Molycorp's (MCP) CEO Geoffrey Bedford on Q1 2014 Results - Earnings Call Transcript

May. 8.14 | About: Molycorp, Inc. (MCPIQ)

Molycorp, Inc. (MCP) Q1 2014 Earnings Conference Call May 8, 2014 9:00 AM ET

Executives

Brian Blackman – Vice President-Investor Relations

Geoffrey R. Bedford – President and Chief Executive Officer

Michael F. Doolan – EVP and Chief Financial Officer

Analysts

Michael F. Gambardella – JPMorgan Securities LLC

Avinash Kant – D. A. Davidson & Co.

Paul S. Forward – Stifel, Nicolaus & Co., Inc.

Tom M. Daniels – Goldman Sachs & Co.

Paretosh Misra – Morgan Stanley & Co.

Tyler Frank - Robert W. Baird & Co.

Melissa Tan - RW Pressprich

Owen Douglas – Robert W. Baird

Jeff Cramer – Morgan Stanley & Co. LLC

Operator

Good day, ladies and gentlemen, and welcome to the Quarter One 2014 Molycorp Conference Call. My name is Sheena and I will be your operator today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Mr. Brian Blackman, Vice President, Investor Relations. Please proceed, sir.

Brian Blackman

Thank you, operator, and good morning everyone. As many of you know, we issued our financial and – released our financial and operating results for the first quarter of 2014 last evening. Our press release is posted on the investor relations section of our website at molycorp.com.

This call is being webcast, and a replay will be available along with the transcript on the company’s website. For those of you who dialed into the call, a slideshow that accompanies our prepared remarks is available on the Investor page of Molycorp’s website as well. For those of you listening by webcast, the slides will be presented in your webcast player where you can advance the slides on your own.

During the course of this call, we’ll make forward-looking statements, and I direct you to Slide 2 for 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 results or performance, but involve a number of risks and assumptions. We urge you to review Molycorp’s SEC filings for a discussion of some of the factors that could cause actual results to differ.

We also will refer to non-GAAP financial measures and you can find reconciliations of the most directly comparable GAAP financial measures in our earnings release, also posted on our website.

As you can see on Slide 3, joining us today is Molycorp’s President and Chief Executive Officer, Geoff Bedford, and Executive Vice President and Chief Financial Officer, Michael Doolan.

I’d now like to turn the call over to Geoff to get things started.

Geoffrey R. Bedford

Thanks, Brian, and good morning everyone. First, let me make a few high-level comments before Michael provides details on our quarter financials.

Let’s start on Slide 4. As we have seen over the past several quarters, demand appears to be stabilizing at more normalized levels in several of our key markets as customers continue to monitor their inventory levels closely and adjust purchasing plans accordingly.

In our core rare earth business, demand was mixed in the first quarter. Light rare earth product demand served by our Resources segment and our chemicals and Oxides segment was positive, and total rare earth volumes increased as compared to the fourth quarter. However, these volume increases were offset by a product mix that included lower sales of heavy rare earth products.

Demand for magnetic powders produced in our Magnequench segment continues to show signs of strengthening, and Q1 volumes were in line with expectations.

Looking forward, we expect the magnetic market demand will continue to grow. Overall, in global rare earth markets, we continue to see less price volatility. This is positive as it builds confidence in the market and encourages customers to increase the utilization of rare earths. It can also lead to new application growth across our vertically integrated supply chains.

At our Mountain Pass, California facility, we continue to optimize and debottleneck our processes, as our production ramp up proceeds. We continue to experience some process interruptions and debottlenecks in the first quarter, and that restricted our production more than we would have liked. However, we are addressing bottlenecks and other interruptions as we encounter them.

Our production processes are working as designed, and currently we do not expect any material technology or process issues that will prevent us from continuing to ramp up production. Unplanned interruptions and bottlenecks are common as production ramps up in a chemical facility of this size and scale. nevertheless, I continue to expect that we will achieve significantly higher production volumes in the second half of this year.

On the demand side, customer interest in increased output in Mountain Pass continues to be encouraging both in terms of external and internal customers. The single-largest volume customer at Mountain Pass is our own vertically integrated supply chain, comprised of our Chemicals and Oxides facilities in Estonia and in China, and our magnetic material facilities in China, Thailand, Arizona, and Japan.

These downstream facilities use Mountain Pass output directly or as feedstock to produce a variety of engineered materials for markets as diverse as bonded magnetic powders, automotive catalysts, and many others. This vertical integration positions us to make custom-made, specialty materials that go into a number of relatively niche markets. It also helps us to take advantage of multiple margin capturing opportunities across our supply chain, generate additional revenue streams, and differentiate our company among the competition.

I’ll provide additional detail on our business segment operations later in the call. first, let me have Mike to review the details of our first quarter financials. Michael?

Michael F. Doolan

Okay. Thanks Geoff, and again, good day to everyone. I would like to start with an overview of the quarter, and I will move into the status of our balance sheet and financial plans for 2014.

First, a quick summary of the quarter, on slide six. We reported net revenue of $119 million, a 4% decrease as compared to fourth quarter revenues of $124 million. This was largely driven by product mix and lower average selling prices or ASPs in our Chemicals and Oxides segment.

Overall product sales volumes were 3,518 metric tons, a 10% increase as compared to the fourth quarter. Our consolidated gross margin was negative 19.4% or a gross loss of $23 million for the quarter. We reported an operating loss before depreciation, amortization, and accretion, or OIBDA, in Q1 of $28 million.

Further details are available in the MD&A section of our quarterly filings for the period-ended March 31, 2014, and in the schedules provided with the press release. On an adjusted non-GAAP basis, we reported OIBDA loss of $2 million. And just a moment as a housekeeping note, you may notice we’ve changed our measurement to OIBDA, but I want to mention that all of the calculations are consistent. so all comparisons remain, and we just felt that the OIBDA represented a better definition of the basis of our calculation, as we do start with operating income.

