holiday season demand, particularly in our traditional base markets such as hard disk drives, optical disk drives, and office automation products. Most of the companies in our supply chain, for example, Seagate, Western Digital, and Nidec reported much weaker than expected unit volumes as a result of sluggish global economic conditions.

From a market development perspective, the story is starting to get a bit brighter. A new permanent rare earth magnet that we rolled out in Q4 of last year called MQ2 has the potential to be a significant game changer in a number of downstream markets. Let me provide some background here. Permanent rare earth magnets or neo magnets, as we call them, provide significant advantages over iron-based ferrite magnets, including increased performance, reduced size and weight, and other benefits primarily better energy efficiency. However, magnet customers, magnet consumers rather have been wary over the past two years about using neo magnets, because when they are used in higher temperature under the hood, for example, environments, they traditionally have required the addition of some dysprosium and/or terbium to maintain their magnetic performance.

One of the key problems is that dysprosium and terbium which are heavy rare earths are fairly rare. Relying on these heavy rare earths for inclusion into neo magnets as part of that formulation significantly increases both the cost and supply uncertainty. In response to this, we have developed a new product called MQ2, which provides motor manufacturers with high performance and high temperature stability they need without the addition of any dysprosium or terbium. In fact, the wide advantage in these MQ2 magnets is we estimated to be between 4% and 6%. In other words, you can achieve the same performance as a magnet containing as much as 6% dysprosium without any dysprosium in the formulation. These zero dysprosium or zero DY magnets used newly developed, I apologize. These newly developed neo powders, which are used in MQ2 magnets are made by our Magnequench subsidiary.

What is important is that MQ2 magnets display far superior retention of magnetic flux at elevated temperatures than higher price sintered neodymium magnets and again they contain no price – no high price dysprosium. We are introducing this new product into two principal markets, automotive and home appliances, largely because of the volume potential and the sensitivity of these sectors to energy conservation, which these magnets greatly enhance. Some of the many applications that can use MQ2 magnets are shown on slide 26. These include automotive ignition coils, automatic transmission motors, electric vehicle traction motors and engine cooling water pumps just to name a few. Also displayed are applications that can use our zero DY MQ1 conventional bonded magnets and our low DY MQ3 magnets just to compare the differences. A typical MQ3 magnet has about a 2% to 4% dysprosium advantage compared to the equivalent sintered magnets.

In the home appliance market, we are working with major end product manufacturers for use of MQ2 magnets in direct drive washing machines and also for compressors in air conditioners. This innovative product is a direct result of our proprietary jet casting technology. Moreover, we can make them in our supply chains either inside or outside of China utilizing our low cost production of neodymium and praseodymium for Mountain Pass. With regard to MQ1 and MQ3 magnets, we’re seeing renewed interest in these products as replacements for ferrite magnets as rare earth prices have fallen from the peaks of 2011. For example, while the per kilogram price of MQ1 bonded neo magnets is higher than ferrite. The greater magnetic properties of MQ1 allow users to reduce other costs by designing smaller models with less copper and steel and greater energy efficiency.

Turning to slide 27, on the sintered neo magnet side, our joint venture with Daido Steel and Mitsubishi Corporation completed construction in the fourth quarter of last year of our sintered neo magnet facility in Japan. That facility is now being commissioned and is on its way to achieving an initial 500 ton per year production of sintered magnets that also use significantly less dysprosium than traditional. Our primarily target markets here are again, the automotive and home appliance sectors, but in distinctly different applications that in MQ1, MQ2, and MQ3. In general, our outlook for the 2013 magnetics market is cautiously optimistic. Beyond 2013, both of the world’s leading independent rare earth market analysts are forecasting relatively robust 9% to 15% per annum growth in these markets.

Historically, the Magnetic Materials – the rare earth Magnetic Materials market has grown at about 17% per year. Both also believe this growth could be higher if a stable and predictable supply of neo magnets and the associated supply chains were made available to the market. That is precisely what Molycorp is positioned to provide. On slide 28, you see a quick update on the proprietary SorbX water purification product.

As some of you may have seen, a press release was issued this afternoon, separate from our earnings release announcing a five-year agreement under which Univar, one of the world’s leading distributors of industrial and specialty chemicals will purchase SorbX-100, our proprietary cerium-based water treatment product for distribution to the municipal and industrial wastewater treatment facilities in North America. This is an important step forward in our ongoing commercialization efforts for this product and I’m especially pleased by the company with Univar’s stature and market leadership will lead SorbX sales into these markets.

