Molycorp's IPO Filing Answers Some Longstanding Questions

 |  Includes: CVX, GS
by: Jack Lifton

Last Friday night, April 16, privately held Molycorp, the owner/operator of America's largest and most recently mined deposits of the lower atomic numbered ("light") rare earths filed the legally required notice that it will have an initial public offering of its shares within the allowed statutory period after such a public announcement.

The filing, as I read it, answers one question that has been out there for nearly 3 years: How much did the buying group, Goldman-Sachs (NYSE:GS), Resource Capital, Pegasus Capital, Traxys, and a small management contingent pay for what they bought from Chevron (NYSE:CVX)? The answer seems to be $80,000,000.00, which I was told by a bidder in the 2007 auction for the company was less than this bidder had offered at that time.

I believe the losing bidder who told me the story, and I think I understand what happened. It is likely that Chevron decided to take cash from a buyer rather than accept bids from other buyers who would then most likely have had to go to the markets to raise the money. This I am told by a friend who had a similar experience with the auction of an oil and gas property by Chevron is fairly routine with Chevron in these situations.

In any case a further reading of the SEC filing caused a very savvy securities lawyer I know to say:

At this stage it's real difficult to tell what the post-money valuation will be for Molycorp. We know they want to raise $350 million, unless the offering size is increased like we saw with A123, and we know that IPOs typically sell 20% to 30% of a company. So depending on their final structure the market capitalization could easily start out in the $1.5 billion range. With proven and probable reserves in the 2 billion pound range and average values of a few bucks per pound, it may be fairly easy to maintain a market capitalization.

My friend further pointed out:

To date, their [the original buyout group's] investments at Mountain Pass are less than $200 million, but they're likely to sell about 25% to 35% of the company to the street for $350,000,000.00 which would value the original buyer's residual interest at something on the order of $500 to $600 million when the dust settles.

It is my opinion that the interest in the rare earths sector by the investing public is still "hot," so that this is a good time for a Molycorp IPO.

I think that institutional investors are holding back on long term investments in the rare earth sector until someone outside of China starts producing rare earth metals and alloys, or at least, separated rare earth "oxides." Molycorp, by going public to raise capital, is doing the whole sector a favor in regard to others getting longer term investments.

Disclosure: I do not own shares in any company mentioned in this article