Market Conditions Quickly Move Molycorp to Price Share Offering and Convertible

Jun.10.11 | About: Molycorp, Inc. (MCPIQ)

It only took two days for Molycorp (MCP) to officially roll out the pricing of its secondary share offering and convertible notes. MCP indicated these deals were “subject to market conditions,” and market conditions may have forced the issue to the tune of a 13% slide.

This overhang that I feared from these events comes on top of a 12% downside resolution to the pressure that was building in the stock. I am anticipating this news will wipe away some of the overhang as quickly as it arrived, so I will unwind some of my hedge. I added some stock to my position yesterday (trades reported on twitter).

Molycorp priced the secondary offering at $51. Presumably, this announcement will provide some kind of near-term floor on the price absent any other catalysts. This assumption does not have to work out, but it provides a rough guide for what the market might think is “fair value” for now. The offering should execute on June 15, so there is time to give this assumption a very rigorous test.

On the upside, the convertible offering was structured to provide a conversion price roughly equivalent to $71.40/share (subject to "customary adjustments"). If held to maturity in 2016, these notes conveniently produce roughly a 7% compound annual growth rate (CAGR) from current levels, close to the long-term return in the stock market. This price provides an upper fair value target over the longer-term although I assume the institutional investors who buy into the offering are looking for a lot more appreciation than average stock returns and the 3.25% on their convertible notes given the high risks involved with a rare earth company. The convertible executes on June 15.

The selling in MCP in June is equivalent in depth (but not intensity) to the other two strong bouts of selling MCP has experienced in its short life as a publicly traded company on the major exchanges. From all-time intra-day highs to yesterday, the stock has lost 35%. MCP lost 36% in three weeks in January of this year and lost 34% from top to bottom from October to November of last year, also lasting three weeks. I am looking for history to repeat itself and mark the end of the selling here as well.

Molycorp has experienced similar selling pressure before...

Molycorp has experienced similar selling pressure before...(click chart to expand)

*Chart created using TeleChart

Molycorp also stated that the convertible offering fully funds the company’s production and expansion plans (emphasis mine):

“Molycorp expects to use the net proceeds from the offering to fund its original Phase 1 production capacity plan as well as its Phase 2 expansion plan at its Mountain Pass, California, processing facility. Any remaining net proceeds will be used for general corporate purposes. With this offering, Molycorp has raised nearly $800 million of proceeds that will be used to fully fund its original Phase 1 production capacity plan as well as its Phase 2 expansion plan at its Mountain Pass, California, processing facility, the cost of which is currently estimated at $781 million.”

I am not sure what the fully funded status does to its application for a loan guarantee from the Department of Energy, but success on that front looks like it will just provide a bonus cushion.

Disclosure: I own shares and puts on MCP