Moving on, our net loss attributable to common stockholders for the quarter was $89 million, or a loss of $0.40 per share. On an adjusted non-GAAP basis, we had a loss of $0.29 per share. Shifting to our detailed financial performance for the quarter of 2014, our operating segment results begin on Slide 7 with the resources segment. During the first quarter, our resources segment sold 988 metric tons of rare earth oxide equivalent products for $16 million. Average selling prices were up 45% from the previous quarter at $15.75 per kilogram, and ASPs improved during the quarter for the majority of products we produce. Now achieving cash breakeven pre-interest in 2014 remains our goal, but a slower production ramp up at Mountain Pass than originally projected makes this more of a challenge.

On Slide 8, chemicals and oxides reported $46 million in revenue, a 16% decrease as compared to the fourth quarter. This decrease was related to product mix for heavy rare earth due to continued inventory destocking in the Multilayer Ceramic Capacitor market, MLCC. Also, weakness in the lighting phosphor market and the continuing negative impact of illegally mined materials entering the market. Although pricing appears to be stabilizing, and our volumes of 1,926 metric tons outpaced sales in the fourth quarter, OIBDA for the segment was approximately $3 million.

On Slide 9, we reported $56 million of revenue in our Magnetic Materials and Alloys segment, a 5% decrease from fourth quarter. And as previously discussed, the commercial ordering patterns within this segment displays seasonality due to the Chinese New Year, and Q1 sales were in line with expectations. We sold 1,374 metric tons of magnetic powders and alloys at an average selling price of nearly $40.71 per kilogram. That average ASP was 3% lower than realized ASPs in the prior quarter. OIBDA for the segment was approximately $14 million.

Lastly on Slide 10, our rare metals segment reported $20 million in revenue compared to $15 million of revenue in the fourth quarter. We sold 101 metric tons of rare metals at an average selling price of $202 per kilogram. Overall, volumes were up 50% compared to the prior quarter. Now, moving back to our consolidated P&L, Selling, general, and administrative expenses were $18 million for the quarter, 42% decline from the prior quarter. We continue to look for opportunities to reduce our SG&A costs. Interest expense during the quarter was $36 million and we reported the tax benefit of $2 million during the quarter, representing an effective tax rate of 2%, on a net loss before income taxes and equity of earnings of $86 million.

On Slide 11, in terms of our balance sheet and statement of cash flows, we used $46 million in cash for operations during the quarter. We also spent $30 million in Q1 for cash capital expenditures, which is now indicative of the significantly lower slowing capital spend at Mountain Pass, and there have been no changes to the overall Mountain Pass project budget. For the remainder of the year, we anticipate capital expenditures will be $61 million across the entire organization. And as of March 31, we maintained $236 million of cash and cash equivalents on the balance sheet, a quarter of which was held in China.

And now, let me turn the call back over to Geoff.

Geoffrey R. Bedford

Thank you, Michael. Now, let’s look a bit closer to how things are progressing within our resources segment, which comprises our operations at Mountain Pass. That begins on Slide 13. We have been operating our new facility with all units complete for a little over three months, and our efforts to optimize and debottleneck processes continue. For example, in the first quarter, we further reduced cycle times within our multistage crack unit. That helps reduce production costs through higher feed and deposit utilization. The new Chlor-Alkali unit, which became fully online in late February is performing well. We commissioned a second electrolyzer unit in April, which doubles the capacity to recycle our wastewater. We continue to work on our reagent production mix, so we can produce the chemicals we need at optimal efficiency.

However, with 1,111 metric tons of production in the first quarter, we did not achieve the production volumes we were targeting. April’s production of 520 metric tons was an improvement, but we clearly need to improve it further. As optimization and debottlenecking efforts continue, I expect we will see significantly increased production in the second half of this year.

On the demand side, we remain encouraged by what we are hearing from customers both internal and external for lanthanum, neodymium/praseodymium, and light rare earth concentrates which we call LREC. The LREC we produce at Mountain Pass is used in our Chemicals and Oxides segment as feedstock for processing valued-added products for a variety of markets.

Moving to Slide 14, let’s touch on the quarter highlights for our Chemicals and Oxides. Overall revenues were down slightly on a lower value product mix, although overall volumes increased to 1,925 metric tons during the quarter. The change in product mix was largely driven by sequential drop in heavy rare earth products in the lighting phosphor market.

Volumes within China during the quarter were down as a result of the Chinese New Year holiday, although, demand for our engineered products going in automotive applications remained stable. European volumes declined as compared to the fourth quarter although sales mix there returned to higher average selling prices with stable margins.

In Japan, we’ve recently seen signs of improvements. Spot transactions have returned to the market, which in the past have proven to be a positive indicator related to inventory management in key product segments. In North America, we experienced volume growth in the quarter related both to magnetic and fluid cracking catalyst products.

And across all geographies, emission catalyst products continued to perform well, and we anticipate this will remain a strong downstream market for us. As we head towards the middle of 2014, the ability of our downstream Chemicals and Oxides plants and our Magnequench facilities to incorporate feedstock from Mountain Pass will become increasingly important to us.

Our facility in Estonia is now substantially reliant on feedstock from Mountain Pass. In fact, we expect Mountain Pass at full commercial production to be able to supply 100% of that facility’s total capacity needs. Similarly, at full production, Mountain Pass could supply all of the feedstock needs at our Chemicals and Oxides facility in Zibo, China, if it makes business sense to do so.

Furthermore, Mountain Pass could supply 80% or more of our Magnequench business units’ rare earth feedstock needs, again, if it makes business sense to do so. Converting relatively low-cost Mountain Pass products into higher value specialty and engineered rare earth materials across these downstream business units is a critical component of our global business strategy.

Turning now to Slide 15, let me provide some highlights from our Magnetic Materials and Alloys segment. Volume shipped in the majority of our end-market segments were flat versus prior quarter, in line with expectations as Q1 is traditionally and marginally a weaker quarter in the rare earth space.

Customer inventories appear to remain very low, and we anticipate this continuing through the second quarter. Our traditional base business, supplying HDD and ODD demand grew in the quarter as did some of our newer applications that we have seen developing over the past few years.

This growth, however, was offset by lower shipment volumes into certain automotive and factory automation markets, which were primarily due to inventory reductions prior to the year end of the Japanese fiscal year. With one of our key patents set to expire in July of this year, we expect conservative order volumes from our customers in the short term. In anticipation of possible price reductions or alternative supplies, we expect our customers, particularly in China to maintain minimal inventory levels and manage their orders accordingly.

