Molycorp's (MCP) CEO Geoff Bedford on Q2 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: Molycorp, Inc. (MCPIQ)

Molycorp, Inc. (MCP) Q2 2014 Earnings Conference Call August 7, 2014 9:00 AM ET

Executives

Brian Blackman - VP, IR

Geoff Bedford - President and CEO

Michael Doolan - EVP and CFO

Analysts

Michael Gambardella - JPMorgan

Jeff Cramer - Morgan Stanley

Brian Lee - Goldman Sachs

Avinash Kant - D. A. Davidson & Company

Kevin Cohen - Imperial Capital

Brett Levy - Jeffries

Melissa Tan - RW Pressprich

Robert Weiss - Citigroup

Owen Douglas - Robert W. Baird

Patrick Marshall - CRT Capital

Operator

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

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

Brian Blackman

Alright, thank you operator, and good morning to everyone who has joined us on this morning’s call. As you know, we’ve just released our financial and operating results the evening before for the second quarter of 2014. Our press release is posted on the Investor Relations section of our Web site at molycorp.com. And this call is being webcast, and a replay as well as a transcript will be available on the Company’s Web site.

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 Web site. 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 those disclaimers. All statements that address expectations or projections about the future are forward-looking statements. Although they reflect our current expectations, these statements are not guarantees of future performance, but involve a number of risks and assumptions. We 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 reconciliation to the most directly comparable GAAP financial measures in our earnings release, also posted on our Web site. As you can see on Slide 3, joining us today is Molycorp’s President and Chief Executive Officer, Mr. Geoff Bedford, and Executive Vice President and Chief Financial Officer, Michael Doolan.

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

Geoff Bedford

Thanks, Brian, good morning everyone. Before Michael reviews financial highlights of the quarter let me provide four high level updates on Slide 4. First I assume that you saw from our press release yesterday we have entered into a Letter of Commitment to secure up to $400 million in financing from funds managed by Oaktree Capital Management. This financing will come through credit facilities and through sale and leaseback of certain equipment at Mountain Pass. $250 million of this will available immediately upon closing, which is expected to occur in the next several weeks. The remaining 150 million is available subject to certain conditions. I’ll provide some additional color on this later in the call.

But let me say, I am very pleased that we have secured this package. We believe that it will provide sufficient liquidity and flexibility to address operating and other cash needs while we progress with our production ramp at Mountain Pass.

At our Mountain Pass facility production volume increased in Q2 to 1,639 metric tons, a 48% increase over Q1 volume of 1,111 metric tons. As production rose our production cash cost declined sharply from $27 per kilogram in Q1 to $16 per kilogram in Q2. In short, compared to Q1 we produced more Mountain Pass in the second quarter and we spent less doing it. We continue our efforts toward our goal of bringing Mountain Pass up to its full initial designed capacity.

Third, our vertically integrated supply continues to deliver increased value and provides us with competitive advantage in the global rare earth markets. No other rate earth company in the world has been able to vertically integrate itself from mine to advance materials on a global basis as we have. As a result, every molecule we ship downstream from Mountain Pass is ultimately sold in a higher value form to customers around the world. And finally, one of the world’s leading independent rare earth market analyst Encore forecast that global rare earth consumption will increase by two to three times out of global GDP growth from now through 2017.

Moreover, demand for various magnetic materials is forecast to experience double-digit combined annual growth through the same period, this illustrates what we have had said for some time. Magnetic rare earth represents the greatest opportunity for sustained growth in the rare earth markets. And that very much plays to Molycorp’s core strength.

I will elaborate a bit more on these and other points but first let’s have Michael give a high level summary of our second quarter highlights. Michael?

Michael Doolan

Okay. Thanks Geoff, and again, good day to everyone. First, you can see a quick summary of the quarter, on Slide 6. We reported net revenue of 117 million, a 1% decrease as compared to the first quarter revenues of 119 million. Overall product sales volumes were 2,996 metric tons, a 15% decrease as compared to the first quarter. However, offsetting the decline was a higher average selling price overall of $39.02 for the quarter, which was a 16% improvement over the prior quarter driven by a change in overall product mix.

Our consolidated gross margin was negative 14% or a gross loss of $17 million for the quarter. We reported an operating loss before depreciation, amortization, and accretion, or OIBDA, of 21 million. On an adjusted non-GAAP basis, we reported an OIBDA loss of $2 million. Our net loss attributable to common stockholders for the quarter was 84 million or a loss of $0.37 per share and on an adjusted non-GAAP basis we had a loss of $0.29 per share. This detailed segment results though are available on Slide 7 through 10.

Now in terms of our balance sheet and statement of cash flow we used 73 million in cash for operations during the quarter as shown on Slide 11. We also spent 15 million for cash capital expenditures of which $12 million was at Mountain Pass in line with our estimates. For the remainder of the year, we anticipate capital expenditures will be $40 million across the entire organization. As of June 30, we maintained 156 million of cash and cash equivalents on the balance sheet of which approximately $46 million was held in China. Further details are available in the MD&A section of our quarterly filings for the period-ended June 31, 2014, and in the schedules provided with the press release.

Let me now turn the call back over to Geoff.

