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Executives

Brian Blackman – Senior Manager, Investor Relations

Mark A. Smith – President and Chief Executive Officer

James S. Allen – Chief Financial Officer and Treasurer

Analysts

Anthony Young – Dahlman Rose & Co.

Michael Gambardella – JPMorgan Chase & Co

Jagadish Iyer – Piper Jaffray

Paretosh Misra – Morgan Stanley

Luisa Moreno – Jacob Securities Inc.

Dan Mazer – Harvest Capital

Molycorp, Inc. (MCP) Q3 2011 Earnings Call November 10, 2011 4:30 PM ET

Operator

Good day, everyone and welcome to the Molycorp’s Third Quarter 2011 Earnings Release Conference. Today’s call is being recorded. At this time, I would like to turn the conference over to Brian Blackman, Senior Manager, Investor Relations. Please go ahead.

Brian Blackman

Thank you operator, and good afternoon to everyone. We just released our financial and operating results for the third quarter of 2011. If you have not yet seen the press release, you can find it posted on the Investor Relation section of our website at www.molycorp.com/investors. This call is being webcast and a replay will be archived in the company’s website.

For those of you dialed into the call, a slide show will accompany our prepared remarks is available on Molycorp’s website in the investor section.

For those of you listening by webcast, the slides will be presented in the webcast player. Please note, that you need to advance slides on your own.

Slide 2 has our Safe Harbor statements. As always, we need to advice you that some of the information discussed on this call will contain forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict. The company’s actual results could differ materially from those contained in such statements because of a variety of factors including those described in detail in the risk factor section of Molycrop’s Annual Report on Form 10-K for the year ended December 31, 2010 and Quarterly Report on Form 10-Q for the period ended March 31, 2011.

We also want to caution you that today’s presentation includes discussions of adjusted or non-GAAP financial measurements, which reflect how the management and directors of Molycrop analyze the business on a daily basis. The adjusted measurements segregate out certain non-cash items such as depreciation and amortization and stock-based compensation and certain out of ordinary items. Internally, Molycorp management analyses our business from an operating income perspective and we want our shareholders to have access to the same information we use in understanding our business.

However these non-cash and other out of ordinary items are important to understanding the company’s long-term performance. Therefore listeners are highly encouraged to study the non-GAAP to GAAP reconciliation supplied at the end of the earnings release, which can be found on our website.

On the call today is Molycorp’s President and Chief Executive Officer, Mark Smith; and our Chief Financial Officer and Treasurer, Jim Allen. Mark will provide an update on third quarter financial highlights, an update on our accelerated Project Phoenix initiative, an important milestone we have met, our multi-pronged strategy for heavy rare earth production, and an update on operations. Jim will discus the detailed financial results for the quarter and finally, we will conclude with the discussion on global rare earth market conditions as well as provide a guidance on future production.

Let me now turn the call over to our CEO and President, Mark Smith.

Mark A. Smith

Thank you, Brian and thank you all for joining today’s call. We are exceptionally pleased to report our third quarter earnings in which we achieved record financial performance. We’ve also completed a number of strategic goals during the third quarter and in the first few weeks of the fourth quarter. These accomplishments have helped to accelerate the realization of full scale production that amount vast facility and position us to take full advantage of rising demand for our products and continue tight global markets for rare earths.

As discussed on the last call, we have focused on achieving four principle operational milestones for the second half of this year, which are shown on slide 6. The first of these is to keep Project Phoenix progressing on time and on budget. And as I will discuss on today’s call, not only have we succeed in this effort from the projects inception, but we are now engaged in accelerating the initial start of the Project Phoenix. The second operational goal was to further the engineering for our Phase 2 expansion so that we could achieve a 40,000 metric ton per year production capacity by the end of 2013.

In fact, Phase 2 engineering has been progressing ahead of schedule and as a result of our recently announced project acceleration, we now anticipate achieving our Phase 2 mechanical completion by the end of 2012, a full six months earlier than planned. The third goal for the year was to have 75% or more of our current letters of intent for Phase 1 product volume converted into final definitive contracts. As of this, week we have a total of 47% of our Phase 1 volume either closed or contracted or reserved for XSORBX, an additional 10% of that volume is currently in the final closing stages with the remainder deeply into the final qualification stages with customers.

Our fourth goal for 2011 was to explore continued down the stream joint venture or acquisition opportunities. I’m pleased to report that we made significant progress in this area during the third quarter and into the first few weeks of the fourth quarter. For example in September, we made a significant financial investment in Boulder Wind Power, which has designed a wind turbine generator that uses dysprosium HREE permanent rare earth magnets and can produce electricity for as low as $0.04 per kilowatt hour.

In October, we purchased the remaining shares of Molycorp Sillamäe, one of only two rare earth processing facilities in Europe. We now own 100% of this Sillamäe, Estonia-based facility, known as Molycorp Sillamäe. We have found this acquisition to be highly accretive to our global operations, which I will discuss later in the call.