Despite the expiration of our patents, we remain confident in our ability to continue to be the leading supplier in this market due to our product quality, our scale, and our know-how. As mentioned on prior calls, we are currently making operational gains in our rare metals facility and we continue to improve throughput against our fixed cost base. The growing trend towards energy-efficient LED lighting has been a good growth driver for gallium from our Rare Metals segment and for lutetium from our Chemicals and Oxides segment, and we expect this to continue.

Let me make a few closing comments on Slide 16 before we turn to your questions. At Mountain Pass, our production plans in proceeding albeit slower than originally targeted and we anticipate a significant production increase in the second half of this year. This will position us to meet both internal and external market demands. The fact that we can sell so much of our Mountain Pass’ output to our downstream Chemicals and Oxides and Magnetic Powders segments for value added processing is a significant advantage for the Company.

Our ability to produce engineered materials that can meet the often exacting specifications of a wide variety of customers for a wide variety of applications is a powerful differentiator for us. Looking ahead at the remainder of 2014, we expect the core economics of our businesses in magnetics and rare earths to continue to improve. This will provide us with a stable platform for continued scaling and growth.

We always retain a measure of cautiousness when speaking towards future market trends, but as I look ahead, despite a slower start than originally anticipated, I see this year as a pivotal and exciting time for our company. As Mountain Pass production continues to increase, it will provide the market with the greater supply stability and increased price visibility it is demanding. I’m optimistic about the continuing prospects for long-term growth and demand for the engineered materials we make and for our Company’s ability to capture multiple margin opportunities across our integrated supply chain.

We look forward to taking your questions.

Brian Blackman

Thank you Geoff, and operator we’d now like to open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Michael Gambardella, JPMorgan. Please proceed.

Michael F. Gambardella – JPMorgan Securities LLC

Yes good morning. My question is regarding the cash burn. It seems like the cash burn in the first quarter was more than you expected and more than expected. And since on the last call you said you discontinued your talks for bank credit facility, you don’t have a bank credit facility and the cash burn was greater in the first quarter. I mean, what’s the contingency if things don’t improve? I mean, quite frankly you guys have thought that production was going to be ramping up quicker for several quarters now. Well, what if it doesn’t or what if prices start to go down when you bring the production on, and your cash burn continues, are you forced to raise equity again?

Michael F. Doolan

Yes, good morning Michael. I think first of all from a cash burn point of view from our perspective, the volume that we were anticipating didn’t come to fruition, so that was the issue why we saw less of a cash positive impact than we’re hopping. I think that’s really what we’re talking about here. So the cash position really comes down to the shape and scale of the ramp, which is what we continue to work on. As far as sort of alternatives, if and when we need them, quite frankly we are a public company. we think that we have alternatives available to us if we need them, and those alternatives and how we access them will really as I said sort of follow along with the ramp production and how quickly we could do that, and we still are very committed to seeing significantly higher volumes in the second half, so that’s what we’re working towards.

Michael F. Gambardella – JPMorgan Securities LLC

Are you still looking to the fourth quarter at 23,000 ton a year annualized rate?

Geoffrey R. Bedford

Yes, I mean that’s still our goal, but I will say that given that we’ve had a slower start than we thought, that target is more of a challenge than it was when we set it sort of six months ago.

Michael F. Gambardella – JPMorgan Securities LLC

But I mean what are your options -- aside from raising more equity, what are your options if the production ramp doesn’t go as you expect in the next couple of quarters?

Geoffrey R. Bedford

Well, I don’t think we’re going go into specific areas of where our options are. but I think that we have options, which include raising equity and others, quite frankly. So if and when we need to reach into those options, we think that we have the ability to do that.

Michael F. Gambardella – JPMorgan Securities LLC

Okay, thank you.

Geoffrey R. Bedford

Thank you.

Operator

Next question Avinash Kant, D.A. Davidson & Co. Please proceed.

Avinash Kant – D. A. Davidson & Co.

Good morning, Geoff and Michael.

Geoffrey R. Bedford

Good morning.

Avinash Kant – D. A. Davidson & Co.

The question was more again, in terms of the debottlenecking issue that you’re talking about. Could you give a little bit more detail in terms of what are the steps that you are taking and how are you holding it maybe a few examples here and there will be good?

Geoffrey R. Bedford

Sure, happy to. So maybe, I’ll start it with sort of a higher level view. my view of sort of where we are at Mountain Pass with the de-bottlenecking. I think early on, I sort of look at it in three different buckets and what we kind of have been challenged with that. We saw sort of the mechanical material type issues; failures if you will early on, filters, pumps not working, that type of thing. And I think as we’ve gone forward here, we are seeing those types of issues starting to really minimize. I mean, things still break, they always will. But from that perspective, we have definitely seen improvement. I think sort of the next area that we’re focusing on, or the second area is also just managing the process. So this is making sure that we have enough inventory in the right places through the system in front of the bottlenecks, et cetera.

so we can keep the process running efficiently and smoothly, bringing chemical plants up and down is always a challenge. So all what you want to do is, make sure that you have the right inventory in the right places, so you can continue to move, so that’s really(inaudible) it’s making sure that there’s places to put the various WIP items throughout the facility in the right areas. So that also is continuing, and I’d see sort of that. we’ll still be working on that through the second quarter, but I see that in the second half as something that we should have behind us.

Then the third area is really around the process itself and this is – I was trying to increase our yield, increase our concentration, so we get higher throughput. I mean this is kind of into the chemistry and the process. And that quite frankly is always on going. We’re always going to be trying to improve our yields, because that’s dropped straight to the bottom line, but is clearly sort of the marginal utility here at the 80/20 rule.

So, I think that that will take, we’ll continue those efforts sort of into the fourth quarter of this year is my view, an example of what we’re talking about specifically is we’re adding some capacity to our leech operation. We feel that doing that we’re going to be able to increase our concentration through that process and by doing that increase our throughput. So that’s kind of an example of what we’re talking about here. So, hopefully that answers your question, but that’s an overall view of where we are in some of the specific items we’re working on.

Avinash Kant – D. A. Davidson & Co.

