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Molycorp, Inc. (NYSE:MCP)

Q2 2013 Earnings Conference Call

August 8, 2013 16:30 ET

Executives

Brian Blackman - Vice President, Investor Relations

Constantine Karayannopoulos - President and Chief Executive Officer

Michael Doolan - Executive Vice President and Chief Financial Officer

Analysts

Brian Lee - Goldman Sachs

Paul Forward - Stifel Nicolaus

Michael Gambardella – JPMorgan

Jeff Cramer - Morgan Stanley

Mike Ritzenthaler - Piper Jaffray

Avinash Kant - DA Davidson & Co.

Bruce Klein - Credit Suisse

Bo Hunt - Bank of America Merrill Lynch

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Molycorp Earnings Conference Call. My name is Philip and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today Mr. Brian Blackman, Vice President of Investor Relations of Molycorp. Please proceed sir.

Brian Blackman

Thank you, operator and good day everyone. As many of you see, we have just released an 8K and our press release announcing the second quarter results for 2013. Our press release is posted on the Investor Relations section of our website at molycorp.com. And this call is being webcast and a replay will be archived on the company’s website following this call. For those of you dialed into the call, a slideshow that accompanies our prepared remarks is available on the Investor Relations page of Molycorp’s website. And for those of you listening by webcast, the slides will be presented in your webcast player where you may advance the slides on your own.

During the course of this call, we will make forward-looking statements and I direct you to slide two for those 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 are you to review Molycorp's SEC filings for discussion of some of the factors that could cause results material results to differ. We also will refer to non-GAAP financial measures and you can find these reconciliations to the 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, Executive Vice President and Chief Financial Officer, Michael Doolan and Executive Vice President and Chief Operating Officer Jeff Edward.

I would now like to turn the call over to Constantine to begin today’s call.

Constantine Karayannopoulos

Thanks Brian and good day everyone. First let me make a few high level comments before Mike will provide details on our finances. I'll then speak to some of the market and technology trends we’re seeing across our business segments and finally Michael, Jeff and I will be glad to take your questions.

Let's start on slide four, we continue to see demand returning to more normalized levels as supply chain inventory destocking seems to be subsiding and we’re seeing increasingly bullish sentiment from our customers with regard to purchasing plans in the second half of the year. It has also been encouraging to see some strengthening of prices for various rare earths in recent weeks. Some of us has lived through many rare earth pricing cycles I tend to take a fairly conservative view of these trends. However, I do want to note the increasing success of the various levels of the Chinese government in their efforts to gain more control over illegal production and smuggling.

These gains are probably figured into some of the recent price movements. The progress that China is making in this area should help deliver greater stability and predictability to markets which is good for the industry as a whole. On the environmental regulatory front, China also continues to make significant progress. We have three plants in China so we see firsthand China's commitment to change in this area. These efforts benefit the entire rare earth industry; the people of China as well as the global community at large.

In the second quarter our Magnequench business delivered good results as volumes for bonded magnetic powders rose in line with expectations. Forecast by our customers continue to increase and we look forward to the second half of the year which we expect to be stronger than the first. I would also like to point out that historically Magnequench has come out of cyclical slowdowns before the rest of the rare earth industry. At Mountain Pass production continues to climb and the facility has successfully demonstrated an operating capacity in access of 15,000 metric tons per year of rare earth oxide equivalent that makes Mountain Pass one of the largest operating rare earth processing facilities in the world.

I'll provide additional detail later on the call on our progress and plans on Mountain Pass. But first let's have Michael go over the details of our second quarter financial results. Michael?

Michael Doolan

Thanks Constantine and again good afternoon to everyone. First a quick summary of the quarter on slide six. We reported net revenue of 136.9 million, a 6% decrease from the first quarter of 146.4 million. We sold more than 3,000 metric tons of product during the quarter. The gross margins was a negative 13.5% or a gross loss of 18.5 million. We reported loss before interest, tax depreciation and amortization of 32.7 million and the loss of 10.6 million on an adjusted non-GAAP basis. Our net loss attributable to common stockholders for the quarter was 74 million or a loss or $0.44 per share. On an adjusted non-GAAP basis we had a loss of $0.34 per share.

In today's press release you will note that we will be filing an amendment to our quarterly report on Form 10-Q/A for the period ended March 31, 2013 with the Securities and Exchange Commission.

A summary of reconciliation of the restatement is presented on slide seven. The Form 10-Q/A to be filed will indicate a material weakness in our internal controls at Mountain Pass in the first quarter which we have subsequently remediated and are currently testing. The Form 10-Q as filed for the first quarter understated inventory related to our resources segment by approximately 16 million. This concurrently over stated cost of sales by approximately 16 million and overstated our tax benefit by approximately 6.5 million. It also overstated our consolidated write-down of inventory by $18 million and then understated our disclosure of consolidated assessment of abnormal production cost by $17.4 million. There was no effect on the net cash used in operating activities or balance of cash at the end of first quarter 2013.

Also during the first quarter, our SG&A expenses were understated by approximately $2.1 million with respect to the approval of certain severance charges, this error caused the income tax benefit in the first quarter to be understated by $800,000. Again, there is no cash impact related to this misstatement. For comparison, our restated consolidated gross margin during Q1 is negative 3.1%, an increase of 11 points compared to the prior presentation.

Earnings per share for the first quarter are restated at a loss of $0.27 per share, a positive movement of $0.06 per share compared to the prior presentation. All sequential comparisons for this quarter’s performance will be presented against the restated Q1 figures as pertinent. Additional details related to the restatement are provided in the explanatory noted in today’s 8-K filing.

Now, moving on just to a review of our results for the second quarter and then shifting to our detailed financial performance to the second quarter of 2013. Our operating segment results begin on slide eight with the Resources segment. During the second quarter, Resources sold 1,049 metric tons of rare earth oxides, or REO equivalent products for $17.6 million in line with the prior quarter’s revenue. Our volumes increased 37% over the first quarter included commercial volumes of light rare earth carbonate shipped to our chemicals and oxides processing facilities. Our average selling prices declined from $23 per kilogram to $17 per kilogram largely due to shifting product mix and slightly lower spot prices for rare earth oxides.