In summary on slide 29, I’d say that the long-term fundamentals of our business have not changed since Molycorp was launched as a public company. Demand for secure and reliable supplies of high quality rare earth materials remained strong and is forecast to grow robustly in the out years, both inside and outside China. Molycorp is uniquely positioned to leverage the power of our globally integrated supply chain and low cost of production to provide customers with increased security of supply and long-term pricing visibility. We believe that our financial performance for the first half of 2013 is likely to be slightly weaker than that of the second half of 2012. This is due to the typical seasonality of slow global rare earth sales in the first quarter of every year as well as the fact that our Mountain Pass facility is not expected to achieve full scale commercial production until mid year 2013. However, we also expect global supply and demand for rare earth oxides will approach a healthier balance during 2013 and our pricing within many key applications of rare earths will be beneficial to both customers and suppliers.

In summary, I believe that we have built a very unique company, which we are continuing to build the only company in the world that can provide customers with a fully integrated global solution for reliable rare earth supply. Thank you for your attention. And I look forward to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question is coming from the line of Brian Lee from Goldman Sachs. Please proceed.

Brian Lee - Goldman Sachs

Hi, guys. Thanks for taking the question. I guess, first on pricing, it seems like Q4 pricing for the Resources segment was lower than that implied in the spot market for your particular mix, can you give us a sense of what might be driving the disconnect and how pricing should trend from here?

Constantine Karayannopoulos

Yeah, primarily the issue with the fourth quarter pricing was one of mix. I wouldn’t read too much about into this, it was clearly not representative of what most folks look at as the basket of rare earths for the Mountain Pass distribution. Long-term, this will be fundamentally corrected, but at any given quarter depending on which product sell preferentially to others that could create some imbalances compared to the standard indices that folks might be following.

Brian Lee - Goldman Sachs

Okay, fair enough. I guess maybe switching over to costs for a second I know you talked Constantine about $6 to $7 per kg as the long-term target. Can you give us a sense just in the near-term given the delay in Chlor-Alkali and uncertain timing of Phase 2 how we should be thinking about the trend in the cost roadmap just over the next several quarters?

Constantine Karayannopoulos

Sure. The $6 to $7 target is again cash costs and they are Phase 1 only, we are not looking into Phase 2 to get there. I would expect that as we ramp up to full Phase 1 production without Chlor-Alkali will be in the low to mid-teens per kilogram. Once Chlor-Alkali comes on stream, it will have a significant impact both in terms of reducing our reagent cost, as I mentioned earlier, but also because it will have a significant cost impact on our wastewater operations, because until the Chlor-Alkali plant comes on stream and allows us to recycle our wastewater, we have to haul the wastewater offsite and that’s a very expensive operation. So, what might appear as a disconnect between the pre and post Chlor-Alkali operation is really a combination of the benefits coming from cheaper reagents and the elimination of the wastewater haulage charges. I don’t know if that helps you, but I would expect to hit that $6 to $7 a kilogram in the second half once our Chlor-Alkali plant is fully commissioned and operating.

Brian Lee - Goldman Sachs

Okay. And I will appreciate the detail. That is helpful. Maybe last one for me, if I could squeeze it in on the Univar agreement, how is pricing being set on that relationship and are there any minimum volumes being included in the terms of the deal? Thank you.

Constantine Karayannopoulos

Yeah, there is a pricing set as a minimum. Above that pricing, there is an 85%, 15% share of the revenues, so 85% of what Univar charges comes directly to Molycorp and they keep 15%. There is a minimum volume in every year that allows Univar to retain exclusivity. If we drop below those volumes, then the contract becomes non-exclusive if we so wish it.

Brian Lee - Goldman Sachs

Is the pricing floor tied to any spot pricing on cerium?

Constantine Karayannopoulos

No. In fact, the approach we’ve taken with SorbX is we are trying to price SorbX to our eventual customers’ next best alternative. It’s priced independently of what the price of cerium is. It’s priced in terms of what the value is to the end user. So, we have launched the product. We have made our first shipments to Univar and we are doing a number of installations over the next three months that we expect will produce somewhat – some definitive optimization of pricing and utilization of SorbX in a variety of applications, different way streams of different characteristics. So, we might take perhaps a more refined approach to our pricing later on in the year either up or down depending on what the early feedback from the end users is.