So, little bit a follow-up here. If you talk about inventory management, there are two aspects of it. One is trying to figure out how much inventory should be kept based on defining the process and the second aspect of that is having the system in place which will tell you how much inventory should be kept if the process were to be run like that. Is it that the system part is missing or is that you’re tweaking the yields and the flow to figure out exactly what’s the best amount to be kept?

Geoffrey R. Bedford

Actually I think it has more to do with physical storage. I mean, it’s really making sure – the golden rule in a production plant is to make sure in front of your bottleneck you have inventory because you got to keep the bottleneck running, because you lose a day in there, you lose a day forever. So this is really us figuring out where, as the guys in the plant call it, the white spots on the road need to be so that we can make sure that we’ve got inventory in the right places and have the ability to sort of move the production levels up and down in various spots in the plant without completely offsetting what’s going on downstream or upstream with that. So it’s not anything more really than just making sure we have [package] in the right places and the right capacity.

Avinash Kant – D. A. Davidson & Co.

Can you talk about the second half ramp? Of course it looks like you’re not talking full capacity now, but could you gives us some. I think you said the month of April was how much, 520 metric tons. How much was that?

Geoffrey R. Bedford

520. 520 metric tons in April.

Avinash Kant – D. A. Davidson & Co.

Okay. And you expect further improvements in May and June going forward or you’re hitting some bottlenecks…

Geoffrey R. Bedford

Yes. Absolutely. I mean, as we said, I mean we don’t see anything that is in our way for being able to continue our ramp. The processes are working, but as I said, these bottlenecks are making sure we’ve got the best utilization we can, I mean, those efforts continue.

Avinash Kant – D. A. Davidson & Co.

Okay. Thank you.

Geoffrey R. Bedford

Okay. Thank you.

Operator

Paul Forward, Stifel. Please proceed.

Paul S. Forward – Stifel, Nicolaus & Co., Inc.

Thanks. Good morning.

Geoffrey R. Bedford

Good morning.

Paul S. Forward – Stifel, Nicolaus & Co., Inc.

Well, just on the same topic, with the Resources segment doing 988 metric tons in the first quarter, that was pretty comparable to the quarterly rate of production that you had throughout 2013 and that was of course all before the multi-stage cracker and the Chlor-Alkali plant were operable. I guess I would just look at that 988 number and it was encouraging to see that April was at a much higher run rate than that, but can you talk a little bit about the ramp-up of those, of the multi-stage cracker in the Chlor-Alkali and how that limited to you in the quarter toward what you think you can do in the second half of the year?

Geoffrey R. Bedford

Yes, sure. So the Chlor-Alkali, it’s early to call, really didn’t come on until February. So it was commissioned. So we were still dealing with that within the first quarter. I think in April we commissioned the second electrolyzer there’s sort of two units there. So that effectively has doubled our capacity for our ability to recycle our waste water. So from our perspective, the Chlor-alkali facility has really run quite well. It’s run to our expectations for the last couple of months that we have been running, and now that we have the second electrolyzer in place. We see our ability to recycle the majority of our water going forward.

We will continue to – maybe this was a mistake on our part not communicating this properly, but we will continue to haul water off site in the second quarter, and it will be reduced from what we saw in the first quarter, but the reason for that is we still have ponds that have water in them from legacy processing that is not – that we're not going to run through that Chlor-Alkali facility. But now, water haul will absolutely decline over time and under our new process, the vast majority of water can be recycled. But we will continue to haul water for a quarter or two to get the ponds to where we need them.

Paul S. Forward – Stifel, Nicolaus & Co., Inc.

And just following up on the Chlor-Alkali plant I think, over the last quarter you talked about that there could be several months ramp period at the plant, as you see it today how close are you to full capacity there.

Michael F. Doolan

I think the Chlor-Alkali plant is capable of certainly capable of managing the ramp as we see it and we have the capacity to deal with in Chlor-Alkali plant to deal with the sort of our 25,000 ton range, I think the issue is and will always be managing that waste water through the plant that will be a learning curve there has we go. So I think it will be ramping the Chlor-Alkali in managing that water as we ramp our production. Keeping that in balance will be the trick, but I think we can do it.

Paul S. Forward – Stifel, Nicolaus & Co., Inc.

And then just switching gears over to the marketing side or the, thinking about your efforts to develop end markets for Cerium as you get to this full run rate either by year-end or during 2015. Any change, any updates on your outlook for your ability to place Cerium into the market at these much expanded production rates in 2015.

Michael F. Doolan

I don't think there is any change. I mean I think what we're thinking is that this is a product development effort, and we’re continuing to pilot our product in various plants, we are working on a number of initiatives, but like as we said this is the product development, so it takes time, we’re confident that we can sell Cerium but it’s going to take us some time to develop those markets.

Paul S. Forward – Stifel, Nicolaus & Co., Inc.

And thanks and maybe lastly as you speak in your slides here about $61 million of remaining cash capital spending for the rest of 2014, and how much of that is locked in and how much ability do you have to economize and back off on any of that spending or is it, is that a pretty firm number in your minds.

Michael F. Doolan

This is Michael, up to 61.40 it is roughly Mountain Pass related. And I would suggest a lot of that has already been earmarked for the de-bottlenecking projects that Geoff has spoken about. The balance across the rest of the organization, we have to look at each specifically, but you could probably cut that back by maybe 25% or so.

Overall, $10 to $15 million would be sort of off stock market, what would be I would say, discretionary, you could maybe squeeze that a bit higher, but I would say right now 10% to 15%.

Paul S. Forward – Stifel, Nicolaus & Co., Inc.

Okay. Thanks very much.

Michael F. Doolan

Thank you.

Operator

Thomas Daniels, Goldman Sachs & Co. Please proceed.

Tom M. Daniels – Goldman Sachs & Co.

Hi, good morning guys. Thanks for taking my question. First, question, just more of a high level. As we think about the upstream, the Mountain Pass facility come online and driving down stream, how much this is – this would drive volume growth versus this would drive, cost synergies and improved gross margins.