On slide nine, chemicals and oxides reported $41.5 million in revenue, a decrease of 35% as compared to the first quarter. The decrease in revenues was largely volume-driven, surrounding lower commercial volumes as certain customers continue to de-stock their supply chains. Customers in all market segments continue to monitor their inventory levels closely. And although overall demand remains soft, we are encouraged by improvements for automotive catalyst and fluid cracking catalyst applications as well as automotive and smaller battery applications. Average selling prices also declined slightly related to both reduced spot pricing for rare earth oxides as well as product mix.

Moving to slide 10, magnetic materials and alloys revenue increased 21% quarter-over-quarter to $66 million as we sold a higher volume of bonded magnetic powders in the second quarter. We also realized a slight increase in pricing related to product mix, increase in ASPs from $43 in Q1 to $45 in Q2. MMA continues to contribute healthy cash flow from operations and the growth trajectory in this business remains favorable.

Last, on slide 11, our rare metals revenue declined 9% from the prior quarter to $25 million. Volume growth from 81 metric tons in the first quarter to 92 metric tons in the second quarter was driven by increased consumption in advanced electronics, super alloys, and LED applications. However, an overall shifting product mix yielded lower average selling prices of $272 per kilogram, a 20% decline as compared to the first quarter.

Now, you will also have noted a significant change in our tax rate quarter-over-quarter. With the finalization of the purchase price adjustment related to the acquisition of new materials as well as updated forecast, the annualized effective rate was adjusted from 40% to 20%. This change had a $0.15 negative impact on EPS in the second quarter.

Moving on to the balance sheet, we look at slide 12. In terms of our balance sheet and statement of cash flows we use $37.4 million in cash for operations during the quarter and spent $83.6 million in total cash capital expenditures. Total capital expenditures for Mountain Pass are estimated at approximately $1.54 billion. As of June 30, 2013, we had spent $1.3 billion on the project and remaining spend through year end is estimated at $150 million.

Excluding Mountain Pass, we expect to spend approximately $17 million on other maintenance and expansion projects across the other business units during the year, some of which are discretionary projects. The remaining total CapEx forecast for 2013 is 167 million.

As of June 30, we maintain 264 million of cash and cash equivalents on the balance sheet and we plan to fund remaining capital expenditures from this cash balance and cash generated from operations. We also continue to evaluate and pursue additional sources of liquidity and we’re indeed closer to finalizing our $125 million revolving line of credit.

And now I would like to turn the call back to Constantine.

Constantine Karayannopoulos

Thank you Michael. Now let’s look at how things are progressing first within our Resources segment beginning on slide 14. As of this week Mountain Pass has successfully demonstrated an operational capacity of approximately 15,000 metric tons per year making it one of the highest capacity rare earth processing facilities in the world. This is no small achievement particularly given the fact that this facility is newly constructed and incorporates several technology innovations never before used in rare earth production.

It is also testament to the hard work and determination of the outstanding team at Mountain Pass that has been working tirelessly to bring this facility up to world class level of operation.

While we’ve not yet brought the entire facility up to its original capacity of 19,050 metric tons per year all units in the production line has successfully operated at this capacity or greater, with the exception of the last stage of our multi-stage crack unit. I would like to give some additional color on the call with regards to the ramp-up as well as provide a bit more clarity on where we’re and why.

In 2012 the company decided to delay implementation of the last stage or a multi-stage crack plan. What drove the decision was a potential benefit of delaying certain capital expenditures as well as the expectation the Mountain Pass can be operated at a Phase I level without this step. In order to make up for it however we would have to run the rest of this process which we collectively call leaching at Phase II rates but as an overall lower recovery level.

In pushing the leach units over the past several months to Phase II levels we have learned a great deal about how to optimize our operation and their limits. As we have discussed before it is routine to encounter a number of bottle-necks when ramping up a facility such as this and we ran a serious of campaigns to the bottle-neck N number of items. These included the filtration and pump issues that I mentioned in the last earnings call. The new filter presses were installed in June and have been operating consistently without a problem since. We have also successfully sold a series of material compatibility challenges around pumps, tanks and agitators in our leach circuit. It is what in previous calls they have referred to as hand to hand combat. Our pumps and agitators have now been running for over a month or more without any issues. But we also learned that as we push leach our leach unit harder it has a negative impact on our recovery rates and reagent use which ultimately affected production cost.

It became clear that we absolutely needed to deploy the last stage in the original design of this plant what we call cracking in order to be able to push the overall facilities production to Phase I rates and beyond in a cost effective manner. Fortunately early this year we had made the decision to move forward with final construction and build-outs of the cracking plant. We’re now completing work in that unit and are installing final instrumentation before launching commissioning and startup operations. Once the cracking process is online, I’m confident that we will see recovery rates and throughput necessary to allow us to produce at Phase I rates and beyond should we make the business decision to increase production to those levels.

Full operation, multi-stage crack also will contribute to lowering our cost of production. And even more important component to production cost reduction at Mountain Pass is as we have talked about it before our Chloralkali unit that remains on schedule for mechanical completion and commissioning in the second half of this year. (Inaudible) has been overseeing its completion and is waiting to commission the plans once it's mechanically complete. Once that unit is fully optimized we expect to see a significant decline in our cash production costs over the coming quarters which will eventually allow us to be cost and price competitive with any rare earth producer in the world. I would also like to note that there has been no material change to our Mountain Pass CapEx budget or its build out schedule as we reported last quarter.

Now, let me say a few things with regard to where we intend to go with production at Mountain Pass. It may sound like I am stating the obvious, but our shareholders expect us to produce at rates that make economic sense that correspond to market demand and maximize financial returns, not necessarily the original design capacity of the facility, which we have referred to as Phase 1. We have been driving hard to bring Mountain Pass without original design capacity. I am confident that we will get there soon, and this may occur just as demand picks up over the second half. So, while we are mindful of the fact the Mountain Pass’ completion will enable us to produce at Phase 1 rates better, our intensive productions to be guided by what makes the most economic sense for the company and for our shareholders. This is especially true given the powerful leverage and flexibility we enjoy today through our vertically integrated global manufacturing supply chain, which is increasingly fed by Mountain Pass’ world-class resource and enables us to provide customers all around the globe with a best custom engineered rare earth materials made anywhere.