Geoff Bedford

Thanks, Michael. Turning to Slide 13, Let me provide me some additional color to the points I made earlier before we turn to your questions. First, regarding our Letter of Commitment for our 400 million financing package with funds managed by Oaktree I would refer you to the press release we issued following market close yesterday for details. But let me reiterate a few points, 250 million of the 400 million in this package is immediately available to us upon deal close. I believe this will help us address any liquidity concerns while we progress with our production ramp at Mountain Pass. The remaining 150 million is available to us until April 30, 2016, at our discretion once we achieve two conditions, one financial and one operating. We believe that both conditions are attainable and that this package will give flexibility to meet future liquidity needs.

Now with regard to Mountain Pass, we remain on-track to produce higher volumes in the second half of this year compared to the first half. This increased production will be driven both by our ongoing success and process optimization as well as our newly expanded Leach system. We plan to begin commissioning that system which we call Leach 2.0 in this quarter. Once fully commissioned, it should enable a significant step change upward in production.

Looking back at Q2 production, we successfully drove volumes of Pass 700 metric tons in the month of May. However, in June, we did experience some mechanical issue at a unit in our Pass plant while this impacted our production volumes for the month that unit has been repaired and is again fully operational.

Also in late June, we began noticing that our Chlor-Alkali unit wasn’t producing a level of regents that we needed. The cause was variability and the specifications of the brine solution that feeds that unit. This was degrading the performance of the Chlor-Alkali electrolyzers. We are repairing these units and working to address the brine quality issues and I am confident we will get Chlor-Alkali back up to full capacity. Normally our contingency plan in the event the Chlor-Alkali plant has issues would be to purchase reagents from the open market. However this summer has been plagued by unusually tight availability of hydrochloric acid due to various operational issues at hydrochloric or HCL plants in the United States.

Many HCL customers like us have been put on very tight allocations. As a result, we have not been able to purchase the qualities of HCL we would like that cost us some production capacity at the end of the Q2 and has continued into Q3, but I would like to reiterate that we fully expect that Mountain Pass will be able to operate at its full designed capacity once optimization efforts are complete.

Our intent is to complete this production ramp as quickly as possible. Based on conversations with our customers, we currently see demand sufficient to support running Mountain Pass at an annual rate between 20,000 to 23,000 metric tons. Beyond Mountain Pass, our vertically integrated supply chain continues to perform well. As I mentioned earlier, every molecule we ship downstream from Mountain Pass is ultimately sold in a higher value form. In particular, we have been steadily growing downstream shipments from Mountain Pass of light rare earth concentrate what we call LREC to feed our Silmet and Zibo plants. Demand for the value-added products these plants produce including cerium is improving.

A good example of value adding benefit of our vertical integration is our engineered auto catalyst products that we make at one of our processing facilities in China. Demand for these custom engineered-based products continues to grow especially as vehicle emission standards in the EU and elsewhere are tightening through government regulation. These products will ultimately help us consume more of our cerium from Mountain Pass.

In looking at rare earth markets, we continue to see greater stability and less volatility in rare earth pricing. We believe these trends are bringing customers back to more normal purchasing patterns and will ultimately improve demand. This is especially evident in the magnetic space. Long-term demand growth looks for these materials especially in the automotive and high plants markets is strong. In general, demand for more energy efficient technologies around the world is rising both because of custom demand as well as by ever tightening government efficiency standards. These include products such as hybrid and electric vehicles, energy efficient home appliances and many others.

Our rare earth magnetic materials are vital to help the manufacturers of these technologies deliver on the promise of greater efficiency, reduce energy consumption and associated reductions in emissions such as greenhouse gases. We are forecasting long-term demand growth in this space.

Let me reiterate my main points which you can see on Slide 14, our 400 million financing package will provide sufficient liquidity and flexibility to address operating and other cash needs as we programs with our production ramp at Mountain Pass. Mountain Pass production continues to strengthen while our cash cost of production is falling. Our vertically integrated supply chain is enabling us to sell every molecule that we ship from Mountain Pass to our downstream facilities as value-added products. And finally, we are strongly positioned to increase sales of custom engineered, rare earth magnetic materials into the single fastest growing segment of the global rare earth markets.

With that let’s open the call up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instruction) And please stand-by for your first question which comes from the line of Michael Gambardella at JPMorgan, go ahead please.

Michael Gambardella - JPMorgan

I have a question, could you us some more detail on the financing package that you announced last night like what is the interest rate that you’re going to be paying on the 250 million that you’re going to draw down soon and what are those operational and financial measures that you have to hit in order to get the other 150 million and also what collateral has been used to secure this facility and I guess I have a couple of other questions but you go with that first.

Michael Doolan

Good morning Mike, it’s Michael. First on the interest rate, it’s 12%, 7% paid in cash and 5% pick as it relates to the hurdles the operations is around production targets at Mountain Pass and the financials in overall EBITDA hurdle of which as Geoff mentioned, we are comfortable that if both of those are well within our forecasted projections and we do have until late 2015 and early 2016 to achieve them so, we’re quite comfortable there. As it relates to the security I think everybody is aware that we have a number of baskets that are permitted under our 10% high yield notes and suffice to say that we’re using several of those baskets including 300 million debt basket, foreign debt basket and obviously as Geoff mentioned the sale leaseback basket or committed asset sale basket. I think just the last piece to it, but I think that was -- I think that covered both as it relates to them.

Michael Gambardella - JPMorgan

And when does the 250 million come due?

Michael Doolan

It’s a 5 year facility.

Michael Gambardella - JPMorgan

5 year facility and then you’re giving them 10% of your equity is that correct?

Michael Doolan

That’s correct.

