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Executives

Brian Blackman – Vice President of Investor Relations

Constantine Karayannopoulos – President and Chief Executive Officer

Geoffrey R. Bedford – Executive Vice President and Chief Operating Officer

Michael F. Doolan – Executive Vice President and Chief Financial Officer

Analysts

Brian Lee – Goldman Sachs

Mike Ritzenthaler – Piper Jaffray

Michael F. Gambardella – JPMorgan Securities, LLC

Jeff Cramer – Morgan Stanley

Paul Forward – Stifel Nicolaus

Owen Douglas – Robert W. Baird & Co.

Molycorp, Inc. (MCP) Q3 2013 Earnings Conference Call November 7, 2013 4:30 PM ET

Operator

Good day everyone. As you can hear I am bottling is it of a suggestion, so I will try to limit my remarks. First, let me make a few high level comments before Michael provides details on our financial performance for the quarter. Jeff Tedford, our current Chief Operating Officer and new President and CEO starting on December 2 will speak to some of the market and technology trends we are seeing across our business segments. Finally Michael, Jeff and myself will be glad to take your questions.

Let’s start on Slide 4. In global rare earth markets, we continue to see demand slowly but steadily returning to more normalized levels as inventories reduced through the supply chain and customers adjust purchasing plans accordingly through the end of this year and into 2014. In particular, our Magnequench business continues to improve on its strong second quarter performance.

Volumes for magnetic neo powders use the neodymium-iron-boron magnets rose 20% in line with expectations and revenue for the quarter grew 10% sequentially. We expect seasonality to dampen demand in the fourth quarter somewhat. However, we continue to see a stronger second half of the year as compared to the first. Magnetic rare earths are the bread and butter of our business. It is highest value component of Mountain Pass production and it is our deepest downstream vertically integrated value-added business.

Magnetic rare earth namely neodymium and praseodymium are also a key drivers of long-term growth for our company. Historically, the magnetic segment of the rare earth industry has been a reasonable supply and demand balance and a growth driver for the industry as a whole.

Now with increasing demand for energy efficient motors worldwide and with a continuing success, we have been achieving in reducing the disclosing content of these magnets. We anticipate good long-term growth trends for our Neo Powders business. We also expect magnetic rare earth element demand, growth do outstrip that of the other rare earths. Within our chemicals and oxide segment, current rare earth prices have retreated slightly from last quarter. However, we are seeing less price volatility in general and that is a positive as it helps to bring confidence and therefore new applications grow back to our supply chains.

Our chloralkali plant and multi-sage cracking plant are both in late stage commissioning and we expect both to start production operations in the fourth quarter as we have forecasted. We are beginning to see material declines and our production costs with our adjusted cost in the quarter declining to $25 per kilogram from $0.35 per kilogram at Mountain Pass in the second quarter.

We think that Mountain Pass is a collection of 12 operating systems working together seamlessly in series and in parallel. In short 11 of the 12 major systems of Mountain Pass are in operation or in final commissioning with one step; our leach system that I’ve talked about in the past remaining as a unit that we continue to improve and debottleneck. We’re working to strengthen that system, improve recoveries, improve on-time reliability, had redundancy and increase throughput. Generating positive cash flow is underscored by improving performance of Mountain Pass.

In light of the revenue, we’ll believe we can generate from continuing to increase out with the Mountain Pass and converting Mountain Pass products into higher value specialty and engineering rare earth materials in our downstream businesses. We believe that achieving operating breakeven cash flow before interest expenses attainable early in 2014.

We believe that the additional $245 million net we raised from the capital markets in October provides us with a sufficient cash cushion to bridge interest expenses and operating capital needs until we achieve positive cash flow. Jeff, will provide additional detail on our business segment and operations later in the call.

First I’ll let Michael go over the details of our second quarter financial results. Michael?

Michael F. Doolan

Hey thanks, Constantine, and again, good afternoon to everyone. First, a quick summary of the quarter on Slide 6; we have reported net revenue of $149.1 million a 9% increase over the second quarter revenues of $136.9 million. We sold more than 3,600 metric tons of products during the quarter, a 19% increase over the second quarter. Our gross margins was negative an 11.9% or a gross loss of $17.8 million. We reported a loss before interest, tax, depreciation and amortization of $32.5 million. On an adjusted non-GAAP basis, we reported essentially break-even EBITDA.

Our net loss attributable to common stockholders for the quarter was $72.8 million or a loss of $0.43 per share. On an adjusted non-GAAP basis, we had a loss of $0.27 per share, a quick note on our adjusted performance and reconciliation tables included in our earnings release. As you review the one-time and out of ordinary charges, you will notice we incurred $20.3 million of inventory write-offs at Mountain Pass, of which the majority related to cerium-based products.

Total inventory write-downs though in the quarter were $26.5 million. While, we continue to drive the commercialization of SorbX and other applications for cerium, our current expectations for 2013 and 2014 do assume limited cerium sales. This is factored in to our cash break-even expectation and we do not need to sell significant volumes of cerium in order to reach cash break-even at Mountain Pass.