Michael F. Doolan

I think it’s going to do both quite frankly. I don't know if that's the easy answer. The benefit we have as we ramp Mountain Pass is we do not – we've got a ready and waiting customers in our own downstream operation. So, we’ve already qualified the NdPr that’s coming out of Mountain Pass for our Magnequench business. And Magnequench has a sort of unique spec that we've been able to meet at our Mountain Pass facility.

And we're now feeding LREC into Silmet and Zibo as well, so things from that point of view that is allowing us to grow the ramp of Mountain Pass sort of uninhibited by worrying about whether you can sell these products, it goes right through.

And then on the margin, quite frankly I’d much rather sell my NdPr as magnetic powders in that value-added space than try to sort of go head-to-head with other some more commodity-like products. So, more commodity-like producers I should say.

So, I think, really it gives us nice options because we can always buy NdPr in China for our Chinese operations if we think we can sell our Mountain Pass material for our higher price somewhere else. But, if it turns out to the economics make more sense to feed our own processes, then we can do that. So, I really think it does give us a really nice optionality and sort of ability to ramp this plant and run these products into our value-added products downstream.

Tom M. Daniels – Goldman Sachs & Co.

Okay, great. Thanks, Geoff. And then next question was just, as we kind of think about you get into 23,000 metric tons of production. How do we think about, how much of that production your downstream businesses can absorb versus how much will need to be sold to third parties?

Geoffrey R. Bedford

Yes, sure. So, if you use 23,000 number that you threw out, 5,000 of that could go directly into feed material or the plants in Estonia and the light rare plant in China as an example. And then, of the reminder effectively all we are not quite because we take a few different products 80% of that could NdPr, because then go into our Magnequench facilities, if it makes sense to do so. And like I said, if we could sell NdPr some more money, somewhere else we’ll do that. But, that kind of is a rough estimate of what we could take downstream.

Tom M. Daniels – Goldman Sachs & Co.

Okay. And would you guys on the long term basis, do you want to be selling LREC into China, doesn’t that bypass some of the processing units that you built at Mountain Pass.

Geoffrey R. Bedford

No, we’ve always the feedstock that we are buying – the feedstock we currently buy in China is very, very similar to the LREC that we are producing in Mountain Pass. So, this is – we never had the cracking facility, et cetera, leech crack facilities, we were downstream from that at that plan. So, we were always buying a feedstock within their composition where LREC is.

And I think you know the answer to do we want to do that? I guess it comes back to the economics right now, when we look at as we think – we think that we do in the sense that we are not some sending these materials into China to be separated and then, sell them in the Chinese market as separate (inaudible). I mean, we are moving these into China to be separated to then moving further downstream into our mixed [offside] products to automotive catalyst into our magnetics business in China, et cetera. So again, thinking the – I’d much rather be selling the value-added stuff as much as I can as opposed to the more commodity like materials and it's really those downstream operations that give us that ability.

Tom M. Daniels – Goldman Sachs & Co.

Okay. Okay, I understood. And then just – one last question, I know we talked on the last call about the Magnequench patent expiration. Just wondering if you could give us an update, have you seen any competitive pricing in the market? Have you guys – it didn’t look like obviously your ASP fell much this quarter. On a go-forward basis, is there a timeline, where you think the ASP does need to come down and certainly we can quantify how much you think that the ASP might come down for the Magnequench business over the next couple of years? Thanks.

Geoffrey R. Bedford

Yes, sure. So you’re right. I mean, we didn’t see an ASP impact in this quarter. I think that we haven’t seen new competitors entering the market since we last talked. But we know that there is competitors out there, that are looking to get into the market. When we look at our Magnequench business, there is a segment of that business that we think is going to be very, very difficult to move away from our products just due to our quality and our ability to deliver that quality of scale, consistency, and you look at the efforts that it would take their engineers to re-qualify, et cetera, versus the cost they might save. It just doesn't make a lot of sense.

So we think that there is a piece of our business that’s quite sticky. There is another piece of our business that as we’ve been anticipating this patent expiration and we’ve been trying to penetrate up in other markets that wouldn’t typically be bonded magnetics, they centered, for example. We’ve already had to price those competitively in order to get that business. So, those prices are already down competing against the next best alternative if you will.

So I think it’s at middle space. So there is definitely a piece of our business where we – they are using our powders, but if they pushed harder enough, they could probably use somebody else's.

And I think that's likely where we are going to have to sharpen our pencil a little bit. But if not all of our business, it’s a segment of it, and the trick for us, of course, is to try to figure out which segment our businesses are in, (inaudible) working very, very hard on. But as far as how much it could come down, quite frankly, I don’t think we are in a position to talk about that right now and some of that will depend on just how good our competitors are as we go through here.

Tom M. Daniels – Goldman Sachs & Co.

Okay, that’s helpful. Just a real quick follow-up, we kind of think of that where you described the assets, it’s kind of a high end sticky business, middle business from the low-end. Do you think about 15,900 metric tons of shipments last year, could you kind of try to help us understand what percent of that was high-end sticky, what is the middle percent, what’s the low-end.

Geoffrey R. Bedford

Yes, I think the high-end, if we look at, say, 30% of our volumes up. The middle is and the low-end is probably in the 25%, so the middle is 50%.

Tom M. Daniels – Goldman Sachs & Co.

Got it. That’s perfect. Those are my questions.

Geoffrey R. Bedford

And I think just to add some color on that. So the part that is growing, I mean what we are talking about is, as I mentioned, we’ve already lowered the prices in the – where we are competing, let’s say, at centered application. And that already baked into the margins that you are looking at. And that actually is the segment that’s growing in automotive et cetera, that’s really growing quickly. So that, we see our ability to continue to grow volumes here to offset some of this margin compression that could take place.

Tom M. Daniels – Goldman Sachs & Co.

Understood. Thanks, Geoff.

Geoffrey R. Bedford

Thank you.

Operator

Paretosh Misra of Morgan Stanley, please proceed.

Paretosh Misra – Morgan Stanley & Co.

Thank you. Hi my question is regarding your objective of operating cash flow positive before interest. So if prices stay where they are, can you give us a sense what production rate in the Resources segment you need to see to achieve that objective?