Michael Gambardella - JPMorgan

And what are the operational the production numbers that you have to hit in the EBITDA that you have to hit to get to that additional 150?

Michael Doolan

I think at this time, we’re not disclosing those but as I have said I mean we’ve got 18 months or so to achieve them and as I said we are well within our forecast projections at this time. I think one thing I would tell you I have said at the onset of the call was as we finalize the documents which as Geoff mentioned, we expect in the next few weeks, there will be an 8-K at which time all of that will become apparent.

Michael Gambardella - JPMorgan

Okay, and the Chlor-Alkali issue, did you say you have it resolved already or were you still working on that?

Michael Doolan

We’re still working on it, we’ve implemented -- we began to implement the solution and we’re seeing in the middle of this month being August we should see that unit coming back online.

Michael Gambardella - JPMorgan

Okay, and are you seeing any changes recently in spot pricing?

Michael Doolan

What we have seen of course compared to last quarter the NdPr price is relatively flat, what we have seen I think lanthanum came down slightly but nothing major, we saw it dropping more in the domestic markets than the international markets I think and so a slight decline in we will to NdPr relatively flat.

Michael Gambardella - JPMorgan

And last question, could you just comment on how your mix change at Mountain Pass from first to the second quarter?

Michael Doolan

Relatively the mix change that we were more LREC so the product that we’re feeding to our downstream facilities than others and that had an impact on the ASP.

Geoff Bedford

And actually if I can add on that that slight increase in working capital inventory related to Mountain Pass we were building up NdPr inventory, which you will see sold in this quarter.

Michael Gambardella - JPMorgan

And the LREC issue impacted pricing down in the second quarter?

Michael Doolan

Yes. So the LREC we -- if you look at LREC it is the market value where we chance to have it lower than an NdPr Latin spread.

Michael Gambardella - JPMorgan

It’s significantly lower right, that pricing?

Michael Doolan

On the basket basis I don’t think it’s significantly lower I mean clearly there is a value-added separating the products. So it was a combination of moving to LREC but hit the ASP and Michael said less NdPr being sold which hit it on both ends of ASP if you will and we fully expected that NdPr to work its way back out of the Mountain Pass this quarter Q3.

Michael Gambardella - JPMorgan

If you increase LREC the lower price material that was in the mix in the second quarter also having impact on bringing down your cost per unit in the second quarter?

Michael Doolan

Somewhat but not materially I think the borrowings we are running today clearly LREC comes out first so that does save us some potential processing downstream, so somewhat is the answer to them.

Michael Gambardella - JPMorgan

Okay. Thanks a lot Mike.

Michael Doolan

Yes, thank you.

Operator

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

Jeff Cramer - Morgan Stanley

Hi, good morning guys. Good to see the financing Michael, just if I could push a little further detail if that is right within the I guess maybe starting with the 250 could you be more specific on which baskets where used?

Michael Doolan

It’s going to be a combination there is the 300 million general debt basket, which is carried with the 10% notes. There will be some of the foreign debt basket used as well and actually upfront as part of that would really be just the sale leaseback will be contained in that also which is roughly 140 million of the 250.

Jeff Cramer - Morgan Stanley

Got it. On that 140 million proceeds which assets specifically was sold?

Michael Doolan

It’s a combination, but largely it’s not exclusively but largely the ones that we’ve talked about in the past, so the water power Chlor-Alkali.

Jeff Cramer - Morgan Stanley

Okay. And as far as the leaseback ramping that back is that similar to that 12% interest rate?

Michael Doolan

Effectively yes, when you go through all of the math quite similar to that.

Jeff Cramer - Morgan Stanley

And that is after the 300 million debt basket was actually specific to ABL collateral, is that correct, is that math correct is that specific to U.S. collateral or does that include west capital in Asia as well?

Michael Doolan

Well I wouldn’t include the Asian assets because they were outside of the high yield offering at that time and ABL would be included in the 300 basket but the basket isn’t exclusive to an ABL if you know what I am saying there. So if we did an ABL with some of that basket but there is more room in the basket from more than just an ABL.

Jeff Cramer - Morgan Stanley

Okay. And then within the foreign debt basket is there, that means that there is debt being raised on the Asian assets?

Michael Doolan

Yes, is the short answer.

Jeff Cramer - Morgan Stanley

Okay. And then repatriate it to the U.S. for using Mountain Pass or?

Michael Doolan

Well, use at Mountain Pass that probably more specifically the debt service.

Jeff Cramer - Morgan Stanley

Right, okay. And maybe just last question on the finance base is this all first lean or is there any second lean as part of it?

Michael Doolan

It would all be carried in first yes.

Jeff Cramer - Morgan Stanley

Okay. And just if you can expand a little bit on leaching 2.0 just I guess kind of the hurdles form here and where we stand on ramping that, has that been impacted by the highest collateralized planned outage and kind of hurdles you see over that few months as you progress?

Michael Doolan

Sure, it has progressed well, we are looking to complete construction and could start commissioning this quarter and it is a process that we have run in the past in what we refer to as the legacy system. So we’re quite comfortable with our ability to commission this in a relatively short timeframe. So that’s all very positive. Having said that the affordable HCL yes, that unit would be impacted with restrictions on hydrochloric. And we’re working very impressively to get our Chlor-Alkali plant back and producing again and as the markets open up for hydrochloric we will have access to purchasing it as well.

Jeff Cramer - Morgan Stanley

Okay. So from where were in May when we were there, they leaching process itself that hasn’t increased that’s still in the process of growing?