Regarding SorbX, we continue to conduct field trials for waste water treatment applications although actual sales have been limited to date. Now shifting to our detailed segment results, performance for the third quarter 2013, please look to Slide 7 with the Resources segment. During the quarter, Resources sold 1080 metric tons of REO-equivalent products for $13.5 million. Product volume was marginally higher in Q3, although pricing was down, which related to both product mix and lower market prices.

On Slide 8, Chemicals and Oxide reported $58 million in revenue, a 40% increase as compared to the second quarter. As Constantine mentioned, more stabilized pricing is helping in bringing certain customers back to market as our sales volumes increased nearly 34%. Our average selling price was up slightly largely due to shifting product mix.

On Slide 9, Magnetic Materials and Alloys revenue increased 10% quarter-over-quarter to $72.6 million on higher volumes of bonded magnetic Neo Powders. The third quarter tends to provide strong seasonal demand for volumes of our bonded powders. For the period, our ASPs were down slightly largely a function of product mix for Specialty Alloys at our Tolleson facility.

Selling prices for bonded magnetic powders were relatively stable during the quarter. And then lastly on Slide 10, our Rare Metals segment reported $21 million in revenue, a 16% decline from the second quarter. Overall, product volume increased during the quarter that was more than offset by lower pricing due to shifting product mix. On a consolidated basis, we reported a $12.9 million tax benefit in the third quarter. For the first nine months of 2013, the company’s effective tax rate was 19.1% on a net loss before income taxes and equity earnings of $204 million.

Moving to Slide 11. In terms of our balance sheet and statement of cash flows, we used $16 million in cash from operations during the quarter. This represents a 54% improvement in consolidated cash burn from operations and we believe that this underscores the priority we’ve placed on tighter controls and improving our fundamentals. During the quarter, we spent $69.9 million in cash capital expenditures. The total capital expenditure for Mountain Pass has held steady at approximately $1.55 billion since the beginning of this year.

As of September 30, 2013, we’ve spent $1.38 billion on the project, and the remaining spend through the end of this year is estimated to be about $60 million. Excluding Mountain Pass, we expect to spend approximately $5 million to $8 million on other maintenance and expansion projects across your other business units during the year, some of which are discretionary. The remaining total cash CapEx for 2013 is $65 million to $68 million. We anticipate CapEx spend will be dramatically reduced in 2014 with discretionary Phase II CapEx being delayed till late 2014 or into 2015.

As of September 30, we maintained $173.9 million of cash and cash equivalents on our balance sheet. Subsequent to Q3, we completed our equity raise which resulted in net proceeds to the company of approximately $247.5 million. We intent to use these proceeds as well as cash generated from operations to fund the remainder of CapEx at Mountain Pass along with working capital needs and debt service. We also continue to pursue a revolving line of credit for ongoing liquidity and management needs.

Now, I’d like to turn the call over to Geoff Bedford.

Geoffrey R. Bedford

Thank you, Michael. Now, let’s look at how things are progressing within our Rare Metals segment beginning on Slide 13. As many of you saw, we announced in October the mechanical completion of the chloralkali plant and the final portion of our multi-stage crack unit at Mountain Pass. As Constantine mentioned, we are now in the louder stages of commissioning both units. As chloralkali operations begin to ramp up, which we expect to occur in the current quarter, we should see increasing production of the chemical re-agent, reduced purchases of external re-agents and a reduction of waste water volumes and costs.

After optimizing our production rate, which we expect in the first half of 2014, we anticipate increasing production volumes as demand requires and seeing our production cost continue to decline. Current demand by external and internal customers appears relatively strong for lanthanum, neodymium, praseodymium and light rare earth concentrate which we call LREC. That gives us confidence that we should achieve operating cash breakeven within this segment in 2014.

As Michael mentioned earlier, since the adjustment to our estimate in the first quarter of 2013, there has been no material changes to our Mountain Pass capital budget. With the bulk of the spending now behind us, we expect this to continue. Now, while we’re mindful of the Mountain Pass’ final completion should enable us to produce that facility’s original design capacity or better. Our intent is to produce a rate that allows us to serve our customers and maximize return to our shareholders.

This is especially true given the powerful leverage and the flexibility that we enjoy through our vertically integrated manufacturing supply chain, which is being and increasingly said by our Mountain Pass and enables us to provide customers globally with custom engineered rare earth materials.

Moving to Slide 14, let me touch on some of the quarter’s highlights for our Chemicals and Oxides segment. Third quarter volumes increased 34% over the second quarter. And we saw an overall increase in both selling prices and gross margins. It appears that the rare earth business is continuing to return to normalized levels as customers look to inventory, a good example of this is what we have seen at our own processing plant in China.

At Zibo, we have now on balance work through our high cost raw material. At Jiangyin. we expect to work through this inventory during the fourth quarter. We saw modest price increases in this segment across many of our products, particularly for certain specialty and engineered rare earths in the back half of the quarter. Our sales volume increase in Q3 was partially driven by our ability to ship LREC from Mountain Pass to our processing plant in Estonia which provides the plant with the more stable source of raw material.