Moving to slide 24, let’s touch on some of the quarter’s highlights for our chemicals and oxide segment. As we have previously discussed, chemicals and oxides had a slower second quarter and ultimately a soft first half, which we anticipated at the beginning of the year. Let me also say that it was not a good quarter. We are not happy with it, but we are confident that the worst is behind us for this business. Raw material concentrate pricing decreased for our three rare earth manufacturing facilities, but so too did our rare earth ASPs and volumes as customers ordered only what was needed to fulfill manufacturing orders in Q2. Overall, demand remained soft in the second quarter primarily due to customers continuing to de-stock inventories.

Across individual market segments, we see the auto-catalyst market continuing to grow as increasing vehicle emission standards continue to help drive demand. In addition, we continue to develop new formulations of cerium based mixed oxides for 2015 vehicle modes as well as for diesel engines and light duty trucks. That should lead to new product introductions that utilize our highly engineered cerium based mixed oxides and should enable additional growth in automotive end markets. Demand in the petroleum refining catalyst market continues to improve with volumes beginning to approach historical levels as rare earth supply and price stability have strengthened.

In the multi-layer ceramic capacitor, or MLCC market in Japan, we continue to see customers coming back into the market ordering at increasing volumes, which have been stable since last quarter albeit at lower than historical levels. As we discussed last quarter, the decrease in physical side of multi-layer ceramic capacitors is a limiting factor for near-term growth in this segment, although the growth in smartphones and other personal electronic devices is a positive trend for us.

As we also noted in the previous quarter, heavy rare earths traditionally used in neodymium-iron-boron permanent magnets such as dysprosium and terbium continue to suffer from high inventory levels in the second quarter. However customers are signaling that these inventory levels should return to traditional levels during the second half of 2013 after which we should see restocking efforts begin. Other heavy rare earths historically used as phosphorous for lighting face an uncertain trajectory as the growth in LED lighting is poised to supply some of these traditional lighting sources. That said, the LED market demand trend is expected to provide a growth driver for a gallium rare metals business of where we come out in the majority market share in gallium tri-chloride, the primary raw material for gallium used in LEDs.

Overall, in the medium-term, we expect to see rare earth volumes and prices stabilize and margins return to more typical levels as higher cost inventory flows through our system. Longer term, we expect global demand for rare earths to increase in more sectors. All these efforts were of course hampered unfavorably by increasing levels of the legal mining production and smuggling out of China but it appears that this is coming to an end. Turning now to slide 25, let me provide some highlights from our magnetic materials and alloy segment. The second quarter rebounded in-line with our expectations and showed typical sequential growth. While volume was lower than the year ago period this was largely a function of an unusually strong second quarter in 2012 which was due in part to supply chains restocking up to supply disruptions caused by flooding in Thailand in 2011. Shipments of Neo Powders into our traditional base business applications and into new applications increased in the second quarter and this was good to see. In particular shipments into media storage devices such as hard disk drives and into automotive products such as seat motors were robust. As you may recall I discussed on last quarter’s call the inventory restocking that occurs in the first quarter which coincides with the end of the fiscal year of many of the companies of the supply chains we serve primarily Japanese. As we have anticipated many of these companies return to more normal purchasing patterns in the quarter.

Inventory levels remained low in the quarter as shipment volumes closely reflected in market demand, customers were reluctant to increase their inventory levels as rare earth prices during the quarter which as a reminder determine the price of our Neo Powders in the following quarter continue to fall.

In terms of specifics markets for our Neo Powders shipments for seat motors characterized by their smaller size and lighter weight are expected to grow as consumer demand increases for enhanced functionality and reduced weight. The majority of seat motors currently use relatively weak, iron based ferrite magnets. Size and weight reduction is critical as a number of motors in the seat is growing while car manufacturers and consumers are demanding lighter and more efficient automobiles.

Turning from a market in which Neo Powders compete with weaker ferrite magnets. Shipments of our New Powders used in magnets which compete with sintered neo magnets also perform well in the quarter. These magnets used in electronic power steering systems and factory automation robotics use much less heavy rare earth than sinter magnets in some applications no heavies are used at all. Thus they have an intrinsic market and pricing advantage over sintered magnets. While the growth was largely a result of a seasonally weak first quarter we also saw a rebound in the automotive market in Europe and in factory automation orders for the semiconductor industry. These trends contributed to our growth in the quarter and they have continued into the third quarter as well.

Our efforts to expand our New Powders market will continue to focus on the automotive and home appliance market where the market demand for high strength magnets were little to no heavy rare earth remained strong. Volumes shipped for much of the first half of 2013 were function of our customers doing just enough to meet demand while reducing inventories in the first quarter and keeping inventories as low as possible in the second. In the third quarter however we have seen customers coming back to purchasing more material for few reasons, first, market demand seems have to improved slightly maybe around 5% or higher than Q2 demand and second now that rare earth market price are increasing our customers want to bring their inventories back to normal levels. As such we think Q3 and Q4 volume shipments could be higher than Q2.

Fourth quarter volumes will likely be softer than Q3 during a historical, seasonal in customer demand we see at the end of the year. As mentioned in prior calls we’re making gains on our operational initiatives in our rare metals facility and we continue to improve throughout against our fixed cost base. Again the growing trend with energy efficient and LED lighting has been a good growth driver for our gallium business which we expect to continue.

Moving to slide 26, I would like to touch SorbX , we continue to conduct full scale trial runs at selected accounts. SorbX efficacy in both municipal and certain industrial waste water segments has been demonstrated through our pilot test but there are thousands of waste water treatment plants in North America alone and each one has a unique situation in terms of phosphorus discharge limits, plant design, and current chemical treatment strategies. As a result, it will make more sense to use SorbX in some facilities as opposed to others, but nevertheless SorbX remains an important growth opportunity for us, and we are developing the metrics and tools needed to help us better target the right customers. On that note, we converted our first SorbX customer in the second quarter in the wastewater treatment market and we are working on converting others in similar situations. As many of you will recall, we have seen selling SorbX products into the recreational, we have been selling SorbX products – apologies into the recreational pool and spot water treatment markets for close to two years now.