Michael Doolan

In May the leach system that we have today was running and it was able to run at its effective capacity and we mentioned that we ramped production in the month of May up to just over 700 tons, so that was all through the tradition the Leach system. So now that once we commissioned Leach 2.0, we will see that capacity expand that will open the door the phase 1 production levels that we have been talking about, so quite confident about that.

Jeff Cramer - Morgan Stanley

Okay, so I guess resources volume during 3Q we would expect it be somewhat similar to the first couple of quarters?

Michael Doolan

Sitting here today with the hydrochloric core restrictions that we have as I said it impacted our July and into August and sitting here I would say that’s accurate.

Jeff Cramer - Morgan Stanley

Okay and then last question on the downstream operations, it’s been about 18 million a quarter roughly, do you expect results in the second half in the downstream?

Michael Doolan

We’ve seen improvement in quarters from Q2, in Q2 on the chemicals and oxides business. And we’re expecting that to continue through Q3 and 4 and so I would say we’re expecting chemicals and oxides to have a better second half than first half. On the Magnequench business, we’ve talked to patents expiring et cetera but what we’re seeing there is the profitability seems to be holding and it’s playing out at as expected in the market. So again I would say the first half relatively second half maybe down slightly due to the patents, but we’re not expecting a significant drop off.

Operator

The next question is from the line of Brian Lee at Goldman Sachs. Go ahead please.

Brian Lee - Goldman Sachs

I just had a couple I guess on the ASP side of things, you have consistently had a sort of lower than expected average ASP versus the basket and resources over the past few quarters, I know some of that actually the LREC issue and it sounds there was some NdPr mix issue this quarter, just wondering when can we expect some of that to normalize where your average ASPs and resources will sort of better mimic the basket pricing churns?

Michael Doolan

Well we will always be selling LREC downstream so when you think about our basket, if you’re looking at say 20,000 tons target and we’re always going to have 5,000 of that feeding our downstream plant that’s always been the plan. So that will continue to reduce our ASP. As far as the NdPr versus lanthanum mix issue, we’re expecting that will start to resolve itself this quarter and we built some NdPr through the second quarter that we’re going to move in the third quarter. So I would say we are expecting that the ASP will come to a level that includes LREC in the next quarter or two.

Brian Lee - Goldman Sachs

Okay great and then on the.

Michael Doolan

I was just going to add to that story that the lanthanum and NdPr we’re selling at our resources is that market prices as published before or better, so we’re quite confident that we can sell our product at market prices and it’s just a mix that we’re having a work through here.

Brian Lee - Goldman Sachs

On the cash cost side of things, how should we be thinking about the progression here in 3Q and 4Q, you had a nice down tick here in the second quarter but given the reagents supply issue and it sounds like based on your commentary production volumes could be somewhat flattish in the very near-term, what’s the progression to be expecting around the cash cost per kg out of resources?

Michael Doolan

Well, it really does come back to the ramp and the volumes and we demonstrated in the second quarter that as volumes went up, our cash cost went down. And I think it’s really going to depend on what kind of volumes we’re able to produce and that will dictate where our cash cost go to. So if we’re expecting volumes similar to sort of Q1, Q2 range for Q3; our cash cost will likely remain in the similar ranges as well excluding water haulage. We were able to get our water haulage cost down significantly in this quarter.

Brian Lee - Goldman Sachs

Okay and it did sound like you’re confident that you’re putting yourself into position to have this sort of step function change in production out of Mountain Pass. You’ve got the temporary issues around Chlor-Alkali reagents in Q3, it sounds like; so is it really Q4 where we maybe start to see that pick back up in terms of the volume production aspect of Mountain Pass?

Michael Doolan

Yes, that’s what we’re thinking today. With the hydrochloric it is definitely constraining our production, no question. So we need to get, the SR unit, our Chlor-Alkali unit back on steam and have the external markets open up. But the commissioning and debottlenecking upwards are particular on crack and Leach 2.0, they’re progressing as we plan, so we’re targeting to be commissioning to those. But we will be commissioning those starting this quarter.

Brian Lee - Goldman Sachs

Okay last one for me and then I will pass it on. Are there any covenants on the facility that you announced last night anything that might preclude you from raising additional capital in the future or restrict your flexibility any other way? Thank you.

Michael Doolan

The short answer there is no, I mean, there is just the normal covenants that you would see in the facility at this time, but nothing that would preclude raising future debt subject to falling within the existing baskets and so forth so I mean we have to manage that but otherwise no restrictions.

Operator

Okay, the next question comes from the line of Avinash Kant of D. A. Davidson & Company, go ahead please.

Avinash Kant - D. A. Davidson & Company

Good morning Geoff and Michael.

Michael Doolan

Good morning.

Avinash Kant - D. A. Davidson & Company

I had one question about leaching capacity I believe you had mentioned earlier that you wanted to get to roughly 12 tanks with the leaching 2.0, could you give us how many tanks have you already installed by now?

Michael Doolan

All the tanks are in place at this point, what we are working on now is some of the final plating and then some of the controls that et cetera that need to be put together.

Avinash Kant - D. A. Davidson & Company

And in terms of the when you talked about July, would you say that the month of July in production volume was lower than June or it was at that level or slightly higher?

Michael Doolan

It was relative I think it would be relatively consistent with the June.

Avinash Kant - D. A. Davidson & Company

And then when do you expect that to start to ramp because at that run rate you will be below last quarter’s production rate?