Our mind to magnets vertical integration strategy is proceeding well and will set the standard in our industry establishing Molycrop as one of the world’s most value-added rare earth as materials manufacturing the companies.

On slide 7, I’d like to discuss our record financial performance for the third quarter. In this quarter, we achieved record sales, record margins and record income. We continue to sell every kilogram of product that we can make and we’re doing so at the highest margins in our company’s history. We achieved record sales of $138 million for the quarter. In addition, we transferred $37 million a product to our Sillamäe facility for further value-added processing, which we expect will generate substantial new sales going forward. Our $138 million in third quarter sales represents growth of 39% over the previous quarter.

Our average sales price for the quarter rose 75% to $131.19 per kilogram of REO equivalent. And this compares to $75.14 per kilogram in the second quarter of 2011. As I mentioned, our margins also continue to expand to record levels during Q3. We achieved a consolidated gross margin of 63.4%, which includes a one-time purchase accounting adjustment of $10.2 million. Excluding this one-time adjustment in other non-cash or out of ordinary expenses our adjusted gross margin for the quarter was 71.5%. We achieved earnings per share in the third quarter of $0.67 per diluted share on an adjusted non-GAAP basis or $0.52 per diluted share on a U.S. GAAP basis.

Please turn to slide 8 now. In the third quarter, we produced a total of 1,228 metric tons of rare earth oxide equivalent and sold 1,428 gross metric tons. In the third quarter, we sold the most Didymium in our company’s history, 375 gross metric tons of REO equivalent. This product, which is a combination of the rare earth praseodymium and neodymium is used by our customers in the manufacturer of permanent rare earth magnets, which are used in technologies such as motors and generators in hybrid and electric vehicles and wind turbines, as well as many other advanced technologies.

Our team at Mountain Pass has been able to achieve record margins even as we maintain a strong focus on completing our modernization project to build the world’s most technologically advanced, energy efficient, environmentally superior rare earth oxide manufacturing facility. That modernization and expansion effort, which we call Project Phoenix has progressed on time and on budget from its inception in 2010.

On slides 9 through 16 you will see a variety of recent photographs for Mountain Pass showing our rapid progress. In fact our management team, our project management team has done so well that we were able to announce in October our ability to accelerate the initial start of the project Phoenix Phase 1 production by approximately three months.

As you can see on slide 17, this acceleration will deliver a number of benefits to the company, to our shareholders and to our customers. First of all it will allow us to achieve our full Phase 1 run rate of 19,050 metric tons per year by the end of the third quarter of 2012, a full three months earlier than originally planned. As noted previously, we’ll accelerate the mechanical completion of our Phase 2 expansion by a full six months providing the company with the capability of producing in an annual rate of 40,000 metric tons as early as mid-2003 if customer demand warrants.

Third it allows us to move more products to the market sooner given the fact that global rare earth markets continue to experience very tight supply conditions getting a stable inflow of new product to the market is the right thing to do for our customers. This acceleration is expected to increase our annual production of rare earths in 2012 by approximately 3500 metric tons providing additional near term sales. The capital required to accomplish this acceleration, an estimated $114 million, will be funded using credit cash balances and cash flow from operations.

Given that we continue to sell every kilogram of product that we can make, this acceleration will deliver significant added sales to our company. Indeed based on today’s rare earth prices, this investment would pay for itself in as little as five weeks of full Phase 1 production. We believe this investment will deliver a very significant financial return to our shareholders.

Continuing on slide 18 another benefit is the de-risking value this acceleration brings to Project Phoenix. A rare earth mine and processing facility is comprised of many different operations and plants that convert the ore mine into separated rare earth products.

These operations include crushing, milling, flotation, cracking, leaching, separation and extraction, tailings processing and storage, power and steam generation and others. Our project acceleration in modified start of sequencing will allow us to significantly lower the risk of start of problems as we ramp up to our full Phase 1 production run rate.

Let me also add another recent development that further de-risks our project, and that is the agreement we reached on a three-year renewal of our labor contract with the United Steelworkers. Our agreement was reached to full six months prior to the deadline. And achieving this key milestone will clearly help to ensure a smooth start up of Phase 1. As we accelerate Project Phoenix, I would also like to note that we have done so with our core values in mine, one of which is safety.

I am very proud to note that we recently achieved over 500,000 hours of work on Project Phoenix without a lost time accident. While the acceleration plan is in near term milestone, we also unveiled in the third quarter, our multi-pronged heavy rare earth strategy for the mid and long-term, this is outlined on slide 19.

In summary, there are four corollary parts to our strategy to increase the markets access to heavy rare earth outside of China. First is to increase heavy rare earth production via recycling of magnets and phosphors. We’re in discussions with company’s involved in both of these phases. We’re excited about the potential of recycling to significantly increase our production of heavy rare earth.