Brian Lee - Goldman Sachs

Okay, thanks guys.

Constantine Karayannopoulos

Thanks.

Operator

The next question is from the line of Jeff Kramer, Morgan Stanley.

Jeff Kramer - Morgan Stanley

Hi, good afternoon guys, thanks.

Constantine Karayannopoulos

Hi, Jeff.

Michael Doolan

Good afternoon.

Jeff Kramer - Morgan Stanley

Maybe just briefly on the operational side and on the crack leaching process, we’re using the proprietary technology to increase recovery rates from low 50%, up to 90%. Could you just touch on where that process is and if it’s meeting expectations right now?

Constantine Karayannopoulos

The leach is running at full input. We are experiencing some bottlenecks, which are not unanticipated, typical teething pains, pump failures, filtering issues. We have been fixing those as we’ve been going along. The cracking plant, we expected to be fully operational in the second quarter and that’s when we will see the full recovery rates that you talked about. Again, I would describe the challenges that we’ve had as more teething pains than anything else. I’m nothing serious in it as I said in my comments that would prevent from hitting Phase 1 rates in – by the middle of the year.

Jeff Kramer - Morgan Stanley

Okay, great. And just with regards to the Univar contract and what would you guys consider your contract position right now at Mountain Pass. I know there was a 20% wedge for SorbX in the past. Just to comment where you are broadly and with SorbX?

Constantine Karayannopoulos

At full Phase 1 run rates, we would have excess cerium at year one of the contract, we’ll be getting close in year two. Year one being 2013, which is less than a full year and we have not hit Phase 1 rates yet. In year two 2013 by the end of the year, I would expect that would be getting closed to being sold out of our run rate capacity and by year 2015 according to the volumes under contract if we are shipping those volumes that we will – that will get us to the situation where we will have to make a decision of either implementing and starting up Phase 2 or becoming a net buyer of cerium for this product line. I don’t know if I answered your question.

Jeff Kramer - Morgan Stanley

Yeah, that helps, I guess the rest of the – on the SorbX, but the rest of the products that accounts the lanthanum or cerium directed away from SorbX as far as – what kind of other positions do you have those or those the rest of it the products what we sold.

Constantine Karayannopoulos

Yeah, I think it’s fair to assume that if the SorbX volumes get to that point, pretty well the entire output of separated cerium from Mountain Pass will be dedicated to SorbX. The output of – the Mountain Pass cerium output is ideally – is an ideal fit for SorbX. For additional cerium molecules to serve the rest of our customers, we will have to rely on Silmet separation which will be fed, and actually we have started to ship raw materials to Silmet out of Mountain Pass and we are getting ready to continue to supply raw materials to our Zibo plant in China as well. We have to rely on the rest of our separation facilities at Silmet, Zibo, and Jiangyin to supply the needs of other cerium customers and also our internal needs for cerium molecules as part of our automotive catalyst based product line.

Jeff Kramer - Morgan Stanley

Okay. And just lanthanum and NdPr?

Constantine Karayannopoulos

Lanthanum, we expect will be sold out, out of Mountain Pass into the fluid catalytic cracking markets. NdPr, the bulk of it will be consumed by our Magnequench facility in Thailand as well as our Tolleson facility in Phoenix. In addition to putting together a number of NdPr metal and neodymium-iron-boron alloy product lines for customers in Japan primarily in the sintered magnet base.

Jeff Kramer - Morgan Stanley

Okay. And just lastly on the financial side obviously at the capital raise in January, and you are projecting healthy cushion at the end of the year, do you feel like you should be kind of displaying what capital raise is for 2013, and just on the ABL facility, should we expect that to be signed, I guess, in the next couple of months or?

Constantine Karayannopoulos

Sorry what was the last part of your question?

Jeff Kramer - Morgan Stanley

The ABL facility that’s being considered?

Constantine Karayannopoulos

Yeah. Well, why don’t I take a sip of water and I will ask Michael to answer that, but yeah, fundamentally you are not off.

Michael Doolan

Yeah, certainly we do not anticipate total impact to the market in 2013 and just on the ABL it’s actually we are looking at a traditional just revolving credit facility. This still remains the number one priority. We have been sort of distracted during this first quarter, but the bank we are dealing with is anxious for us to proceed. And yeah, I hope to be able to report positive news by the next time we do our call.