For the fourth quarter, we anticipate volumes continuing to strengthen, although we expect that our ASP will ease as our overall product mix shifts. The automotive industry remains the strong downstream market for us, both through the petroleum catalyst market and the auto catalyst market. However, we are currently limited by our production in Mountain Pass to support the additional lanthanum needs of SEC customers. This will be addressed as production volumes increase.

In addition, we are starting to see an improvement in demand in the fourth quarter for engineered rare earths products used in the phosphor lighting market, well this should help our overall gross margins over the mid-term, we expect longer-term, downward trend in the phosphor market offset by market growth in LED lighting, which uses considerably less rare earth material. However, this trend towards LED lighting will be a goal to our – for gallium rare metals business.

Overall, in the near to mid-term, we continue to expect to see rare earths volumes increase. Price volatility decreased and margins returned to more typical levels as high cost inventory flow through our system. Longer-term, we continue to expect global demand for rare earths to increase across multi-sectors.

Turning now to Slide 15; let me provide some highlights for Magnetic Materials and Alloys segment. Volume shipped for our traditional market segments for Neo Powders including hard disk drives grew sequentially in the third quarter in line with our expectation.

More important, Powder shipments into our new applications market predominantly automotive and home appliance motors were also stronger in that quarter. As many of you know, our Magnetic Neo Powders enable customers in these markets to produce high performance Rare Earth magnets with little to no reliance on scarce and expensive heavy rare earths such as dysprosium.

The fundamental drivers of this business continue to strengthen as customers demand for and government regulations require smaller, lighter and more energy efficient motors in vehicles and home appliances. We see this as a key growth area for the Company.

Let me provide just one example here. A very good and growing business for us is providing Magnetic Neo Powders for use in magnets that help enable high efficiency, residential water circulation pumps across the European Union. EU has an active regulations that now required increased efficiency levels for these pumps.

Every new home build needs high efficiency circulation pumps and we estimate that the magnets made from the Neo Powders will be the predominant technology in these pumps. This is good, both for the environment and for customers, given that the EU estimates, that there are more than 100 million of these circulation pumps now in operation across the EU that market promises to be good for us as well.

In the short-term, we expect customers to reduce inventory levels slightly in the fourth quarter, as this is a seasonally weaker period for the segment. However, we anticipate that the second half of the year will be stronger than the first half.

As mentioned on prior calls, we are currently making operational gains in our rare metals facilities and we continue to improve throughput against our fixed cost base. The growing trend with energy efficient LED lighting has been a good growth driver for our gallium business, and we expect this to continue.

Now, let me turn the call back over to Constantine.

Constantine Karayannopoulos

Thanks, Geoff. Let me make a few closing comments on Slide 16 before we turn to your questions. In general, we were pleased with our third quarter results particularly after the very difficult second quarter that our industry has been work through. Global markets appear to be strengthening albeit slowly as I said earlier and the core economics of our business in magnetic and rare earths are improving. This presents us with a stable platform for continued scaling and growth.

However, as the years have taught us, we always retain a measure of cautiousness when speaking towards future market trend. At Mountain Pass, our engineers and the entire team have done a great job in keeping the facility in the chloralkali and multi-stage cracking plants in particular moving forward to commercial operation, higher recoveries and lower operating costs.

Finally, let me say how pleased I am as the entire Molycorp board – as the entire Molycorp board rather with a selection of Geoff Bedford as the company’s new President and CEO effective on December 2. After having worked closely with Geoff for nearly 15 years in this industry, I can’t think of a more experienced capable and strong leader than Geoff to guide this company into the future. I planned to continue my service to the company on the Molycorp board.

As you’ve heard me say many times before I firmly believe in the industrial logic that created Molycorp as a global vertically integrated rare earth company. And we’re now well in our way to deliver in this industrial logic that combines the world’s best rare earth resource with the world’s best rare earths processing and downstream capabilities.

Now, we’ll turn it over to Brian and take your questions.

Brian Blackman

Thank you, Constantine. Operator, we would like to go ahead and open up the queue for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And 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. I had two of them, first off on the cost side. I know in the past, you’ve talked about getting your production cost down to the $5 to $7 per kg range at Mountain Pass. I believe you quoted this at the 40,000 metric ton run rate which for the foreseeable future it sounds like it’s off the table. Can you give us some sense of where you’re targeting at 19,050 as you get to the completion of Phase I?

Constantine Karayannopoulos

Thanks, Brian. We actually have talked about $6 to $7 per kilogram and to the best of my recollection that would be at our 19,000, 20,000 tons a year run rate, not the 40,000. And we remain committed to that number and that is definitely our target. We’re not going to get there tomorrow, but that’s certainly a target that we consider achievable as Mountain Pass gets to that level for the 19,000, 20,000 tons rate of production and it gets optimized over the next few months.