Michael Doolan

So, the constraint today is the hydrochloric acid and as I’ve mentioned, we are looking at bringing our unit back online this month and starting it up again. So, that would help add more capacity, hydrochloric acid capacity and also then we’re dependent on buying hydrochloric from the external markets which remain tight and we expect that, they will maintain tight certainly through August and potentially into early September.

Avinash Kant - D. A. Davidson & Company

Okay, if we were to think of the progression of the volume at Mountain Pass production volumes, how should we think of volume day would you expect the September to be the best month?

Michael Doolan

The way we think about it is the things that need to get done I mean as we’ve get Chlor-Alkali commissioned and we’ve get the Crockett operator running and commissioned. So it opens up the availability of the capacity in the upstream part of the process. Once we get there then assuming we’ve the hydrochloric acid availability we then will see that step change in production as we’ve been talking about this as far as exactly when which month will be list out I think for the purposes of this conversation, those are the key hurdles that we need to move through, we’re fully confident that we’re moving in the right direction there and once we do, we’re going to see our production increase.

Avinash Kant - D. A. Davidson & Company

Okay, on the cost side from the way we understand there are two key variables there, one is the Chlor-Alkali plant that’s expected to bring your cost down and the other one is volume, would you say that the reductions you saw this quarter on the cost side, you already had all the contributions from Chlor-Alkali already in there and from hereon on the volumes will cause the cost reduction, or you will have a little bit more coming from the Chlor-Alkali side probably that it was not operating good at this point.

Michael Doolan

It’s hard to answer that question, what the Chlor-Alkali facility does is it that allows us to produce our own reagents which saves us money and it allows us to minimize water haulage. So, those would otherwise be variable costs so as we ramp production within those two pieces we would see our cost ramping with our production with that in place, we get much better the flexibility of more of a fixed cost and we get a much more better gearing as we had production ramp. So, that’s the first piece of it but having said that as we ramp production there is some variable cost components as well so we are going to see those variable cost increase as we increase our production. From our perspective though we still believe that when we get into the phase 1, the 20,000 to 23,000 type ton range and we completed our optimization, that $6 to $7 cash cost production target is achievable but it will take us some time to get there.

Avinash Kant - D. A. Davidson & Company

Thank you.

Operator

The next question comes from the line of Kevin Cohen at Imperial Capital, go ahead please.

Kevin Cohen - Imperial Capital

Good morning and thanks for taking the questions. I guess turning to the resource segment, how do you sort of bridge to a potential ASP kind of looking back at the mid May slides in terms of the Mountain Pass example economics, the ASP of about $19 ex cerium, how do you kind of bridge to that just given new supply directly with way on pricing?

Michael Doolan

I think the difference there is that what we’ve seen is that the lanthanum prices have come I think we did that slide today it wouldn’t be $19 quite frankly and I don’t know what the number would be but we’ve seen since that slide was done which was six months ago. We’ve been the lanthanum prices would come off, NdPr sort of held steady, I would say LREC has come off because the market price we’re using there really is the relative market price in Asia or otherwise same, praseodymium and because of the lower domestic prices of cerium lanthanum in Asia we’ve seen the LREC value come off as well. So, short answer is we probably would be below the $19 if we did that calculation today.

Kevin Cohen - Imperial Capital

And then I guess in terms of the liquidity the capital raise of 250 committed, why do you think the company would need so much money if things are starting to turn around and then the correlated to that is why potential one have the additional 150 million if the company is confident it can hit operational and financial hurdles for future liquidity it would seem like if you hit those hurdles you won’t need that potential 150 or how should we be thinking about that?

Michael Doolan

Sure. We continue to believe that the liquidity requirements here it’s been 150 million to 200 million that’s what we’ve been stating and we continue to see that. But when we got into this process of the financing and we are looking at what could fit under the indenture and the assets that we’re going to finding as collateral, quite frankly it made sense that we make sure we get maximum value for those assets. So we thought it prudent to take the 400 million. The second tranche is at our discretion and it just in general gives us the options and flexibility that we otherwise didn’t have.

Kevin Cohen - Imperial Capital

And then in terms of the cost of production in the resources segment I guess kind of thinking back to last year at one point the company had spoken about sort of $3 per kilogram figure excluding SG&A certainly revised that sort of talk and more or like 6 to 7 per kg and then in the second quarter came at about 16.5. So I’m just kind of thinking out loud may be can help bridge me what’s the path to bring down the cost per kilogram?

Michael Doolan

Well I think a couple of things, the $3 that was well before 2013-12 I mean that was some time ago. So we’ve been consistently saying $6 to $7. In May I mentioned our production was 700 tons slightly and we did see our cash cost coming down into the $13 to $15 range. So we definitely saw a production decline there and again it’s really dependent on the volume in the month, in the quarter we did 1,600 tons and we saw our cost coming down $16 I think if you sort of extrapolate that math on a 20,000 run rate with a slight increase in variable you’ll see that the range of $6 to $7 is quite doable. But again it will take us time to optimize to get there.

Kevin Cohen - Imperial Capital

And then the last question in terms of the collaterals as it relates to 250 and potentially 400 million of financing, is any of the cash if the non-gearing towards subs was about 113.6 million to 630 does that factor into security at all or not?

Michael Doolan

No not specifically no.

Kevin Cohen - Imperial Capital

Does it factor in un-specifically or just literally not at all?