Jeff Kramer - Morgan Stanley

Okay, that’s in China, right?

Michael Doolan

Well, there is a tranche in Asia, yes, but there is also rest of the world piece, so round number is $25 million in Asia and $100 million for the rest of the world.

Jeff Kramer - Morgan Stanley

Okay, thank you.

Michael Doolan

Okay.

Operator

Your next question is from the line of Chris Kovacs, Robert W. Baird.

Chris Kovacs - Robert W. Baird

Hi, thanks for taking my question. First, on the decision to no go or go on Phase 2, you mentioned SorbX in demand there, what are some of the other factors that are just sort of decision-making process, and when should we look out for that?

Constantine Karayannopoulos

Yeah. Clearly, since half of our output out of Mountain Pass is cerium, SorbX will play a big role in any decision to startup Phase 2. Other factors will be the health of the magnetic industry both the sintered customers that we have as well as our internal Magnequench division. Lanthanum, I think could be not as important a revenue and margin driver if we have NdPr and cerium sown up. So, fundamentally, I think the biggest challenge will be cerium. There is really no other customer, no other producer rather of rare earths in the history of the rare earth industry in the last 20 years that has been sold out of cerium.

Neo materials used to be, but that involved a number of optimization steps running the separation facilities at lower rates if the output could not be sold and becoming a net buyer of other products in the markets, but realistically, I have not come across any rare earth operations that have been sold out of cerium on a sustained basis. So, if we can sell out, if we have a pretty good visibility into cerium sales SorbX or not, then that will go a long way towards justifying the startup of Phase 2, because let’s face it, selling neodymium and praseodymium into the growing magnet space is not as big of a challenge as selling cerium into any application that will accept it.

Chris Kovacs - Robert W. Baird

So, you gave yourself about a year till you have that decision?

Constantine Karayannopoulos

Well, no, I think the year might be a little too soon, because the markets are still fairly depressed. We would prefer to see the real demand for rare earths become a little closer to apparent or the other way around, apparent demand, which is what we are seeing now being a little closer to the real demand. The real demand being the rare earths that ultimately are used in all the consumer products that are being bought on a daily basis and there is still a significant disconnect, if you do better first principles accounting of what rare earths are bought and sold in the world.

So, when the apparent demand gets a little closer to what it should be and we have a little bit better visibility for a few quarters and perhaps a little longer term of that and we will make that decision in Phase 2. But the bulk of Phase 2 is still integrated into Phase 1 that it’s not really that big a step. There are a couple of fundamental steps that we will need to take such as the construction of Phase 2 of our co-gen facility. But we can operate Mountain Pass at higher rates than Phase 1 without absolutely having to have Phase 2 of co-generation. We also need to spend a bit more money on Chlor-Alkali on an additional burner for example, but these are not high cost items. Collectively, they are in the ballpark of about $60 million to $70 million and they have about a 12 month lead time some of these issues, some of these items. So, I think if we by the end of this year, if we feel that we have a little better visibility on SorbX as well as the rest of the industry, we could be getting closer to making that decision to startup Phase 2. But in all honesty, if that’s the case, I will be very pleasurably surprised, I wouldn’t expect to be having this conversation with our board probably well into 2014.

Chris Kovacs - Robert W. Baird

Okay. I imagined you’ve had plenty of customers that you had long-term agreements with, some trying to come back and renegotiate with you, is that behind us now?

Constantine Karayannopoulos

Well, yes and no. There are a number of customers that I would – let me say this the right way. It’s very easy to forget what happened in 2011, and I guess there are still a few folks out there that feel that there might be room for prices to continue to slide. Of course when prices stops sliding and they start going the other way they want to get the benefit of the even lower prices. So, it’s a constant struggle. Some of our contracts have floors and ceilings, which allow for prices to come down within certain percentage of the Asian metal or the Metal Pages Index. So, I think the relative volatility in the prices is a fact of life for those contracts, they are long-term.

But specifically what I am referring to is contracts in the magnetic space where we suffered through the couple of years or year and a half of motor producers and the users of motors made a very conscious decision to get out of any activity that introduced any new development in motors that utilized rare earth based magnets given what had happened to prices. So, I think it will take someone like Molycorp back in the space, back in the supply chain what a secure supply position all the way from raw materials to magnetic materials and magnets out of our AMG, for example, facility at a predictable price to cause these customers to regain the confidence that they lost for a good reason back in 2011. It’s not going to be a quick solution. But I think as I said, Molycorp has a big role to play in this. And I expect this is something that we will be able to turn into a very fundamental advantage compared to all of our other competitors inside and outside of China.