Brian Lee – Goldman Sachs

Okay, fair enough. I guess just from a near-term standpoint given that chloralkali here is now it’s coming online should we see the first kind of step function reduction here moving into the fourth quarter where we have to wait for 2014 to see some real progress there?

Geoffrey R. Bedford

Well I think we did see a fairly reasonable step reduction from the second to the third, from $34 and the $25 or so. I think in the fourth quarter we should be able to demonstrate a meaningful reduction and you will see continuing reductions in the first quarter and the second quarter and so on. This is not going to be one massive step change from today’s cost level to $6 to $7, it will be continuous improvement and continuous optimization but as I said we do remain committed to getting there at the levels we discussed.

Brian Lee – Goldman Sachs

Okay, great and my second question was just on the financing you alluded to it quickly but on your efforts to arrange the revolver and I know in the past you’ve also talked about maybe equipment backed financing, what’s the latest there because it seems like that’s been out there in terms of an expectation for several quarters now and also wondering if there is a back up plan in place if those fall through or should we be expecting that the recent equity raise keeps you guys sufficient from a capital standpoint through 2014 even without additional cash inflow?

Michael F. Doolan

Hey, thanks Brian, it’s Michael. I guess to answer the last question first yeah we actually see this capital raise seeing us through until we’re actually completely free cash flow positive. So that’s after debt service and CapEx having said that we are continuing to pursue the revolver essentially as I discussed in the past split between China and the rest of the world.

Having a recent equity raise gives us a little bit better position and quite frankly the way the revolver had always been anticipated and structured, it would not have actually helped us at the corporate level anyway, I think as you recall it was ring fenced around the legacy Neo. And where most of our cash needs are actually outside of that group, so we are going to proceed with it but be a working capital management tool and not a funding vehicle.

Brian Lee – Goldman Sachs

Okay, thanks guys appreciate it.

Operator

And your next question comes from the line of Mike Ritzenthaler from Piper Jaffray. Please proceed.

Mike Ritzenthaler – Piper Jaffray

Yeah, good afternoon. Couple of quick questions one in magnetic materials, I guess I was little surprised to see pricing down given the trajectory in 3Q can you kind of step us through the pricing element and the inventory effects if there were any in 3Q and whether or not we should see similar pattern in 4Q?

Michael F. Doolan

Let me start with the pricing on the magnetic material. So the way that our pricing works as we look we price off with the formula that looks at the prior quarter’s raw material costs for the current quarter. So we were seeing raw material costs climbing through the third quarter effective October 1, we’ve implemented a price increase on those materials, so there is a one quarter lag if you will for some of the pricing, I think also we saw a bit of a product mix in that decision with some of the alloy product that comes out of our Tolleson facility.

Mike Ritzenthaler – Piper Jaffray

Okay, that makes sense and then looking into 4Q, I know you don’t give guidance but could you elaborate on whether that pricing formula will be a modest lift in 4Q?

Geoffrey R. Bedford

On an ASP basis that the pricing formula would give us a lift on ASP basis for the magnetic materials, but the one thing to keep in mind if that business is a bit seasonal and the third quarter is always typically the highest quarter from a volume basis seasonality wise, so we would typically expect to see the seasonality trimming in volume in that business unit in the fourth quarter.

Mike Ritzenthaler – Piper Jaffray

Yeah that makes sense. And then briefly to touch on SorbX with your comments today and the release in mid-October that these novel markets aren’t expected to be much above trailing in through 2014. I was wondered if you could maybe elaborate a bit more on the trials and what’s can sort of lead to that particular piece of guidance?

Constantine Karayannopoulos

Let me answer that Mike. SorbX as I’ve said before is a product and it will have a market, but in any product development effort these things need to take their course. We have started demonstration projects with a number of customers around North America. We’re seeing good success and we continue to learn about what the drivers are for SorbX acceptance in this market and we continue to drive that that project. It’s well equipped, well financed, well resourced and we continue to develop with I hope that what we indicated in the October isn’t interpreted as molecule giving up on SorbX on the contrary we continue to approach that business because we still consider it perhaps the best hope for new cerium applications world wide.

The adoption of this product, takes time. We are dealing with municipal waste water treatment plants, we’re dealing with industrial waste water treatment plants and we’re dealing with some new initiatives in drinking water where we’re seeing some pretty remarkable effect. But at this stage Molycorp, we consider rather SorbX to be very much product and market development activity. So we wanted to make sure that the market understood that and we folks didn’t expect that SorbX will become a major contributor to volume and earnings in the near term.

Mike Ritzenthaler – Piper Jaffray

Okay. One other related question I guess so that I under the process technology. On the cerium side in particular as you ramp up to the 19,050. The cerium compound will have to go through its purification phase before its inventory. Is that correct – proceed with that processing ant et cetera?

Constantine Karayannopoulos

It’s not completely correct. Again without divulging proprietary technologies and processing, we’re one of the few companies in the world that does a bulk cerium removal step before the solvent extraction purification. So removing cerium out of our process streams is relatively lower cost operation. So again, the world would be better if we would have a home for this cerium, but not being able to sell all of this cerium is not the end of the world either. We do incur lower costs in removing the cerium. And if we do have and for those customers rather than that need higher purity grades of cerium, we do then put it through our normal processing and finishing operations either our Mountain Pass or Silmet and or Zibo in China. So, Geoff.