Now, let me make a few concluding comments outlined on slide 27 before we take your questions. If global demand for rare earth material strengthens in the second half of this year and we see many signs that this may very well be the case, this will coincide nicely with the increase in our production capacity at Mountain Pass and the declining cost of production that we anticipate there. It has been encouraging to see some strengthening of pricing for some rare earths. However, as a company, we do not necessarily assume that these trends will continue or that the pricing bottom has been reached. However, we do remain optimistic.

At Mountain Pass, we continue to closely manage cash flows, cost of production and other factors that will determine what production rates we settle upon. Controlling cost is of paramount importance in getting our Chloralkali plant online and fully optimize is key to achieving those cost reductions. Similarly, we continue to look for additional areas in which we can reduce our cost structure more quickly, so we can return to generating positive cash flow from operations and achieve profitability. We were pleased to have been notified this past quarter by the U.S. Securities and Exchange Commission staff that the SEC investigation has been completed and that the staff does not intend to recommend any enforcement action against the company.

Looking forward, we continue to believe that our growing presence in global markets and the increasing diversity of global production we are bringing should help to bring greater stability to rare earth prices and greater supply security. Our ability to offer our customers long-term contracts and forward visibility with pricing is something that has not been possible in our industry for years. Customers strongly desire the certainty and we are uniquely positioned to provide it. This is precisely the value that Molycorp brings to the rare earth supply chain.

Finally, let me say a couple of words about retirement this week of Jack Thompson from our Board of Directors. Jack is the former Vice Chairman of Barrick Gold and a current Board member of Anglo American and Tidewater as well as the Chair of the John Muir Health Foundation. Jack served with distinction on the Molycorp board for the past four years and helped to steer this company from its inception as a public company to where we are today. We will certainly miss Jack as a board colleague. We wish him the best of luck. I will look forward to your questions.

Brian Blackman

Thank you, Constantine. And operator, we would like to open and queue up for questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Brian Lee from Goldman Sachs. Please proceed.

Brian Lee - Goldman Sachs

Hey, guys. Thanks for taking the questions. First on ASPs, CK given your experience in China, I was wondering if you can comment on the historical relationship between domestic Chinese REO pricing and FOB? It seems like, and you alluded to it a little bit we have seen some strength in Nd and Pr in China specifically over the past month or so, wondering if you are seeing that or expecting it to flow through here soon as well?

Constantine Karayannopoulos

Yes, thanks Brain. Historically or at least in the last 10 years or so when VAT and export duty regulations came into effect in China, the sustainable price difference between the domestic Chinese price and the export or FOB price has been in the order of 40% which is roughly the effect of the VAT plus the export duties, which fluctuate a little bit depending on elements. Of course, then that doesn’t take into account 2010/2011 where prices moved far beyond that 40% range as supply of rare earth outside of China was severely limited because of the export controls but again typically I think it's safe to assume that as long as the VAT and export duty regulations are in place the difference between - of the order of 40% between domestic and export prices would be sustained and we have not seen any signals that these will change although clearly today given the softness of demand outside of China versus the availability of supply that has really meant that what in 2010 and ’11 what we call the quota value which reached levels that were clearly not sustainable that has gone away. But going forward I would expect that a 40% difference would be sustainable.

Brian Lee - Goldman Sachs

Okay, great and then on cost it sounds like there is still a number of moving pieces with Chloralkali and cracking equipment in order to hit the production cost target so wondering if you can update us on what you think is achievable at Mountain Pass in the third quarter and exiting the year? Thanks.

Constantine Karayannopoulos

We typically, Brian, we do not provide guidance so I’ll not be specific to the third quarter and the fourth quarter however I will say that the trend is definitely in the right direction and the biggest single variable, the single greatest effect will be as volumes out of Mountain Pass grow. In addition and as we get to the higher rates of operation even at today’s throughput level of the 15,000 tons a year I expect that that volume increase will have a significant effect to our cost of production.

The last stage of our multi-stage unit that I referred to what it will do is it will have a pronounced effect on recovery which really affects the cost of the front end of our plant. Chloralkali has an effect throughout the plant, so I expect Chloralkali to be to complete, to mechanically complete next month and commissioning starts, I expect there will be a few weeks of commissioning but as I said we have assembled a world class team which will bring it up to and we’re confident that we will bring it up to production relatively quickly and then optimization starts at that point.

What I would really like to see is a significant movement in production cost up hopefully into the single digits but a lot will depend on execution and will also depend on things that are not within our control between now and the end of the year but if we finish the end of the year with cash operating cost in the single digits I will be very happy and I would expect that trajectory to continue into the first quarter and then subsequent quarters of the next year.

So fundamentally what we’ve said before in terms of our where we think cash cost, cash operating cost will be at Mountain Pass we’ve absolutely no reason to feel that those costs are not achievable. It's not going to happen this quarter or next quarter but we will definitely we’re already seeing that path to those production cost which as I said in my comments will position Mountain Pass as if not the lowest cost one of the lowest cost facilities in the world.

Operator

Your next question comes from the line of Michael Gambardella from JPMorgan. Please proceed.

Michael Doolan

We will move to the next call, he is not, Michael are you there?

Operator

Your next question comes from the line of Paul Forward from Stifel Nicolaus. Please proceed.

Paul Forward - Stifel Nicolaus

Thanks. Good afternoon.

Constantine Karayannopoulos

Hi, Paul.

Michael Doolan

Hi, Paul.

Paul Forward - Stifel Nicolaus

I wanted to ask about, well you just mentioned the Chloralkali facility, I wanted to ask about timing more specifically within the second half of the year, when do you think you will be mechanically complete at that facility, and how long of a ramp up time do we expect before you can say we are operating at full capacity. And within the second half of the year, when do you – are there any details you can give us on the timetable?

