Molycorp (MCP) has announced that its initial private equity investors were looking to sell a $500 million stake in the company, and that the company was also selling $172.5 million mandatory convertible preferred stock.
We think this is a net positive for the following reasons:
- At current market prices, $500 million represents approximately 25% of the total stake of the private equity backers of Molycorp, so this is a relatively benign sale.
- The board has approved the company's attempting to double production to 40,000 tons per annum by the end of 2013, according to the company's press release and stock offering documents.
The ramifications of doubling the production rate is are massive. Molycorp has the lowest cost of production on a kilogram of product basis, due to its extraction technology that essentially cuts in half the amount of ore required to produce a fixed amount of product. Per JP Morgan’s (JPM) initiation report, this cost per kilogram of product is less than even the Chinese's.
With this convertible offering, it looks to us like the entire Mountain Pass project, including the doubling of production, is fully financed.
- The IPO proceeds were approximately $394 million.
- The Sumitomo investment was $100 million plus $15 million in debt.
- The convertible preferred stock offering if completed is $172.5 million before fees.
- The company announced earlier that BNP Paribas (OTCQX:BNPQY) had given it a $150 million loan facility.
- Total financing: $831.5 million before fees.
The total capex budget before doubling production was approximately $550 million, and the Molycorp CEO has stated in interviews that the cost of doubling production could be an increase of $200 million in capex.
Based on our arithmetic, Molycorp has a Mountain Pass fully financed post-convertible stock offering.
The doubling of production rates has the potential to double the earnings power of the company, and as a low-cost producer, we expect it will have a similar effect. Based on research reports we have read, pre-doubling production, Molycorp had potential earnings power of $5/share. If we only assume doubling production results in a 50% increase in earnings power, then Molycorp has potentially $7.50/share in EPS power.
At $7.50/share, Molycorp is trading at less than 6x its full production earnings power. To us, that seems like a bargain for the company that we think could become the Freeport McMoRan (FCX) or Exxon Mobil (XOM) of the rare earth sector.