Geoffrey R. Bedford

Yes, I just want to comment on that you talked about the 19,000 keep in mind that for using 20,000 tons is a number, roughly 25% of that goes to our other plants as feed material. And those plants have had cerium customers we typically sold all that cerium. So we’re really just talking about the volumes at down past that is separating there.

Mike Ritzenthaler – Piper Jaffray

I see, interesting. Thank you.

Geoffrey R. Bedford

Thanks Mike.

Operator

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

Michael F. Gambardella – JPMorgan Securities, LLC

Hey yes, good afternoon, I guess just a follow-up question on the cerium and also your cost expectations were $6 to $7, if cerium was about I think it’s about 48% over the Mountain Pass ore body, I don’t understand if your stock piling a significant portion of the cerium because you can’t sell it, because the major consumers have switched to alternative material. Doesn’t that have an impact on your cost objectives?

Constantine Karayannopoulos

Yes it does Mike. We’re not saying but it does not. But…

Michael F. Gambardella – JPMorgan Securities, LLC

But I think – entire still $6 to $7.

Constantine Karayannopoulos

Yes, but overall including cerium production, it will be on the total REO basis that moves through Mountain Pass. It will be, that continues to be our target. If we assign zero cost to cerium then that will drive our cost of production into the low teens. However, that will also move our ASP into the mid-to-high 20s.

Again I’m trying to use sort of publicly available information and I’m – because it is highly proprietary business. So, yes as I said the world will be better if we had a home for the cerium, but if we don’t we think, and as Michael said, we can get to cash flow positive without having meaningful sales of cerium in our mix.

Michael Gambardella – JPMorgan Securities, LLC

Then you have to…

Constantine Karayannopoulos

And we will be happy to walk you through that calculation, I’m sorry.

Michael F. Gambardella – JPMorgan Securities, LLC

You’re saying [Indiscernible] if you can so, a significant part of the cerium. Yet your costs would be in the mid-teens instead of 6 to 7.

Constantine Karayannopoulos

No, I said in the low-teens.

Michael F. Gambardella – JPMorgan Securities, LLC

Low-teens, okay. Right.

Constantine Karayannopoulos

Again it’s a simple arithmetic Mike. Given where cerium comes out in our process, no it does not, it doesn’t cost us as much to separate cerium as it cost us to neodymium/praseodymium and lanthanum. And at the same time, what we sell out of Mountain Pass, DASP does go up although the volumes drop without the cerium in the mix. Michael?

Michael F. Doolan

No I was just going to say, I mean right now if you take, and I’ll just use metal stages seeing as a public sourced information. If you look at the composition of the Mountain Pass ore and I hate to use basket pricing, but if you just would break it out, today it’s about $17.19, if you just take away, if you only value the lanthanum, NDP, NdPr, the SEG, it’s going to be about $28, and then very crudely if you take away half of our production as Constantine said, sort of having a $6 to $7 target, it’s effectively at $12 to $14 target, but you’re now comparing that to $28 selling price for the materials versus $17.

Michael F. Gambardella – JPMorgan Securities, LLC

Men I’m assuming if you start pilling all the cerium that [indiscernible] and everyone else in the world is doing the same and what type of implications on the overall rare earths market is there for that?

Constantine Karayannopoulos

As I said in my comments, historically, what has been driving the rare earth industry is magnetic rare earths supply demand. I can’t – as I said, again in previous calls, the only company that I’ve ever known to be balanced in terms of its production in sales of cerium has been Neo and that’s because we did not have an ore body to work with and we could optimize it downstream operations, but cerium the rare earth industry has been long cerium pretty well for the entire 20-year period that I’ve been learning or living in it. So this is nothing new Mike.

Clearly, we need to change that, but I think the simplest way to also think about it is if we cannot sell cerium and this has been a philosophy of all of us here on the call. If it’s not a – if you’re not selling in regardless of whether it’s a rare earth or not, if you’re not selling it, it’s not a product, it’s a waste.

So perhaps we need to start shifting our thinking, but at the same time, we are still a large supplier of cerium specialties to a number of sophisticated customers and we will continue to increase our presence in the downstream cerium markets as well as SorbX and other larger volume applications.

But again, I’m not trying to dismiss the importance of cerium clearly, we would much rather be able to sell all the cerium that we produce. But if we cannot then it’s not the end of the world. Molycorp will do not as well as we could do with cerium sales but we will do just fine and we will be able to continue to grow the company and hit our financial targets.

Michael F. Gambardella – JPMorgan Securities, LLC

Just one last question, if your competitors like [indiscernible] can’t sell cerium either, does it really push them harder to try to ramp up their ramping on neodymium production?