Michael Doolan

Well, just as its part of the assets of that group of companies those assets, would otherwise, really some of them would be flat so in that context yes, but cash specifically no.

Kevin Cohen - Imperial Capital

And then the last question very high level thematically, do you think that rare earth pricing on balance if you guys when you look at sort of the basket, do you think that’s going to be going up, down or sideways assuming that production impact does ramp at your facility and assuming that they other key player on a capacity also does add that capacity as well? Thank you for taking all the questions.

Michael Doolan

Yes, on pricing short-term is always, there is a lot of variable to go into pricing on a short-term basis. Inventory comes into the market China just announced their stockpiling program so that takes supply out of the market et cetera. But on the long-term basis again the world needs rare earth and we are in applications that are going two, three times GDP the magnetics we have talked about growing at greater than 10% double-digit type growth. So from our perspective we see continued demand growing as we go out here, so longer term when you look at the supply that’s coming into the market and if you look at the longer demand in growth forecast, we think that there is balance there.

Kevin Cohen - Imperial Capital

And then just going back to the cash again at the non-guarantor subs does not to harp on it too much but maybe just to better clarify my own question, is that going to remain unrestricted or will it become restricted?

Michael Doolan

The cash you mean?

Kevin Cohen - Imperial Capital

Yes, 113.62.

Michael Doolan

No.

Kevin Cohen - Imperial Capital

It will remain unrestricted?

Michael Doolan

Unrestricted, yes.

Kevin Cohen - Imperial Capital

Unrestricted, okay. Thank you.

Operator

Next question is from Brett Levy at Jeffries. Go ahead please.

Brett Levy - Jeffries

Hey guys. You’ve given I think the 11 or 12 different metrics in sort of percentage of completion achieved on previous calls and I just wanted to know, most of them were very close to the finish line, do you still keep track of those metrics, and can you give a bit of an update there?

Michael Doolan

If I recalling the slides that you’ve been talking that you’re referring to, most of those projects that was through the building of Phoenix and most of those projects are now complete. The plant is up and running and if we look at the power the Chlor-Alkali all these facilities are running, some of them were having to expand the bottleneck and others were still working on optimizing and making more efficient. But from our perspective the plant is complete other than the projects that we’re talking about specifically.

Brett Levy - Jeffries

And then can you us anymore…

Michael Doolan

Go ahead. No, I wanted to make sure I’m thinking about the same slide you are but that was a long time ago I believe.

Brett Levy - Jeffries

And can you give some granularity around sort of what the major components of the back half for the year CapEx number is, and then sort of any adjustments to what would ballpark 2015 CapEx today?

Michael Doolan

I will start with the CapEx for the remainder of the year really relates to the key projects that we’ve talked about which is Leach 2.0, it’s the crack unit where we’re working on some filters and other things, so those are the main projects that are underway today and that’s where the CapEx is headed. As far as ’15 and I think if you look in Q we are saying 60 million, essentially 30, 30 being Mountain Pass, 30 being across the rest of the operations and up the 30 for the rest of operations. There is probably fair bit of discretion in there, but we’ll look at it on a case by case basis. Just because it’s in the budget the operators have to come back to us put the business case together to justify it, but as the place sold there for next it’s certainly about 60 million.

Brett Levy - Jeffries

And is there anything favorable out of China on the supply side happening right now?

Michael Doolan

The Chinese continue to control the industry. They are quite committed trying to make sure that the industry is well regulated. And we continue to see the efforts of them to reduce smuggling in some of illegal mining that’s going on. So from that perspective I think they continue to try to control and improve the supply situation.

Operator

Thanks. The next question comes from the line of Melissa Tan at RW Pressprich. Go head please.

Melissa Tan - RW Pressprich

If you kind of just elaborate little bit more on the bottleneck issue that’s still going on at Mountain Pass, its sounds like the Chlor-Alkali issues is new and since you haven’t fully finishing commissioning of Leach 2.0, which one of these would you say is causing more strain to your operation progress at Mountain Pass?

Michael Doolan

Well, currently it would be the Chlor-Alkali. Leach 2.0, we’ve just finished the new construction and we’ll start commissioning, so in our current production it hasn’t been playing a factor and really what it will do as expand production or capacity once complete. So at present it would be the hydrochloric or the restrictions or reductions in hydrochloric availability that are impacting our production.

Melissa Tan - RW Pressprich

Okay and let’s assume that you should be resolved by end of this month or September and with both working in your favor, what type of jump in production can we expect, I mean, would you keep on saying significant, I mean would that be we’re looking or look at doubling on the monthly basis or what type of jump we can be expecting?

Michael Doolan

With the expansion complete, it will allow us, it will give the capacity to run -- we believe that benefit is one type volume. We will then -- we have to commission that and we’re going to have to build that sort of in an orderly fashion. So we do believe that it will open up and allow us to have a step change in production, but we’re going to have to work through that and increase our production in a very controlled manner. So it’s hard for us to say, we’re expecting that one month everything will just double but we’re expecting that absolutely we’re going to be able to run this thing at phase 1 capacity and we’re going to ramp that as quickly as we can, making sure that at the end we have something that we can have a repeatable control process because at the end of the day that’s really what we need to do here as make sure we’ve got some of that sustainable and not just looking toward a particular month’s production volume.

Melissa Tan - RW Pressprich

Sure and do you still see that happening by end of this year or it’s more likely first Q 2015?

