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Summary

  • Management will ask shareholders to approve issuance of up to 350MM new shares at its investors meeting today.
  • I believe share dilution or bankruptcy are real risks for the company.
  • Investors should remain vigilant in order to profit from or protect their investments during today's trading.

June 25th is here. For Molycorp Inc. (NYSE:MCP) longs you know what that means - management will ask shareholders to approve the issuance of up to 350 million new shares at the company's investors meeting. In the company's May 13, 2014 proxy statement, Molycorp implied the new shares would give it flexibility for dividends, acquisitions or stock splits. However, I saw it as a signal for management to batten down the hatches:

Management believes the additional shares will give the company flexibility for future actions such as mergers and acquisitions, stock splits or dividends. Shareholders will vote on the request at the annual shareholders meeting on June 25, 2014. This may be Molycorp's attempt to batten down the hatches amid cash out flows that may continue unabated in the near term. In my opinion, the company will need to raise an additional $250 - $260 million in fresh capital.

What's Causing All The Drama?

Molycorp has been experiencing cash out flows for several quarters now. On my previous article I discussed Molycorp's bankruptcy risk, sans new capital. Below are the my high level cash flow projections which show the company running out of cash by 1Q 2015.

Has a Capital Raise Been Priced In?

Molycorp longs have portrayed me as the "boy who cried wolf", and have been adamant that a capital raise has been priced into the shares. One of the commenters on my previous article had this to say:

There is nothing new here. Everyone who sold on this thing during the last conference call sold with the very notion that a equity dilution was on the horizon. That said, even if MCP issues an additional 350 million shares at $2.5 -$3 per share valuation, it will give the company more than enough time to get things ramped up. The only real question at this point are average sales prices on the materials they are selling, which is largely dictated by China Rare Earths and whatever export controls China wishes to impose in the future ... That said, it does not mean MCP will go bankrupt.

However, it appears the market is saying otherwise. The stock fell $0.20 (7.3%) yesterday on volume of 6.1 million shares; average trading volume is 4.9 million shares. Investors are beginning to price in news from today's shareholders meeting. If 350 million new shares are authorized and eventually issued, that could mean dilution for the shares. However, if new shares are not approved, that could mean bankruptcy. Below is the movement in the stock over the past month.

(click to enlarge)

  • The stock hit a 52 week low of $2.44 per share after the market realized the company's $560 million intangible assets were worthless.
  • It tested the 52 week low yesterday, one day prior today's shareholders meeting. After the results of today's meeting, the stock could hit another 52 week low.

How to Trade The Shares

Bondholders - If new share issuance is approved, hold onto the bonds; the bonds will rise in value as new capital will give Molycorp the cash to pay interest and principal on the bonds. However, if new share issuance is not approved, sell the securities immediately, as bankruptcy would be imminent.

Equity Holders - Sell the shares. If you believe in the company you can always buy the stock back at a lower value post-dilution. Otherwise, buy put options to protect your downside in case the shares drop precipitously.

Holders of Call Options - Sell the calls now, before they decline further. Otherwise, buy put options to protect your downside in case the shares decline further.

Holders of Put Options - If the stock falls below $2.50 or $2.00 per share, then buy call options to lock in gains. The shares will trade wildly in either direction. They could drop below $1 per share on dilution or the threat of dilution from new shares, or they could rise as high as $2.90 per share on short covering. Either way, you will have locked in your gains. However, if the stock drops below $1 per share, then sell because the worst case scenario - bankruptcy - has already been priced in.

Conclusion

I believe Molycorp shareholders will approve the issuance of new shares today. Share dilution or bankruptcy for the company are likely scenarios. Molycorp is a sell.

Source: Molycorp: How To Trade June 25th Shareholders Meeting