Constantine Karayannopoulos

Well, I guess that would be a rational approach to what alternatives they would have, but I also want to point out that in terms of our Molycorp’s ability to sell neodymium, praseodymium which in the live rare earth business and in the rare earth business in general, it is the largest value component of the distribution no one can come even close to Molycorp’s ability to do so. Our Magnequench business and our Magnetic Materials and Alloys business unit is one of the largest consumers of neodymium, praseodymium in the world.

So we have an internal demand for the largest value component of our distribution and that business continues to grow and it continues to add value downstream. So if we were to go head to head against the competitors that you mentioned I would much prefer, our chances are much like, our chances compared to theirs to be able to do just that.

But again, I want to point out that historically, and given, there is volatility here and there, but historically the one group of elements in the rare earth industry that has been in reasonable supply demand balance that has been neodymium, praseodymium regardless of when you look at the times when prices were going up or down. There has been a relatively close correlation between supply and demand for neodymium, praseodymium

Michael F. Gambardella – JPMorgan Securities, LLC

Thank you.

Constantine Karayannopoulos

Thanks Mike.

Operator

(Operator Instructions) And your next question comes from the line of Jeff Cramer from Morgan Stanley. Please proceed.

Jeff Cramer – Morgan Stanley

Hey, guys thanks and Geoff, congrats on the promotion. Just following on that conversation I mean as far as when Mountain Pass is generating cash flow kind of early next year. Are you guys be using market prices today, I know that the back up price if you will during the third quarter getting pretty low at $12.50. I guess correct me, if I’m wrong I would probably asked him a greater percentage of cerium sales there, but could you talk a little bit about that?

Geoffrey R. Bedford

Yeah, sure, I mean I think that when we’re looking ahead we’re not building into our thinking that there’ll be significant increases in prices. So the answers that we’re looking at basically – when we look out at our projection.

Jeff Cramer – Morgan Stanley

Okay. And with regards to the $12.50 in the third quarter versus where our market prices where – does that just have your component of the cerium?

Geoffrey R. Bedford

Yes that was – yes primarily that’s mix related.

Michael F. Doolan

It’s Michael. As Geoff pointed out, we’re now staring to sell the LREC to a downstream businesses and the value of the LREC is a lot lower than the individual element price. So that’s also skew the overall ASP for the business unit.

Jeff Cramer – Morgan Stanley

Okay. And for next year, are you sold out on lanthanum and NdPr, is that fully placed at this point?

Constantine Karayannopoulos

Yeah, when we look at our own internal projections as we continue to rollout Mountain Pass we do expect to be sold out a bulk of those elements, yes.

Jeff Cramer – Morgan Stanley

Okay, and then just shifting over to the Chemicals and Oxides for a minute, the $4.6 million of EBITDA for the quarter. You’re still working through the high cost of inventory as Zibo. I guess when we see a step change in the fourth quarter then [indiscernible] those are done and then again in the first quarter once Shannon has worked through its high cost inventories there? Maybe it’s kind of order of magnitude as we could.

Geoffrey R. Bedford

I mean we expect improvement in both the fourth and the first quarter. I don’t know what [indiscernible] a step change, but we definitely are seeing improvement or expecting improvement in those – in that business unit in the four and the first quarter. And as exactly as the reason you said, we’ve seen, we’re working through those high cost inventories. But also as I mentioned in the remarks, we are seeing demand improving for a number of that products that we’re seeing in that business unit as well.

Jeff Cramer – Morgan Stanley

Okay. And then maybe just lastly [indiscernible] can you just talk a little bit about the heaviest demand there, and you just touch on a little bit, but maybe you just talk a little bit more I know their substitution there, if you see that coming back and how you see that playing out into the next year?

Geoffrey R. Bedford

Sure. I think for my perspective what we – the challenge we’ve seen in 2013 has been a combination of still the sort of feeling the hangover from the high prices in 2011 and the inventory work down. But also I think we’ve talked in prior calls that we’ve seen smuggling and a legal mining in China and that was primarily a heavy rare earths.

I think we’ve – since over the last sort of few months in quarters we’ve actually seen the government taking pretty aggressive action in that and trying to reduce that. And I think that is sort of broad that’s had an impact on our business and the heavy rare earth business overall. So at this point, we expect that to continue. I mean we know that the government is taking that very seriously and they’re actively out there.

So I think that’s how impact on a heavy in a positive way, the primary – couple of the primary applications that heavies go into the electronic applications, I think we’ve seen that demand returning. I think we have seen some form factor issues where the volumes, that number of pieces are the same, but we’re seeing the amount of rare earths going into right to us.

On the lighting, the phosphor lighting, we’ve talked about that in our remarks as well. That business seems to be returning, the longer-term [indiscernible] LED, but our view is that emerging market phosphor lighting will remain for sometime here. And then as Constantine talked heavy is also going to make next and that’s a very strong application for us.

Jeff Cramer – Morgan Stanley

Okay, thank you.

Operator

And your next question comes from the line of Paul Forward from Stifel. Please proceed.

