- Shareholders have filed a shelf registration to sell nearly 24 million shares (about 10% of shares outstanding).
- The stock is down 10% on the news.
- Given operating losses and cash burn gone unabated, investors should avoid Molycorp.
Major shareholders of Molycorp, Inc. (NYSE:MCP) have registered to sell up to 23.8 million shares (nearly 10%) of outstanding shares. According to a registration statement filed April 4, 2014:
We have entered into a registration rights agreement, dated as of April 15, 2010, with Resource Capital Fund IV L.P., Resource Capital Fund V L.P. (collectively, the "RCF Funds"), PP IV Mountain Pass II, LLC, PP IV MP AIV 1 LLC, PP IV MP AIV 2 LLC, PP IV MP AIV 3 LLC (collectively, "Pegasus Capital"), TNA Moly Group LLC ("TNA Moly"), MP Rare Company LLC ("MP Rare") and KMSMITH LLC, pursuant to which the stockholders party thereto were granted certain demand and piggyback registration rights. MP Rare subsequently distributed its shares of common stock subject to the registration rights agreement to its members, which included Alan Docter and Mark S. Kristoff, and TNA Moly subsequently transferred its shares of common stock subject to the registration rights agreement to its members, which included Traxys S.à.r.l. ("Traxys").
In February 2014, the RCF Funds initiated a demand registration right under the registration rights agreement. This prospectus supplement is being filed pursuant to the exercise by the RCF Funds of the demand registration right.
The following table sets for the names of the selling shareholders and the amount of shares that may be offered:
Buyout Believers Now "Non-Believers"?
In 2008 Resource Capital, Pegasus Capital, Traxys Group and Goldman Sachs (NYSE:GS) acquired Molycorp, then a forgotten unit of Chevron Corporation (NYSE:CVX). The investment group made history in February 2011 when it turned its total investment of $200 million into paper profits of about $2.3 billion. The investment was one of the fastest windfalls in private equity history. Since, Molycorp has generated consistent losses. The sale of shares pursuant to the shelf registration could potentially reduce the original buyout group's holdings to as little as 2.4% of shares outstanding.
Below are the company's most recent quarterly financial results:
The thesis that made Molycorp such a great investment - the need for additional rare earth suppliers after China's 2010 embargo - is no longer in play. Other providers like Lynas Corporation (OTCQX:LYSDY), (OTCPK:LYSCF) have entered the marketplace, and China has relaxed its embargo. Rare earth prices have since plummeted, and so have Molycorp's business prospects. Molycorp's recent $400 million bootstrap financing from Oaktree Capital is its third capital raise in the past 18 months. Lastly, its Q2 2014 cash burn of $80 million may be a harbinger of things to come.
Though the original shelf registration was filed in April, a supplement to that registration was filed on August 16th and hit the news wires earlier this week. The stock sold off from $2.15 per share on August 18th to as low as $1.93 today (10% decline) as the market began to digest news about the selling shareholders. Whether the stock re-tests my original $1.60 valuation remains to be seen.
The shelf registration to sell nearly 24 million shares has created a sell-off in the stock. The fact that the selling parties include Molycorp's original investor group speaks volumes for the company's business prospects. Given operating losses and cash burn gone unabated, I advise investors to avoid Molycorp.
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