Geoffrey R. Bedford

I mean we really to get to that for the full year, I mean on the run rate basis, we would be having to get 1,000 tons basically double where we are today on a run rate basis. Are you talking – well I’m talking pre-interest if you are talking after interest, totally free cash flow positive, which we sort of indicated is still at the end of 2015 then that would presume running at 20,000 tons plus to get to that level, but to get to pre-interest we would need basically a 1000 tons or 1,100 tons a month.

Paretosh Misra – Morgan Stanley & Co.

Got it, okay. And second one on pricing for your products, what are you able to achieve? Is that in line with what we see as published prices, export prices out of China, or is that a premium or a discount to those prices, did you give us any sense on that?

Geoffrey R. Bedford

It is a bit all over the map quite frankly, on the commodity-like products that we sell, the prices that are indicated that you see on the market – I can touch on it but – sort of relatively close to the types of prices that we see, but as you know our goal is to try to move as much as we can into the value-added stuff or the little more specialty stuff. And we definitely see a premium and it really depends on what product we’re talking about, over those prices in the specialty products.

Paretosh Misra – Morgan Stanley & Co.

Okay great thank you guys.

Operator

Tyler Frank, Robert Baird, please proceed.

Tyler Frank - Robert W. Baird

Hi guys thanks for taking the question. Looking at your OpEx it’s obviously down sequentially and year-over-year, just wondering if you can discussing what are your thoughts on run rate for that going forward, should we expect that’s a ramp throughout the year as you guys ramp production.

Geoffrey R. Bedford

Yes, I think if we’re talking about the resources segment specifically because it's hard to sort of – I think, as we’ve sort of mentioned in the past there is quite a fixed component to our cost structure there. So our expectation is that as we ramp volumes we will not be sort of a similar ramp in total spending. So our cost per kilogram or cash cost per kilogram will decline as we see our production volumes go up. I’m not sure if that’s really what your questions was, I hope - if I answered it properly.

Tyler Frank - Robert W. Baird & Co.

I guess I was more looking at the absolute value of OpEx. That is helpful. Also when I look at the rare earth volumes as well as pricing, can you discuss sort of what’s going on in that market, are you seeing a decline, is there a decline in demand which is causing the ASPs to fall?

Geoffrey R. Bedford

It depends on what sector. I think the answer is it’s mixed. We continue to see - when we think about out magnetic - the market, where it’s going into magnetic market that continues to grow and we see demand there, strong demand there. When we think about the FCC catalyst and some of those larger volume markets I would say steady, we’ve been watching our customers releasing results as well and giving guidance and things like that, look it’s a steady market going forward.

So on the electronics and the more niche specialty products, in Japan I think we still are seeing, believe it or not, some inventory de-stocking as we go and talk to these customers. So it’s bit of a mixed bag. I think that overall when you look at sort of the end use of rare earth in those products you know I think that we continue to see kind of the growth that we are expecting.

But back to the supply chain there’s still seems to be a bit of inventory de-stock plus-minus going on?

Michael F. Doolan

From an ASP perspective we talk about mix, a lot of the growth activity that Geoff is talking about is in light whereas the heavies has been flat. So if you look at our mix we’re just not selling proportionately as many heavies as we did previously and the heavies are obviously are the higher value material.

Geoffrey R. Bedford

Yes, so that’s had a negative impact on us.

Michael F. Doolan

Negative impact, yes.

Geoffrey R. Bedford

And really specifically what we're talking about there is lighting phosphors…

Michael F. Doolan

Lighting phosphors.

Geoffrey R. Bedford

…just we're seeing LEDs moving into the market.

Tyler Frank - Robert W. Baird & Co.

Okay, great, very helpful. Thank you.

Geoffrey R. Bedford

Thank you.

Operator

Melissa Tan, RW Pressprich. Please proceed.

Melissa Tan - RW Pressprich

Thanks for taking my questions. Just flowing-on to the previous caller I mean it sounds like you’re seeing more stabilization in the demand for rare earths. And is it fair to say that when you get to or close to your production capacity whether that’s close to 19,000 tons that your downstream facilities should be able to absorb the majority of your supply. So at this point we’re not seeing an oversupply as an issue, more as an issue that getting production out of the Mountain Pass?

Geoffrey R. Bedford

Yes, with the caveat of Cerium as we’ve talked about. When we look at the NDPR in the lanthanum that’s coming out of our Resources Group, we’re quite confident we can move that into the market either through our downstream operations or on its own into other applications. So based on our current – at the market today and what we’re sort of hearing from our customers, that’s correct with the caveat of Cerium.

Melissa Tan - RW Pressprich

Okay, thanks. And secondly, since you mentioned you did about 520 metric tons in April and you expect to get to that cash flow breakeven point if you do over 1,000. I mean, what type of improvement in your operation rates on a monthly basis should we be expecting, when you say significantly higher in the second half, should we be expecting I guess 30% jump per month, 50% jump per month, I mean can you give more specific guidance in that range?

Geoffrey R. Bedford

Well I think we’d come back to we’re sort of targeting exiting the year - but I’m focused on the run rate as it really as opposed to sort of the yearly bucket but our goal is to kind grow this plant into as we talked about 20,000, 23,000 run rate and do that as quickly as we can. And the chance we have is we’ve had a slower beginning to the year, which makes it more of a challenge to get there in 2014. But we are still looking to move into that quantum and we’re looking to move there as quickly as quickly as we can. So that’s certainly more than 50% improvement over where we are today.

Melissa Tan - RW Pressprich

Okay, so you could be – I mean one quarter could be just, for example, like the third quarter could just really jump significantly.

Michael F. Doolan

The nature of the de-bottlenecking in the plant will really give rise to step changes. I mean it's not really just kind of linear something happens. As the finance person and the lay person I can look at this, you’ve got a kink in your garden hose and the water is kind of dribbling through it currently, all of a sudden you release that kink and it just rushes, it’s that - I mean that’s the very poor analogy but that’s the way I look at it from my sense. So one kind of de-kinking can allow quite bit of additional throughput and it’s just a matter of getting the kinks out of the garden hoses, that’s using my analogy. Don’t be surprised if there are step changes I guess is what I'm saying.

Melissa Tan - RW Pressprich

Sure. So I guess it's fair to say that you could still be accounting new bottlenecks as thing goes and as production continues. And is there - are you able to identify some of these bottleneck surprises in advance and or how far in advance can you really identify or they just kind of jump up at you?