Paul Forward – Stifel Nicolaus

Thanks, good afternoon. On the – just on the question on cerium again I think you talked about well $6 to $7 per kilogram is the target by placing all the cerium and 12 to 14 if you’re not placing any of it, can you and that would be Mountain Pass is going to project it cost excluding any cerium sales at a kind of full run rate.

I was just wondering if you could take a stab at comparing those adjusted cost excluding cerium with kind of the rest of the world rare earths industry and how you see Mountain Pass if you take cerium out of the equation on a unit cost basis. Where does – where is it fit relative to competitors?

Geoffrey R. Bedford

Well, couple of questions, first of all we did not see 12 to 14 month, we stood at low-teens, for the simple reason that cerium does not – it doesn’t cost us as much to separate and purify cerium as it does – as I said earlier lanthanum, praseodymium, and neodymium that is why it is not a straight doubling of our production cost and also when you look into our – when you look at our product mix which also includes LREC, the purified light where it concentrate that’s also a lower cost material. So in balance I would expect to see a fully absorbed or rather cash cost that does not assign production cost to cerium to be in the low-teens.

So we might be I guess been low perhaps the lower end of your 12 to 14 range. In terms of comparing Mountain Pass to other rare earths, basic rare earths production operations around the world. Our sense is that no matter which way you got it, Mountain Pass will be right there at the bottom of the production cost scale and it will be competitive with any of them regardless of whether you’re looking at the big Chinese operations in the light rare earth industry for any potential operations outside of China.

We have a very high degree of confidence at Mountain Pass we will be even the lowest or absolutely among the lowest cost producers in this space regardless of how cerium is looked at. And as a previous question mentioned [indiscernible] does not sell most of its cerium either, so this is a phenomenon in the industry that has persisted for a long time and it’s nothing new.

So I think with all the producers in the Rare Earth industry would have a pretty well similar problem with – or at least the cerium problem would be in the same ballpark for everybody. So in that basis, we continue to be very confident at Mountain Pass will be a very low cost producer compared to anyone in the world.

Paul Forward – Stifel Nicolaus

Yes, great. And I wanted to ask also I think last quarter we talked about certainly an improvement from the first half on operating cash flow, when you did show that with the $16 million negative number in the third quarter. Just wondering if because you look at the fourth quarter and the first quarter, the fourth is maybe with the commissioning phase at the Chloralkali plant that I guess, I would say, going to ask does that still allow the potential for fourth quarter swing to positive overall operating cash flow or if it’s a more of a first half next year event.

Can you talk a little bit about, because I know in past quarters you’ve had seasonal issues with the slow low level of activity – sales activity in the first quarter? Can you talk a little bit about how you see in the next couple of quarters stepping up as far as the swing, more positive swing on the operating cash flows?

Michael F. Doolan

Yeah, I’ll take this is Michael. I mean, I think – with the seasonality comments, I mean I would see this positive in Q4, but my assessment is that if you are probably looking at kind of flat from where we are today and then as the throughput at Mountain Pass ramps up, early into 2014 and continues. I would see as cash positive early in 2000 – you’ll start to see as I said, sort of flat Q4 and then you’ll start to see sequential improvement after that.

Paul Forward – Stifel Nicolaus

Okay, thanks.

Operator

And your next question comes from the line of Alex Fairglen [ph] from BNPP. Please proceed.

Unidentified Analyst

Hi, can you hear me?

Constantine Karayannopoulos

Yes.

Geoffrey R. Bedford

Yes.

Unidentified Analyst

Thanks a lot. Thanks for taking my question. Two part question just for a clarification purposes, there been I think a lot of confusion in the market is to exactly what your CapEx is going forward into 2014 and 2015? So I was wondering if you could just review that again with everybody in terms of what’s mandatory, what’s not in terms of Phase I, Phase II et cetera. And then just – then I have a follow-up.

Michael F. Doolan

Okay, again it’s Michael. I mean for the balance of the year as we said in the call, you’re looking at I mean about 65 to 68, so round number 65 to 70 for the balance of this year. Into next year, we’re looking at 65 to 70, sort of 40 is Mountain Pass plus or minus, 25, 30 the rest of the organization.

Within that, ballpark probably half of that would be discretionary and then moving into 2015, where at the movement we’ve – just as a place holder anticipated Phase II spending then there is probably another $100 million or so in 2015, a very good portion of that though being discretionary because it does relate to the final build-out of Mount Pass, which we’ve stated in previous calls, would only be spent if the market demands it, and we can afford it.

Unidentified Analyst

In fact, most of the $100 million is discretionary, right?

Michael F. Doolan

That’s a fair statement, yes.

Unidentified Analyst

And the follow-up was really just on the current run rate at Mountain Pass, you mentioned in the slides that you’ve demonstrated 15,000 metric tons run rate, but what’s the current?

Constantine Karayannopoulos

As you saw into the third quarter before chloralkali and crack were mechanically complete, were just in excess of 1000 tons of production. That has been growing. We expect to be operating. Again, having demonstrated that rate versus where we are running, there is the number of inputs, including supply demand and our expected cost of production that goes into the chloralkali.