Chris Kovacs - Robert W. Baird

Okay. My follow-on is kind of related, anything that you at the helm would like to divest now that you’re running the show?

Constantine Karayannopoulos

Sorry, I didn’t get the question.

Chris Kovacs - Robert W. Baird

To divest say any of your operations that don’t really fit into your plan?

Constantine Karayannopoulos

At this stage, listen we have some pretty clear priorities and objectives. If someone shows up with a big check for any of our assets we’ll listen everything has at the right price.

Chris Kovacs - Robert W. Baird

Anything is for sale.

Constantine Karayannopoulos

Well, it’s not on sale, it’s not for sale, but at the end of the say if someone wants to pay the right price for some of our assets with the exception of the crown jewels like Mountain Pass, for example. I’d be willing to listen and, but we are actively quoting any buyers for any parts of our business as I said, we are not a very large operation and we need to be deadly focused on what’s going to make the difference in the near-term like starting up Mountain Pass and focusing on some of our key customers. Next year or two years from now if we have sold all of over and achieved all of our other objectives, yeah, that might be the right time to start revising or just starting to examine whether our asset base is the right asset base and how all of our assets fit, but I wouldn’t hold my breath; I will be doing any asset sales in the near-term.

Chris Kovacs - Robert W. Baird

Great, thanks. Good luck.

Constantine Karayannopoulos

Okay, thank you.

Operator

(Operator Instructions) Our next question is coming from the line of Paretosh Misra, Morgan Stanley.

Paretosh Misra - Morgan Stanley

Hi guys.

Constantine Karayannopoulos

Hi, Paretosh.

Paretosh Misra - Morgan Stanley

I thought you said that you expect to get your first refined samples probably sometime in the second quarter. And is there any certification process after that, in other words, you have to send it to your customers and they let you know if the samples meet the quality they are looking for or how does that…

Constantine Karayannopoulos

Refined samples of what?

Paretosh Misra - Morgan Stanley

Of rare earth say neodymium, praseodymium, and lanthanum primarily.

Constantine Karayannopoulos

Well, we have been producing NdPr out of Mountain Pass for a couple of years now. I assume you are talking about coming out of our new Phase 1.

Paretosh Misra - Morgan Stanley

Correct, yeah, new Phase 1, yeah.

Constantine Karayannopoulos

Well, given the fact that the bulk of the NdPr or a significant portion of that will be used internally. I don’t expect very serious qualification issues. I think ultimately what comes out of the Phase 1 facility will be indistinguishable from the legacy systems that were employed at Mountain Pass, but yeah, the late first quarter, which is a couple weeks to go. Second quarter is the time when we will have commercial quantities coming out of NdPr out of Phase 1.

Paretosh Misra - Morgan Stanley

Got it. And then the second and the last question, could you tell us what was the cash cost at Mountain Pass in the fourth quarter or at least approximately?

Constantine Karayannopoulos

Well, I’ll turn it over to Michael. There is some – we do have our estimates and there are a number of issues around the Q4 cost such as increased wastewater charges and the like, but I’ll let Michael to elaborate.

Michael Doolan

Yeah, actually in Q4 just given the low production volumes, but also the ramp up of additional maintenance in anticipation of the Phase 1. On a cash basis, it’s jumped to almost just under $36, I mean, I would say that’s abnormal, but that’s just, I mean that’s the math of the quarter. And as Constantine said, wastewater haulage as an example typically $3 million plus in the quarter was just over $10 million for this quarter as we had to close a couple of the ponds and haul more wastewater up offsite.

Paretosh Misra - Morgan Stanley

Got it.

Michael Doolan

That we get – that should come as again as we start to ramp up now in Q1 and then going forward, as Constantine said, in the absence of Chlor-Alkali low to mid-teens and then by the end of the year into that $6 to $7 range so, we’re still – notwithstanding the split, we’re still on track for what we’ve indicated previously.

Paretosh Misra - Morgan Stanley

Understood. Thanks and good luck for the ramp up.

Constantine Karayannopoulos

Okay, thanks.

Operator

Due to time constraints, our final question will be coming from the line of Zach Zolnierz, GMP Securities.