Geoffrey R. Bedford

So, the bottleneck in the process improvement we can absolutely identify in advance and we have a list of the things that we're working on. But there are – as we are ramping up the facility, there are interruptions that we weren't planning on. Something moves and then we have to react to that and I think – and again there is a lot of things that we’re working on, but as you’re changing the chemistry in one area that fits one thing, you can find that two steps downstream something’s changed that you necessarily weren’t thinking and you got to react to that. But this is all sort of normal course, I mean this is the way that these plants sort of ramp up, so we just need to keep our list in front of us and bang these things off one at a time and step through to get the process running a little more consistently and smoothly and getting the utilization and throughput we're looking for.

And you know we’ll get there; we’re confident we can get there. And as we said earlier, we can get to the kind of volumes that we’re targeting and we are confident that our downstream facilities can take in and we could sell that. So as I said we’re confident we’re going to get there and we think we can – once we do, we'll be able to sell it.

Melissa Tan - RW Pressprich

Sure. And just going back to the first half of my question, so do you think that having 2,000 production metric tons a month in the second half would not be out of the question where things are progressing at this point.

Geoffrey R. Bedford

Well, again I mean that - if you look we’re at 520 today or in April, that’s – our target is in that range, but we’re where we’re today and we need to grow to that and it’s more of a challenge to get there in the fourth quarter then it was six months ago when we set the target because we thought that we might have higher production today. So I mean that’s all really I can the best I can answer that.

Melissa Tan - RW Pressprich

Sure. And just going back to your liquidity, I mean you talked about you have many options including issuing equity, but do you have more of a preference or going back to capital markets versus equities and because I mean I went through your intention on the notes it seems that you should be able to still have more debt capacity in that sense.

Geoffrey R. Bedford

I think we have a number of options and we wouldn’t – we are trying to keep those options open and quite frankly a lot will depend on where we’re at the time and when. So, at this point I think we’re looking at everything and thinking it about considering everything. And I guess when we need to increase our liquidity based on that, the market at the time will decide in what makes the most sense.

Melissa Tan - RW Pressprich

Okay, great. and just a last question and I’ll get off, and just want to verify that do you see there’s any real technological issues relating to the Mountain Pass facility or is it, if there is any unproven scale system that need to be rectified.

Geoffrey R. Bedford

Technology, no. The process is that they’re working as we had expected, and I think as I mentioned we need to get better utilization, we need to in some areas get better concentration et cetera, which will help our throughput. The scaling, we still need to run the volumes and that will put more demand on the plant, and our expectation right now is that we will be able to deal with that increased demand. but I expect that as we get there, we’re going to have to be again, moving things around and thinking about things differently as that large volume comes out. So the short answer is we’re confident, we can get there, but we will have to sort of step our way through.

Melissa Tan - RW Pressprich

Okay, great. Thank you for your time.

Geoffrey R. Bedford

Thank you.

Operator

Owen Douglas, Baird. please proceed.

Owen Douglas – Robert W. Baird

Hi, guys thanks for taking the question. Just wanted to ask currently, looking at the downstream segments, what proportion of their fee slate is coming from Mountain Pass?

Geoffrey R. Bedford

Currently today, if you – the Estonia plant is probably taking the most, and it’s the last month or two, I would say that we pretty much supply [are sent] [ph] to it I don’t know if it’s actually arrived yet, because we are sort of on the water but we’ve been able send to it the material needs, feedstock requirements they would have – almost 100%; I would say in China we’re still building towards that. and quite frankly Magnequench, as I said, we have alternatives in China and if we can sell it more expensively our products outside of China rather than moving it into our Magnequench business we would do that and that’s kind of been the case for us so far. so we have not been prioritizing our product at Mountain Pass into our downstream Magnequench business, because we have options at other places.

Owen Douglas – Robert W. Baird

Okay. So just to go back to that, you said Estonia taking almost 100% or will be taking almost 100%; China, you said building towards that, but can you provide some context of the numbers, more of a 75% range, 50% range.

Geoffrey R. Bedford

Yes. at this point, it’s still – I think it’s likely below 50 still. we wanted to focus on Estonia and sort of the outside China market for the Mountain Pass and because – and also because we had access to raw materials within China for Zibo. so that was our priority and as we ramp production, we will also fill Zibo’s requirements as we go long.

Owen Douglas – Robert W. Baird

Okay. and that just leads us down to the differential in pricing, internal China and ex-China right?

Geoffrey R. Bedford

Yes. Exactly, and pricing at the time and you know this will be something, this is why I want to be careful that we’re not implying that we’re always going to do the same thing, I mean the nice thing that we have here is some optionality; if we see an ability that the economics shift pricing wise one way or the other, we can move our production around.

Owen Douglas – Robert W. Baird

Okay, great. Thanks for that and those tons get sold, do they get sold at the market price to Estonia or are these done at an internal transfer of cost plus basis?

Geoffrey R. Bedford

Yes. The transfer prices are plus or - basically market. We kind of view the business that the downstream businesses should be viewed as if they were out buying materials from somebody else, and they have to sort of make their way based on their competitors in that space, so similar to their competitors in that space. so it’s basically at market.

Owen Douglas – Robert W. Baird

Got you, I see. And it sounds like you guys view the Mountain Pass facilities as adding great optionality but at the same time you also seem to talk very highly of your downstream processing segments. Has any thought been given to perhaps monetizing the downstream segments, in order to ensure that there is greater cash buffer for the Mountain Pass business?

Geoffrey R. Bedford

I think that it’s the integration of the business that really sort of sets us apart from others in the industry. I mean a lot of people talk about it, but we really are the only one in my view that sort of right from the resource into something as sophisticated as bonded magnetic powders, automotive catalyst. And the ability for us to maintain the quality through the supply chain kind of give that visibility and stability into the value added customers, not just the people buying the commodities. I really think that that’s important for our business. So, that was really the strategy when we put the two companies together all along. So that’s an important aspect. So at this point, we definitely want to keep those pieces together.