Constantine Karayannopoulos

Yes. I did hint at it in the previous answer that we expect mechanical completion next month that being September. Typically, we would expect commissioning to last if everything goes flawlessly somewhere two to three weeks, but from the school of hard knocks that we all at Mountain Pass come from probably something in the order of four weeks perhaps a little longer. What gives me confidence that we will do fairly well there is that as I mentioned we have assembled a world class team of operators, managers, and engineers. These are old hands in the Chloralkali industry and I am totally convinced that we have some of the best world in that space at Mountain Pass getting ready to fire the plant up as soon as mechanical completion by our contractor engineers at KBR is done.

We have one of the critical pieces of the Chloralkali facility is the feed to that facility. Typically for commercial plants, you buy a special grade of salt. You dissolve it in deionized water and then you feed it to that plant. This is our fallback plant, but the design of our system takes our wastewater, moves it through a series of purification stages. It concentrates it and it feeds very high purity brine into the Chloralkali. We have been testing the brine systems. We are quite happy that we are achieving the specifications necessary for that brine to be fed into the Chloralkali. And again we are trying to eliminate as much of the uncertainty ahead of that mechanical completion. So, as I said everything within our control, where we are taking all the boxes and we are making great progress. However, we still have to wait for that facility to be complete by KBR.

Since we reported on our capital plan and timing earlier in the year, nothing has really moved the wrong way, so KBR and our engineering project manager [Ike Lee] [ph] continue to feel that the Chloralkali will be mechanically complete on target and on budget, which is quite a positive development, because a lot of the units we have seen at Mountain Pass have not had this sort of a budget and timing performance. But as I said, we expect it to be completed next month and we are quite optimistic that we have done everything that we needed to do to fire it up and commission it in a normal way.

Still though without, I don’t want to make any, I don’t want to diminish the seriousness of this milestone. In my view, the Chloralkali plant is the next big one and it’s really the one development that will allow us to get faster down the ramp of reducing production costs. And as I said, what we have seen so far is very encouraging.

Paul Forward - Stifel Nicolaus

Great. And just along those same lines, you had a couple of first and second quarters here cash from operations was negative on the order of $37 million both quarters. Just wanted to ask about, in the second half of the year with the Chloralkali plant ramping up and with your expectations of the market and what you’ve already got placed with customers. Can you anticipate a swing in either the third or fourth quarter if that positive cash from operations and then has a follow-up to that considering that cash balance was 264 million, you’ve got 167 million of CapEx in the second half of the year, how important is it going to be for the company to get that revolving credit facility, the 125 million available just to keep it comfortable level of liquidity as you finish the project?

Constantine Karayannopoulos

There is no question that by far most the important parameter that we’re focused on is cash flow, we will again without any giving guidance we expect fully expect that we will be making progress towards that goal that you mentioned becoming cash flow positive from operations in the third. We should be even closer in the fourth and again depending on how a number of factors beyond our control overall markets pricing volumes et cetera I think we do have a good shot at being cash flow positive from operations in the fourth quarter. But at the same time we are conserving cash some of the CapEx that you mentioned we may be able to use our judgment and either defers if not absolutely necessary or continue to minimize the levels of our expenditures. In some the other questions let me turn it over to Michael.

Michael Doolan

Yeah I think as it relates to the line I mean we’re clearly having it, just give us that additional buffer and flexibility to do some of these discretionary things as well. On that as I indicated on the call we’re much closer we have finished or the bank has finished the due diligence process and it is currently with their credit committee and I guess we’re expecting final term sheets in the next week or so and then really be able I guess close and fund end of September realistically probably October.

Operator

Your next question comes from the line of Michael Gambardella from JPMorgan. Please proceed.

Michael Gambardella – JPMorgan

I know you can’t comment on your cost guidance for the next couple of quarters but can you tell us what your Mountain Pass costs were in the second quarter?

Michael Doolan

Sure. On a cash basis they are down slightly from Q1 at $33, Q1 was $36 I believe 36 in change.

Michael Gambardella – JPMorgan

What is the CapEx for 2014 for Mountain Pass and the rest of the company?

Michael Doolan

In a perfect world I mean again if you were to take everything that would be 85, however as we have stated before 60 plus of that really relates to Phase II so it really will depend on market conditions and so forth.

Michael Gambardella – JPMorgan

So how much is Mountain Pass.

Michael Doolan

Mountain Pass is 85, included in that 85 though is 60 odd million related to Phase II principally the other unit of the Chloralkali as well as the second unit of the power plant. The rest of the company will be about 40.

Michael Gambardella – JPMorgan

40 for the rest of the year, okay and the bank facility sounds fairly very confident in terms of the schedule you gave that you are going to get it.

Michael Doolan

We have been working very hard. I was with bank officials in China few weeks ago just completing the due diligence to our plants and so forth. And as I say it’s now with their internal approval process, and yes, I mean, I can’t offer a 100% guarantee, but we are – I think they won’t be devoting all those time and energy if we weren’t close to a deal. So, I think that the timeline up to end of September, October is good.

Michael Gambardella - JPMorgan

Okay, I think the second quarter and the (inaudible).

Constantine Karayannopoulos

Sorry, Michael, you are breaking up badly again.

Michael Gambardella - JPMorgan

And in terms of the second quarter, Mountain Pass production, how much of that was neodymium and praseodymium versus cerium and lanthanum?

Constantine Karayannopoulos

Well, the typical distribution out of Mountain Pass is in the order of 16% to 17%, Nd plus Pr, so the balance ultimately we have given recovery constraints, and the fact that the plant was not running anywhere near its optimal operation neodymium, praseodymium would have been something in the year between 10% and 15% of that output.

Michael Gambardella - JPMorgan

Okay. And that’s where you have seen the recent price increases in the market?

Constantine Karayannopoulos

That’s correct. But at the same time, we are seeing a leveling of cerium and lanthanum prices as well which had been slipping right through the second quarter.

Michael Gambardella - JPMorgan

Right, thank you very much.

Constantine Karayannopoulos

Thanks Michael.

Operator

Your next question comes from the line of Jeff Cramer from Morgan Stanley. Please proceed.

Jeff Cramer - Morgan Stanley

Hey guys. Thanks. Just on the – you have given kind of timeline of the Chloralkali plant, can you touch on getting the multi-stage crack units fully up and running?