We are running at rates that are better than the third quarter, but we are not running at the – currently at the 15,000 ton a year run rate. Again, I can’t give you a more precise answer, but we are above the third quarter and we are below the demonstrated capability of the plant.

Don’t forget, the chloralkali and the crack have not been fully commissioned as we said earlier in the final stages. And we expect both of those units to be fully commissioned during the current quarter. But realistically, you should be seeing a significant pick up in output starting in the first quarter and then growing from there.

Unidentified Analyst

Thanks a lot.

Constantine Karayannopoulos

Thanks [2.11].

Operator

And your next question comes from the line of Owen Douglas from Robert W. Baird. Please proceed.

Owen Douglas – Robert W. Baird & Co.

All right. Hi guys, thanks for taking my question. Just had a quick one, so I think as the previous caller mentioned, do you have some CapEx needs 2014, that $65 million to $70 million. And I think that your interest expense is going to be on the order of $120 million next year. What are you thinking in terms of saying that you guys think you can become cash flow break-even next year. Was that factoring in that full that’s got $200 million of CapEx and interest expense or is this only on a pro forma run rate basis?

Michael F. Doolan

Yes, I guess first of all just the cash interest is ballpark about 105 round numbers, sounding interested, slightly higher and just because of accretion and so forth just accounting interest, but what I said in early 2014 to be cash, really just operating cash flow positive before debt service. And I think completely free cash flow, I’d love to see it by the end of 2014, but probably into 2015 before we are totaling free cash flow positive. But the raise as we’ve said, we feel very confident that that’s sufficient to see us through to completely free cash flow positive. But you are not going to see that though in 2014. I will be very presently surprised that we do.

Owen Douglas – Robert W. Baird & Co.

Okay. And the gaining factor on that is really about the operational results?

Michael F. Doolan

Yes it is.

Owen Douglas – Robert W. Baird & Co.

Okay, and how much of that is due to getting the cost down in the facility versus increasing volume, just add that there is somewhat interrelated, but can you just walk through that?

Geoffrey R. Bedford

I would say that, I mean you’re going to get a bigger bank for your buck with just the increased throughput. I mean the move in this quarter from the 34 to 25 was solely increased throughput. As we ramp up, I think you’ve heard Constantine say in the past, without chloralkali, we get into the end of the low-teens and then we need chloralkali to get a set kind of last $5, $6. So clearly, we would want chloralkalis, but in the absence of that even with the throughput, we would be generating very respectable cash flow.

Owen Douglas – Robert W. Baird & Co.

Okay. And so right now, it sounds to me and based on the previous call you said, that you guys are running at a slower level purely because there is no enough market demand for the products. Is that correct?

Constantine Karayannopoulos

No, what we said it’s – demand is always one in the inputs into our decision making process. The ability of the plan to achieve the run rates is another, and finally, the cost of production, which still to this day, without chloralkali. Chloralkali still means about a $5 kilogram cost reduction for Mountain Pass.

So it’s a calculus that takes into account demand. But demand is not the only issue. If we could produce more neodymium, praseodymium and lanthanum for example, we could sell it. So we always need to look at the continuous optimization of our production versus sales equally.

Owen Douglas – Robert W. Baird & Co.

Okay. Can you remind me again, so you guys have demonstrated niobium to run at 15,000 run rate, why is it again that it’s now something if I just look at your chart and say somewhere about 10,000? Why is it at that level?

Constantine Karayannopoulos

Because there is a number of inputs into our decision of how hard to run Mountain Pass. And the demonstrated capacity of the plant is 15,000 tons a year annually. However, the plant is not easily run at that level, and the cost of production are at a level that we do not find attractive to run at that rate without chloralkali and crack running at the same time that would allow us to get our production costs into a level that would make it attractive for the plant to run at that rate.

Owen Douglas – Robert W. Baird & Co.

So even though the volume benefits are not enough to offset that operating efficiency?

Constantine Karayannopoulos

The volume benefits help by given the product mix and the demand that we see that’s why it’s a bit of a circular argument. There is a number of factors that go into our daily and monthly decisions and how hard to run the plant. At the end of the day, we have to make a call, what is the most optimal way to operate and that’s where it comes out at this stage.

Owen Douglas – Robert W. Baird & Co.

Okay, thank you.

Constantine Karayannopoulos

Thanks a lot.

Operator

Ladies and gentlemen, this ends the Q&A portion of today’s conference call. I like to turn the call over to Mr. Blackman for any closing remarks.

Brian Blackman

Thank you, operator. And just as a couple announcements, I’d like to remind people that Constantine will be speaking at the metal events, the Ninth International Rare Earths conference in Kowloon, Hong Kong on November 13 and Mike will be at the Small and Mid Cap Deutsche Bank Conference on November 20 and 19 of this month. Thank you everybody again for joining us on today’s call and we look forward to speaking to you in another couple of months.

Operator

This concludes today’s conference. Thank you for your participation. You may now disconnect. See you all, have a great evening.

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