Michael Doolan

We certainly see us increasing production through this year absolutely. I mean, with the commissioning of the Leach 2.0 that will add some capacity for us and we will begin to ramp aggressively as we move through that. So I think the answer is that we fully expect that the Q4 volumes will be an improvement.

Melissa Tan - RW Pressprich

Will that be meeting that your initial phase rate or it will still be short of that?

Michael Doolan

Sitting here today looking with the hydrochloric restrictions we’ve had, I think trying to get the phase 1 in the fourth quarter is an aggressive target, but that doesn’t change what we’re trying to do which is we’re trying to ramp this plant as quickly and as aggressively as we can and we fully believe that we can do that. And the debottlenecking some of the efforts that we’ve been working are progressing as we had hoped and now the matter of getting those commissioned and getting the Chlor-Alkali plant running and that should open the door.

Melissa Tan - RW Pressprich

Okay great thank you and the second question has to do with your sales volumes for the resource segment and it seems like quite low compared to your production, was that just mainly due to you’ve mentioned you’re building the NdPr inventory or do with something else due to seasonality or something?

Michael Doolan

And cerium, so if you look at the production, they would be not selling NdPr building some inventory with NdPr and then not moving all the cerium relative to what we produce.

Melissa Tan - RW Pressprich

Okay, thanks. And the next question is on your magnetic business, I’m reading more articles about the Chinese market supplier definitely being more aggressive with the patent expiring and Molycorp in some Japanese companies, can you just elaborate a little bit more on what you are seeing out in the market and what type of pricing decline you would expect for later this year would have been like single-digit, low double-digit I mean you did say will be mild but if you can just be a little bit more specific and what type of work you would take for a supplier to really build up their plant to offer the same type of product that Molycorp does?

Michael Doolan

Absolutely, so the patents have now expired and what we are seeing in the market is basically as expected or as we were thinking it would unfold what we refer to as the base business which is really hard disk drive, that business prices have remained and our intent to that we’ll continue that as a very demanding product and it is something that our view is that it will be more difficult for competitors to penetrate that market space. Then there is another piece of our business we refer to it as strategic business which is already priced competitively with other application centric for example because what we’re trying to do there is compete with a magnetic space and their magnetic applications that don’t necessarily have to be bonded magnets as we produce.

So by definition we need to be as competitive as the next best alternative so that pricing is already baked into our current ASP if you will and we don’t expect significant changes there and there is a piece in the middle and as we’ve talked about that’s the piece that we would be more susceptible to others competing and penetrating and that’s one that we’re watching very closely in. Quite frankly we’re going to see, we will see some price reduction in that segment but we view, we’re the market leader here and we’ll continue to be and we need to we’re the price setter and everybody will sort of fall off of our price so we’re very careful of how we’re pricing those products that in the market.

Melissa Tan - RW Pressprich

And can you just give the percentage breakdown of the three type of market that you just mentioned, like how much you..?

Michael Doolan

Yes, absolutely the base business is around say 20% it moves around a bit depending on which quarter, the strategic business is the largest it is probably 40%-45% of our business and then the middle makes up the difference.

Melissa Tan - RW Pressprich

Okay, great, thank you very much.

Michael Doolan

And it’s our strategic piece that it’s already priced competitively that we’ve seen the greatest growth in over the last 6 to 12 months. So, that part of the strategy of trying to be competitive without after patents expired has already been implemented.

Melissa Tan - RW Pressprich

Thank you.

Operator

The next question comes from the line of Robert Weiss at Citigroup, please go ahead.

Robert Weiss - Citigroup

Hi, do you have any color on the ASP, was that the Chlor-Alkali affect any of the mix there or was that was the more Alkali produced because of the Chlor-Alkali restrictions or was there any interaction between those two parts?

Michael Doolan

No, not really. The Chlor-Alkali did not impact the choice between LREC versus NdPr separating product.

Robert Weiss - Citigroup

Okay, and just one additional question, you enter the -- could you give more color on the ABL carve out and the 10% and how this fits into that?

Michael Doolan

There is a specific ABL carve-out but it does come under the overall 300 million carrier basket. The ABL itself has permitted us to the I guess ABL itself put us up to the full 300 but if you have the assets to back it up, I am not sure beyond that what you are looking for to be honest so.

Robert Weiss - Citigroup

No, I was just curious if any of the 250 is going to be under the ABL basket or to what extent…

Michael Doolan

I am sorry no, in that case that no, none of the ABL basket is used up for this facility.

Robert Weiss - Citigroup

Got you, thank you.

Operator

Thanks. The next question is from Owen Douglas at Baird, go ahead please.

Owen Douglas - Robert W. Baird

Hi, guys. Thanks for taking the question. I was just curious a little bit can you help us better understand a little bit about what’s going on with the brine solution the problems that took place to Chlor-Alkali?

Michael Doolan

Yes, sure without getting into too many specifics here because we need to be careful but there are impurities into deposit that would, that is in the brine solution will impact the performance. So, what we need to do before that brine enters the system that Chlor-Alkali plant we need to remove those impurities and what we saw in late June, early July as those impurities started to rise and that was impacting the plant’s production. So we are now in the process of putting in equipment that will again make sure that those impurities are removed. And really more so improving the performance of equipment we already have quite frankly.

Owen Douglas - Robert W. Baird

Okay. And this is a new event for you guys I thought that the Chlor-Alkali facility was put in place in December so I’m just kind of curious as to how was running after six months now becoming a problem?