Constantine Karayannopoulos

Jeff, what’s left in that unit is primarily instrumentation. So, the build out is essentially complete. So, we expect to go through sort of pressure testing and so on in the next few weeks. And I would expect that, that unit will be commissioned either ahead of or concurrently with a Chloralkali facility.

Jeff Cramer - Morgan Stanley

Okay, thanks. You just talk a little bit about, as you are thinking about ramping up production in the second half, the flexibility you have of selling NdPr and lanthanum possibly stockpiling cerium, if I would how do you guys see the balance there?

Constantine Karayannopoulos

Well, I think you called it right, our feeling is that will be sold out of NdPr, lanthanum and we will not be sold out of cerium. And at the same time, we will be running very hard for what we internally call LREC, light rare earth carbonate, which is a very clean feed material into our plants of Sillamäe and Zibo in China, which will continue to produce cerium and lanthanum and in the same suite of products that Mountain Pass produces. So, we are looking out into the second half. We are fairly bullish on, neodymium, praseodymium, and lanthanum. Clearly, cerium will not be sold out.

Jeff Cramer - Morgan Stanley

So, would you like, is there a target run-rate you would run at to maximize those sales, as I think about the 19,000 ton capacity is there a kind of capacity level you would run at to maximize those sales of lanthanum and NdPr?

Constantine Karayannopoulos

Sure. We are very comfortable that at an operating level between where we have demonstrated the plant’s capability currently without crack and without Chloralkali. And the somewhere at or above the design, the nameplate design capacity of the plant, we will be able to run and sell out neodymium, praseodymium, and lanthanum. We will fine-tune depending on production plans that are the result of sales forecast and specific sales forecast coming from our customers. So I think we should be able to run at the demonstrated run-rate which is 15,000 tons or higher. This is not going to happen in the third quarter, clearly to get there we would need to get there with a chance of getting close to positive cash flow for Mountain Pass, we will need the Chloralkali facility. So I would see that more as an objective for the fourth quarter as opposed to the third.

Jeff Cramer - Morgan Stanley

Thanks and just last question on, from a cash flow perspective. At 167 million CapEx how much of that do you feel any could be deferred in a 2014 and from a working capital perspective do you feel still you’re kind of where you need to be or will that continue growing into the end of the year and if so by how much?

Michael Doolan

Off the 167, 150 is Mountain Pass and to do what we want to do we’re going to spend the 150, off the 17 there really isn't any single big projects in that and off the top maybe seven other we could push off 7 or 8 to be pushed up in the next year if we really wanted to.

Jeff Cramer - Morgan Stanley

Okay just on the working capital front?

Michael Doolan

On the working capital front it is I mean you will see a slight build between now and the end of the year as we continue to fill the pipeline with product within Mountain Pass itself as well as Constantine referred to as (inaudible) which is the concentrate it will be going both to Estonia in China but the good news is these will be basically just at our they will be filling the pipeline at our cost rather than what we would otherwise had to do would have been a purchase cost if we were doing them directly from in Estonia in China. You will see a build but relatively speaking it will be modest.

Operator

(Operator Instructions). Your next question comes from the line of Mike Ritzenthaler from Piper Jaffray.

Mike Ritzenthaler - Piper Jaffray

Just try to flush out something Constantine you had mentioned in your prepared remarks Magnequench being able to pull out of a trough rather quickly and given the appreciation recently NdPr pricing was that sort of a telegraph at the margin squeeze and Magnequench’s abating rather quickly or are there inventory effects that are still, that still needs to be work through here in 3Q and 4Q.

Constantine Karayannopoulos

Yeah I think you should expect a bit of an inventory effect in Q3. Typically Magnequench prices are a function are based on the previous quarter’s average so selling prices in Q3 will be off the average of Q2 which is lower than Q3 but still I think Magnequench performance we expect it to be fairly strong given the volume pickup that we’re that we expect to see in the third quarter. The other comment that you’re referring to is that historically given it's fairly commanding market share position in the order of 80%, 85% in this space. We’ve been very careful in running relatively lean supply chains, when we sense that customers are building inventories to take advantage of lower prices and there is a degree of speculation we try to limit that to the extent that we can and as a result because we to some extent we actually have spoiled our customers we have been able to deliver the products they need on very short notices on a regular basis. They tend to run leaner inventories than and perhaps another supply chains. As a result when we go into, when we come out of a slowdown like the slowdown we experience in the recent quarters, Magnequench has come back before the rest of the rare earth industry. So the second quarter performance to us almost seemed like an indicator that the supply chain destocking is abating and the rest of the industry should recover relatively soon.

Mike Ritzenthaler - Piper Jaffray

That makes sense and I guess given that as you had mentioned cerium and lanthanum slipping a bit here through 2Q and obviously the opposite direction for NdPr, is there something anecdotally from your time in China that gives you conviction that the smuggling is on the downswing?

Constantine Karayannopoulos

Well, we have been – yes, of course with smuggling you never really know what is going on, I mean, that’s the nature of the business, but I think for the first time in the last since about late May, June, and then we have had a number of discussions with the regulators in China, the Ministry of Industry, the National Development and Reform Commission, the Customs folks, the Ministry of Land and Resources, and these are big ministry names in China. They are going out on the limb to make declarations that they will put an end to illegal mining, illegal processing, and illegal exports. And there is a large political implications for this sort of thing. For years now, the central government in Beijing has made it very clear that it intends to regulate the rare earth industry in China with the aim to preserving the Chinese resources and protecting the environment in China. And illegal mining production and smuggling goes totally against the objectives of the policy as it was articulated by the state council and this is not something that either the state council or the various ministries or the various provincial or even local governments can afford to tolerate for too long. So, I think this is what ultimately is bringing this to bear and the comments and declarations by fairly senior folks primarily at the Ministry of Industry as recently as yesterday announcing a crackdown, a more serious crackdown starting on August 15 and going into November 15. This is a very serious and very public declaration that all political levels in China are taking this very seriously. And I expect to see some very pronounced effects, which will be felt through the industry and the supply chains. So, I am fairly optimistic that this effort will be effective.