Owen Douglas – Robert W. Baird

Okay, I see. Now, in terms of thinking about so you guys - I think some of the prior questioners have alluded to, you guys have experienced difficulty raising capital in the form of a revolving credit facility. What are the other options that you are considering right now, just to ensure that you continue to maintain a liquidity buffer as the ramp goes on?

Michael F. Doolan

Yes, I can take that. I mean, we are still notwithstanding we sidelined the previous discussions, we continue to talk to other lenders but I think, probably higher on the list now would be equipment financing, we talked about that in the past, but the reality is from a year-ago to now, we actually have the equipment built and running. So the equipment financiers are more willing to sit down and talk us about those types of things. So, as Geoff said earlier, as we continue to build out Mountain Pass, it’s up, it’s there, more options are presenting themselves to us.

And as we do the terms become slightly more favorable as well. We’re in various discussions, we keep our options open and we continue to monitor quite closely the liquidity situation. And it’s really contingent upon the ramp.

Owen Douglas – Robert W. Baird

Okay. When you say equipment financing you’re referring to sale lease back transactions, is that correct?

Michael F. Doolan

That’s correct. Yes.

Owen Douglas – Robert W. Baird

Okay. And how much of your - I think looking through your year-end 10-K it says there’s about $288 million of planned equipment. How much of that would you say is located at the Mountain Pass facility or at least domestically?

Michael F. Doolan

The $288 million at year-end, the majority is going to be Mountain Pass clearly. And I guess a lot of it would have been still in construction and process at year-end; we’ve moved some in Q1 and probably the majority of any construction and process will get moved in Q2 as it starts to ramp up.

On a different note, the fact that it’s kind of all in and built, we’re no longer capitalizing any interest towards any of the Mountain Pass assets. So the lion’s share, I don’t have the year-end downstream in front of me but the lion’s share clearly is Mountain Pass.

Owen Douglas – Robert W. Baird

Okay. And at what point would you say that during this year, that you would make the determination that a liquidity buffer was needed, because perhaps the ramp was taking a little bit longer than originally envisaged.

Geoffrey R. Bedford

Well, I mean again, I think that really depends on the ramp. So I mean we’re watching it every month and looking at where we think we are and where our liquidity position is, and if and when we think we need to access the markets then we will do that. But it really is going to be driven by our progress with our ramping production.

Owen Douglas – Robert W. Baird

Okay. I just want to make sure I got these two numbers right. so one referred to the cash flow positive number, the with interest was presumably about $20,000 plus run rate at Mountain Pass. What was the number for the pre-interest operating cash flow positive?

Michael F. Doolan

That would be $1,000, $1,100 per month.

Owen Douglas – Robert W. Baird

$1,000, $1,100, so about $12,000 to $13,000 a year.

Michael F. Doolan

That’s correct.

Owen Douglas – Robert W. Baird

Okay I see, great. Thank you very much. I’ll pass it over.

Michael F. Doolan

Okay.

Operator

Jeff Cramer, Morgan Stanley. please proceed.

Jeff Cramer – Morgan Stanley & Co. LLC

Hey, good morning guys. Just at Mountain Pass the conversations you’re having with your customers I seem to recall Lanthanum was pretty well sold out; just given the slower ramp, I mean, I guess, I presume they’re okay, waiting, and as soon as the ramp happens that you start delivering to them?

Geoffrey R. Bedford

Well, to be honest, we would love to have been able to be a better supplier to our lanthanum customers, quite frankly. So they’ve been more than patient with us. But yes, we’re confident that as we ramp that lanthanum we will be able to move with into their operation, but they’ve been very patient.

Jeff Cramer – Morgan Stanley & Co. LLC

Okay, and just given the strong demand in lanthanum, I guess at what point do you see price divergence between cerium and lanthanum, given difference in their dynamics?

Michael F. Doolan

Difficult to say, it’s difficult to say, but I think that given what we’re seeing as you said lanthanum demand being, we’re seeing - see the markets being demanding lanthanum much more than cerium I would fully expect that we could start to see price divergence as that continue, but trying to pick exactly when is…

Jeff Cramer – Morgan Stanley & Co. LLC

Okay. and just shifting to the downstream ops for [all in] [ph], on the demand growth, you had demand growth or volume growth in each of the three downstream segments. I guess do you expect that to continue in 2014? You talked a little bit about the patents at Magnequench, but would you expect that to continue as the year goes on?

Geoffrey R. Bedford

I think that, yes, so in the Chemicals and Oxides business, the swing factor there is the heavy rare earths for us and how that’s coming in and out of the market and our expectation is that some of the illegal mining and things that are going on continue – it’s getting better. But we were in the ministries and et cetera few weeks back and there’s quite a focus on trying to stabilize and eliminate that and as that happens we could – we will see our heavy operations increase. So that will be positive.

I think on the Magnequench business, you’ve already alluded to the patent expiration. And that could put downward pressure on our volumes. Short-term as our customers are sort of figuring out, how they want to manage themselves and watching their inventories closely. I think on the rare metals, we’ve kind of got off to a slow start; the rare metals market has been a bit quiet for us. So we’re hopeful that we’ll see expanding volumes there.

Jeff Cramer – Morgan Stanley & Co. LLC

Okay. just finally if you just comment on Chinese demand post the Chinese New Year, has that returned as you had expected or compared to previous years?

Geoffrey R. Bedford

I would say that it has returned as we expected, but not as good as we’ve seen in previous years; still a bit mixed there. I think that some of the [polished there- polish] [ph] markets in China got [polished] [ph] actually are moving along quite well. I think the magnetics markets are also moving well. But the heavy rare earths, as I talked about, the phosphor market for lighting phosphors, I think it’s starting to feel the impact of LED.

Jeff Cramer – Morgan Stanley & Co. LLC

Great, thanks.

Geoffrey R. Bedford

Thank you.

Operator

I would now like to turn the call over to Brian Blackman for closing remarks.

Brian Blackman

I’d like to thank everybody for joining us this morning. And as a reminder, next week, we’ll be hosting an Analyst Day, which will be available via audio cast and that information is available on the Molycorp website. Once again, thanks everybody for joining our today’s first quarter call, and we look forward to checking in in just a week. Thank you.

Operator

Thanks for joining today’s conference call. This concludes the presentation. You may now disconnect. Have a very good day.

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