Michael Doolan

Well, it’s not a new event in the sense that we do with our Chlor-Alkali facility is slightly different than what how most people run out facility and I think we’ve talked in the past that a traditional Chlor-Alkali facility would take water and very clean salt put it together and make brine and process it. And what we’re doing is we’re taking in key effectively the waste streams from all the various processes in our plant and we are then using those cleaning them up getting rid of the impurities and processing those through the system so that we can reduce our water haulage and recycle our reagents. So managing the impurity levels is always something that we’ll need to be watching closely and we put equipment in front of the system that can remove these impurities and quite frankly it didn’t perform as needed the two and now we’re having to go back and make some adjustments.

Geoff Bedford

Just also on that point in actual fact, the build wasn’t complete for the Chlor-Alkali until February and we didn’t actually turn it on until early March. And up until then it run quite well. So we’re fully confident that we can get a back running again but we do have to make sure this brine is clean going in the front end.

Owen Douglas - Robert W. Baird

Okay. I see and what’s been the incremental CapEx of replacing the purification system?

Michael Doolan

Again it’s more of an equipment change than it is, sorry, it’s more of the process systems change than it’s an equipment addition we’re not expecting that we’re going to help in driving significant capital items but what we do need to think about is some of the resins and some of the processes we’re using to clean up these impurities.

Owen Douglas - Robert W. Baird

Okay. So then what’s the additional operating expenditures we should expect as a result of this process change?

Michael Doolan

It’s not material. I don’t have the number at the top of my head but it’s really not material and it certainly doesn’t make us think that all of a sudden our cash cost production range is moving. But we have the short-term impact our maintenance cost.

Owen Douglas - Robert W. Baird

Okay. And if I think about some of the market for HCL I believe that at least one producer out there has been increasing their output of HCL, so while the prices are high I thought that supplies were available, can you talk to me about what is the incremental cost of using merchant HCL versus your internal production cost at your Chlor-Alkali facility?

Michael Doolan

So the HCL capacity in the U.S. has been restricted by a number of factors. So we’ve seen the HCL cost going from roughly $0.18 a gallon to into the mid 20s. We typically use -- we need about 100,000 gallons a day running our plant at phase 1 capacity. But as far as what we’re talking from a cost savings the challenge of course is that Chlor-Alkali facility it is just saving as money hydrochloric is also reducing our wastewater haulage. So when we talk overall we’ve always said it’s been in the solid range that is cost savings. Sitting here today we continue to be able to evaporate water that’s all running fine. So our water haulage remains low. But if we have to go back into the markets and buy HCL then we’d be looking at purchasing we don’t need to purchase all 100,000 gallons but would need 100,000 gallons a day at around $0.18, currently mid 20.

Owen Douglas - Robert W. Baird

Okay. Just ask about that because we saw a decrease in the water haulage cost which was definitely positive but if that’s been offset by reduced production level it is just a question of is that worthwhile restricting the fixed cost absorption there. And also I just ask a little bit, as I look through the MD&A I saw that there continues to be some inventory write downs in the resources segments it’s been about I think $16 million-$17 million in Q2 versus $16 million in Q1, can you just explain us when is that we should expect those inventory write downs to big and what exact in the process, this is about the cerium stockpiles you have or is it something else?

Michael Doolan

No, it’s just that right now within the throughput that we have the overall cost of production is higher than the market basket. So it’s really just, until we get our cost down and I will say sub 10 but ultimately into the $6 to $7 range. We’re still going to have each quarter an amount of our cost that just go straight to the P&L as we adjust from our production cost down to what would be a net realizable cost ultimately, so when that’s going to happen I would suggest some time between now and year end as we continue to ramp up the plant. But I certainly can’t give you a specific month at this point.

Owen Douglas - Robert W. Baird

Okay. And that cash cost number what you quoted at the beginning of the call, does that include the cost of inventory that near to be write down or is that excluding that?

Michael Doolan

That includes that.

Owen Douglas - Robert W. Baird

Okay. Thanks. And the final question here, can you just explain us a little bit just as we think about Q3 production what are some of the puts and takes and how should we think about the incremental growth in production in Q3 versus Q2?

Michael Doolan

Well, again the challenge we’re going to have in Q3 is the hydrochloric availability, so what we need to do is get that Chlor-Alkali back in production so it’s generating hydrochloric and wait for the rare earth markets to open a little bit so we can buy some as well. So that’s really the gating item, and if we can do, then we will see production increasing.

Operator

The next question is from the line of Patrick Marshall at CRT Capital. Please go ahead.

Patrick Marshall - CRT Capital

So I had a question on the spring maturities and what piece of that actually has to be addressed in order for that spring maturity to not come in to play?

Michael Doolan

That would be our June 16th, 3.25% convertibles.

Patrick Marshall - CRT Capital

Okay and there isn’t any kind of spring maturity on the sale leaseback, is there?

Michael Doolan

Well, in fact it’s on the package so I guess I will leave you say that or depending on how you allocate it, but the piece of it effectively is.

Patrick Marshall - CRT Capital

Okay.

Michael Doolan

Tied for the spring maturity.

Patrick Marshall - CRT Capital

So it is subject to spring maturity as well then?

Michael Doolan

Right.

Operator

Thank you. And now I would like to turn the call back to Mr. Brian Blackman for closing remarks.

Brian Blackman

Well, I would like to thank everybody for joining us on our second quarter call. We certainly look forward to checking back in November for the third quarter report. I wish everybody a very good day and thank you again for joining us today.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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