Mike Ritzenthaler - Piper Jaffray

Yes, okay. Just one last from me on SorbX, I am assuming that this that the new supply agreement that you had reached or the first conversion that you achieved in 2Q on water treatment, municipal water treatment, I should say, that’s through your Univar partner. And I guess maybe it’s fairly obvious, but are the terms and everything as you had sort of expected as you laid out that partnership?

Constantine Karayannopoulos

Yes. I mean, it is through Univar and the end customer is without again, there is all kinds of confidential issues around it, but it is a full – it’s a private, large private food processing plants and they have other plants, which we are now negotiations to convert. To SorbX to be exactly the agreement was signed in the beginning of the third quarter. We have made our first shipment. And I imagine you are talking about volumes and pricing, volumes were in line with what we expected. Pricing, again, this was the first customer, a bit more leveraged than normal. So, the pricing was slightly lower, but not totally out of the ballpark that we expected to be. So, overall this is our – even though we have had a number of pilot runs at full, throughput full capacity at a number of locations, this is our first customer and we are very pleased with it. And also it’s helping focus our efforts and Univar’s efforts on this particular sector of the industry. So, we are making good progress and we expect that we will continue to build on this.

Mike Ritzenthaler - Piper Jaffray

Okay, outstanding. Thank you.

Constantine Karayannopoulos

Thanks.

Operator

And your next question comes from the line of Avinash Kant from DA Davidson & Co. Please proceed.

Avinash Kant - DA Davidson & Co.

Good afternoon, everybody. A few questions. The first one was wanted to get some clarity on the cost structure and you guys talked about this, the first we have the Chloralkali plant and we also have this cracking plant coming up. So, wanted to understand without the cracking plant just with the volume increase that you’ve right now how far can you get in the cost structure and then once the cracking plant comes where could you get and then the call rebound (ph). So how will be this step-down in cost structure?

Constantine Karayannopoulos

Unfortunately you’re asking a question Avinash that I would have to either select a disclosure and give you information that’s very competitively sensitive so I think as I said in my comments there is a significant impact on the front end of the recovery, performance of our plant. So it is significant but the biggest problem is that without cracking we have to run leach so hard that we’re pushing up against the hydraulic and temperature limits of leach. So there are technical bottle-necks that we don’t want to push through but there is also a cost penalty because we’re giving up a good junk of our recovery and we don’t want to operate at that level. Besides cracking is coming up fairly shortly so there was really no point pushing that envelope to far, but in terms of us providing you cost clarity this is not something that we can do. On the Chloralkali plant what we said before is the cost benefit of the Chloralkali plant being up and running at an optimum level and today’s numbers in the order of $5 a kilogram at the throughout in the ball park that we’re talking about at or above that 15,000 ton a year run-rate that I mentioned and that comes both from the cost savings on reagents that we will be producing and not buying in the open market but also a cost savings on hauling waste water which we currently do because we cannot dispose waste water at Mountain Pass.

Avinash Kant - DA Davidson & Co.

So the Chloralkali will give you $5 a kilogram benefit right?

Constantine Karayannopoulos

Cost savings, correct.

Avinash Kant - DA Davidson & Co.

So then also talking a little bit about the volumes and the pricing. Now as we have observed the pricing move up a little bit lately, is there a time lag between when you see these pricings in your revenues or is it immediate? How does it work?

Constantine Karayannopoulos

At Magnequench there is a quarter lag that I talked about, Magnequench will see the effect of the higher new neodymium pricing in the fourth quarter because those prices will be the fourth quarter selling prices will be based on raw material Magnequench (ph) prices in the third. The rest of the business it's a bit more immediate because it's on spot (inaudible) in a day for example we’re making sales at the current neodymium prices around the world and then in some local markets where a number of folks have been caught with very low inventories in fact we on a very selective basis small volumes we’re realizing prices that are higher than even those. So in the rest of the business the pricing effect is a bit more immediate.

Avinash Kant - DA Davidson & Co.

And maybe I don’t know if you gave this one, could you talk a little bit about the clarity so you have the capacity of 15,000 metric tons, now have you talked about how will you ramp throughout the rest of the year at least?

Constantine Karayannopoulos

Well today if we wanted to produce 15,000 tons at the rate of 15,000 tons we would produce at that rate. However it will be sub-optimal it will be higher cost because of the Chloralkali are been up and running and the recovery losses through the crack are being because of the crack not running. So clearly if we were running at this rate at today’s prices we would not be able to turn a profit or even be cash flow positive that’s why we need to wait until those two, the Chloralkali plant is up and running and crack is commissioned. So as I said in my comments the decision at what rate to run will depend on two things customer demand and cost of productions.

Avinash Kant - DA Davidson & Co.

So what I’m trying to understand is that at this point you are any kind of close to 1,000 metric tons is that demand driven or is that capacity limited?

Constantine Karayannopoulos

Sorry you have to repeat that question Avinash.

Avinash Kant - DA Davidson & Co.

Like the current run rates that you have in the resources segment they are well below 15,000 right? So what I’m trying to understand that is because demand is not there or?

Constantine Karayannopoulos

Run-rate, no, no, that's a wrong statement. If we wanted to run a 15,000 tons we have demonstrated the plants ability to run the 15,000 tons a year so, I'm quite understanding what you're saying. Are you talking about the actual output through the second quarter?

Avinash Kant - DA Davidson & Co.

Yes, actual output into the second half, how do see it ramping up like you have 5,000, 10,000, 15,000 by a certain time, how do you actually see it ramping up. You have the capacity but the actual output how do you see it ramping up?

Constantine Karayannopoulos

Yeah. As I've said until we're confident that we can meet the demand at the right cost structure we're not going to be pushing the plant through that level. I expect in the fourth quarter we will probably be at that level the 15,000 ton or higher. I don’t know if that answers your question.

Avinash Kant - DA Davidson & Co.

I think I would also to tie in one comment that you made Constantine that by the end of the year, you expect your cost to be in the high single digit you said that’s a single digit or high single digits. So, to get to that, you have to be producing at roughly close to the 15,000 at least right?