Zach Zolnierz - GMP Securities

Hi, guys, thanks for taking the questions. Just quick question on cash flow generation, I guess I’m just wondering when you gave the adjusted EBITDA number of $111 million, is it fair to assume that the legacy neo assets, are they doing a number perhaps higher than that and then Mountain Pass is a draw on that number at this point?

Michael Doolan

Actually that’s a fair assessment. If you look at legacy neo, quite frankly it wasn’t as high as I would hope for a full year basis. But again on an adjusted EBITDA basis we back out the old neo deal costs and so forth 130 to 135 on a full-year basis. So yes, so then there is offset at Mountain Pass and so forth and earlier costs at Silmet at the beginning of the year. They were operating at a loss as well.

Zach Zolnierz - GMP Securities

Got it. And I think in the past you guys have given some disclosures on the cash balance and sort of where that cash was divvied up in the corporate structure. I guess if you could just comment. I mean are you pretty - is it pretty flexible on how cash can move in between entities and of the 220 side to 227 ending balance I mean is that – so it’s fair to just assume that that’s all available for CapEx?

Michael Doolan

Essentially, yes, I mean there are some frictional cost movements between jurisdictions. And other than that I mean one question of course we always get is the draft in China. There is procedural issues, really, just basically, having the authority to sign off on your earnings for the previous year, so in this case having them signoff on our 2012 earnings. After they do that, then we are free to distribute the cash. So, that’s underway now. We would expect that any of 2012 earnings would be distributable by May. And we actually have still some 2011 earnings that are undistributed that could be distributed at any time.

Zach Zolnierz - GMP Securities

And then to confirm, you talked about the ABL earlier. You talked about putting it in place but you didn’t actually say whether you expect it to draw I mean that you expect to put in place, but you think liquidity is ample now and that’s assuming no drawer on the facility, is that accurate as well?

Michael Doolan

I guess what I would suggest is that the $25 million piece or portion thereof just as working capital needs in Asia, but it would be used as a working capital management tool. The $100 million I would say is really essentially undrawn.

Zach Zolnierz - GMP Securities

And then just a couple quick last ones, first on the JV, the magnet manufacturing JV structure. You mentioned that, I guess I’m wondering how as we look in 2013, how that’s going to flow through the financials and if given it’s that almost a third, a third, a third I mean is there any cash flow expected from that operation and how that perhaps ramps up?

Constantine Karayannopoulos

Well, let me start by saying that we do not, initially when we went into this JV we did not expect it to be cash flow positive or at least contributing cash flow back to the ownership structure before 2015. The facility is being commissioned as we speak and it was completed last year and we expect shipments of magnets to one of our main German customers in the second quarter of this year.

Michael Doolan

I guess to the second part of that question, we were just equity account for our percentage interest in the JV similar to we do as Toda and the (indiscernible) ventures.

Zach Zolnierz - GMP Securities

Alright, that’s helpful. And then my last question and I understand that this perhaps can’t be answered. But I was wondering Constantine if you could comment on perhaps the relationship with Molymet, obviously a large shareholder and perhaps just to give us a sense maybe what type of synergies are there with that relationship that maybe is not apparent. And then thanks for the time guys.

Constantine Karayannopoulos

Molymet owns just under 20% of Molycorp. John Graell, the CEO of Molymet is on our Board. There are really no synergies to speak of other than being able to draw on John’s tremendous experience in the Resource space, as well as global markets because Molymet is the largest supplier of molybdenum to the world, extensive operations, experience in South America, North America, Europe, and Asia, but other than there is really no other synergies to speak of. Incidentally they were a big investor in our latest fund raising round both in the equity and the convert issue, and they have a fantastic balance sheet that we hopefully we won’t need any of it in the future but they have been extremely supportive so far.

Zach Zolnierz - GMP Securities

Alright, thanks. Great job guys.

Operator

At this time, there are no further questions in the queue. I would like to turn to turn the call back over to Mr. Brian Blackman, Senior Manager of Investor Relations for closing remarks.

Brian Blackman - Senior Manager, Investor Relations

Well, I would just like to conclude by thanking everybody for joining us on today’s call. And we certainly look forward reporting our first quarter 2013 results to you in May. Thank you very much again for joining our call.

Operator

Ladies and gentlemen that concludes today’s conference. We thank you for your participation. You may now disconnect. Have a great day.

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