Constantine Karayannopoulos

Yes because as I said, that the biggest cost reduction contribution comes from larger volume and the amortization of our fixed cost over much larger volumes that we operated in the past. So, yeah that is correct we need, today as I said and an answer to a previous question we should be able again I am looking at the fourth quarter, is it because the fourth quarter is when we should be running a lot closer to optimum than today. In the fourth quarter, I have a very high degree of confidence that we will be able to sell all the neodymium and praseodymium as well as lanthanum that we will produced as a result of the 15,000 ton or higher operating rate.

Avinash Kant - DA Davidson & Co.

Right and at that point your cost will be in the high single digits it will be not the double-digit cost?

Constantine Karayannopoulos

Yeah, well in that ballpark but again a lot will depend on execution and a few things that are beyond our controls but that's ultimately where we need to get to.

Avinash Kant - DA Davidson & Co.

So, we should expect as far as your total revenues and operating performance is concerned we should expect improvements throughout the rest of the year now given that you have the capacity or not?

Constantine Karayannopoulos

Yes and that's what I've said in my comments earlier.

Operator

Your next question comes from the line of Bruce Klein from Credit Suisse. Please proceed.

Bruce Klein - Credit Suisse

I'm wondering on the neo side I think last quarter you might have given us an EBITDA for that entity and then if you do have that was there any add backs when you were giving me that number. I don't know where the inventory write down took place, can you help me with that also?

Michael Doolan

Unfortunately I don't have an EBITDA number for like the legacy neo off the top but as it relates to write-downs, there was some minor amounts. And I just go work the memory, I will say 2 million as it relates to some dysprosium, but most of the write downs were obviously within Mountain Pass and some within Silmet so, but I think if you look at M&A and chemicals and oxides I mean bearing in mind that Silmet is in chemicals and oxides I mean that's not a bad proxy for the old neo off the top, but I apologize I don't have a comparative EBITDA for the legacy neo. And we're trying to move away from that.

Constantine Karayannopoulos

And this was an exercise that there is no meaningful reason why we should be doing it. So as a matter of course we don't track the performance of old legacy businesses. We have restructured the company and we're managing it on the basis of the way the divisional separations are done right now.

Bruce Klein - Credit Suisse

Yeah. I understand. That's helpful. And the 15,000 run rate I missed a little bit of the call but I think the original goal was a little higher, was there anything specific that you would say contributed to being shy or did you disclose that or did you talk about that yet?

Constantine Karayannopoulos

I did talk quite a quite a bit about it.

Bruce Klein - Credit Suisse

I don't want to make everyone, I can get the (inaudible) unless there is something quick. I don't want to hold everybody else.

Constantine Karayannopoulos

No. The original design basis was 19,050. We got to 15,000 and what we effectively said is we will wait until our Chloralkali plant is up and running and our crack, our remaining last stage of our Multi-Stage crack unit is up and running and again it will be in the near future before we push through that level, because that's what makes the most business sense as opposed to us continuing to change in our design target that, you know at the end of the day we need to run the business in the way they makes the most business sense.

Bruce Klein - Credit Suisse

Okay, that's helpful. And lastly just minus the competitor what are you hearing or seeing M&A being disruptive and how anywhere from customers running how they're performing?

Constantine Karayannopoulos

Well, I don’t usually like to talk about others, competitors or otherwise, they recently had a call Eric is their CEO, he is a good guy, good operator so you follow the transcript. But at this stage the industry is very much in a flux and I think at the end of the day the best approach to this market is to ensure that you have the technical capabilities to produce what you need to produce out of cost that is competitive with anyone out there which is the direction that we're heading.

Operator

And your final question comes from the line of Bo Hunt from Bank of America. Please proceed.

Bo Hunt - Bank of America Merrill Lynch

Couple of questions. You mentioned exploring alternative sources of liquidity in addition to the revolver. I am just wondering, are you looking at asset sales as an avenue to boost liquidity and do you see any opportunities to optimize your asset base?

Michael Doolan

Nothing specific and if I guess, I mean to state the obvious everything is for sale at the right price but there is nothing, there is no active programs along those lines at the moment. We have talked about ABLs (ph) and so forth in the past, equipment financing, I mean those are the ones that are probably closer to the surface like everything else we are doing. Obviously in addition to the revolving line of credit that we have talked about.

Constantine Karayannopoulos

Yeah and as Michael said at the right price an awful lot is for sale but I think given the overall environment, a number of folks out there, and a number of resource type companies are selling assets, and they now realizing the values that perhaps they had in mind. So unless it is something meaningful, we probably would not be actively looking to dispose of any assets at this stage.

Bo Hunt - Bank of America Merrill Lynch

Okay. I understood. And then last question. I think in previous calls you'd mentioned well in your neo material business you can call it whatever you want, you (inaudible) rare metals but you mentioned those businesses maybe being in the 150 million of EBITDA annually on normalized basis. Is that still your view of the ultimate profitability of the businesses or any changes on that front?

Constantine Karayannopoulos

No. I think that's a fair way to look at it, but again it has to be in the context of a normal environment. And there was nothing normal about the second quarter. In fact the second quarter was the worst quarter in my experience with the rare earth business at least and since sort of first quarter of 2009 at the depths of the recession.

So it was, the demand was nowhere near normal levels and pricing kept sliding. So yeah our view is that legacy business should be in the normalized, in a normal environment of demand and pricing, that business should run in that ballpark that you mentioned. But as I said there was nothing normal about the second quarter as far as that business is concerned.

Michael Doolan

And if I could add on that point I mean it also assumes that our input cost are acquired in the same environment as the selling, so that we can make the margin whereas we're still working up because of the low demand we're working up inventories that in some case were actually acquired in 2012. So which clearly is not the normal situation.

Operator

Ladies and gentlemen, due to time constrain, this will conclude the question and answer portion of today's conference. I would now like to turn the call back over to Brian Blackman, Vice President of Investor Relations for closing remarks.

Brian Blackman

Thank you operator. And I would certainly like to thank everybody for taking the time to join us on our call today and we look forward to reporting back to you for third quarter results in early November. Thanks everyone. Have a good day.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation and you may now disconnect. Have a wonderful day.

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