Number two, we want to increase the efficient use of heavy rare earths in key applications, one example is our investment in Boulder Wind Power, which has developed an advanced wind turbine generator that uses dysprosium free permanent rare earth magnets. We’re also following research by various magnet producers on reducing dysprosium needs for automobile magnets by 50% or more.

The third corollary is deploying our new tracking technology at Mountain Pass. This will allow us to process both the bastnasite and monazite minerals within the Mountain Pass ore body, and we availed the process mineral concentrates from other rare earth resources as well. The fourth corollary is identifying and developing new heavy rare earth resources.

With regard to new heavy rare earth resources, we recently announced efforts focusing on four potential sources for heavy rare earth, including one that is located within several miles of our current Mountain Pass operations. In sample, analytical results from that occurrence have indicated an ore grade exceeding 4% and a heavy skewing of the rare earth mineralization towards the heavy rare earth.

We filed a drilling plan notice on this site with the U.S. Bureau of Land Management on October 28 to proceed with exploratory drilling. We're in very constructive discussions with BLM officials about how to proceed with that exploration in a timely manner and we’re really pleased with the federal government's response to date on this initiative. We're also continuing work on three other very promising heavy rare earth occurrences around the globe, all of which indicates significant rare earth ore grades and natural mineralizations that skew towards the heavies.

Now, let me take a minute on slide 20 to highlight the rapid progress we are making towards integrating operations at the two facilities we acquired earlier this year, Molycorp Sillamäe and Molycorp Tolleson. As part of our “mine-to-magnets” vertical integration strategy, we acquired both Sillamäe and Tolleson to add to our downstream manufacturing capabilities. These facilities are allowing us to produce higher purity rare earth products and to convert our rare earth oxides into higher value products such as rare earth metals and rare earth alloys, including neodymium-iron-boron alloy and samarium-cobalt alloy.

During the quarter, we’ve been able to leverage Molycorp Sillamäe’s ability to further refine our rate earths in the high purity, higher value products. We sent the majority of cerium produced at Mountain Pass to Sillamäe for refining into a higher margin product that can be used in a variety of applications such as; glass polishing powder, catalyst and catalytic convertors, or as an additive in UV filtering glass. Refining these rare earths in the higher purity products was one of the many reasons we acquired Molycorp Sillamäe and it is another validation of our vertical integration strategy.

Since we closed these acquisitions we’ve been able to further optimize the roll of these facilities on our global distribution channels, this is good for our customers for Molycorp and for our shareholders. The ability to process and qualify customer products in several locations around the globe is also proving to be an extremely valuable asset for our sales marketing, and product engineering groups. Qualifying rare earth products in order to meet customer specifications is essential to finalizing any sales contract. This is a very intensive process and can take up to six months or longer to complete. The fact that we can do this work now gives us a powerful advantage to being able to convert letters of intent into definitive sales contracts.

The net result of these acquisitions and supply chain developments has proven itself at the top line for our company. Average net sales prices were 27% higher at Sillamäe, compared to the average net sales prices out of Mountain Pass, thus demonstrating the increased margin potential of these downstream businesses. Another long-term growth strategy involves our XSORBX line of water filtration products, which are all based on cerium related technologies.

During the third quarter, we increased the number of customers that are currently purchasing XSORBX to just over 20, with most in the recreational water filtration market and one in the municipal water treatment space. Our market seeding strategy for XSORBX has been gaining traction. While this product is not yet a material contribution to our net sales, we remain confident in the long-term growth prospects for this innovation and we do expect significant sales in 2012.

Continuing on the slide 21, other strategic goals that we accomplished in the third quarter and the first several weeks of the fourth quarter include the following. In October, we established the capability of producing neodymium metal at our Sillamäe facility, an absolutely crucial step in the manufacture of permanent rare earth magnets. Coupled with the rare earth metal and rare earth alloy capabilities that we have in our Molycorp Tolleson facility, we are progressing as planned toward achieving our full mine-to-magnets business plan.

As I mentioned previously, in October, we purchased the remaining shares of the Sillamäe facility. This month, we also opened an office in Tokyo and established a more direct day-to-day customer service presence in Japan.

Now, let me turn the call over to Jim Allen to discuss our financial results in more detail.

James S. Allen

Thanks, Mark and good afternoon everyone. I will start my discussion on slide 23. As Mark noted, we reported a record $138 million in sales this quarter. These record sales serve as an indicator of our production capabilities during this pre-Phase 1 period of operations.

The $138.1 million of sales for the quarter compares to $99.6 million in the second quarter of this year, is dramatically higher than the year ago period. This sales increase is directly attributable to higher sales out of our Mountain Pass facility, largely from a more favorable product mix and strong pricing.

On a consolidated basis, we sold 934 net metric tons of rare earth equivalent products at an average sales price of $131.19. We also sold an additional 88 metric tons of rare metals at an average sales price of $151.16.

As a remainder, consolidated financial and operational results are presented on a net basis that is removing intercompany sales. When discussing the operating performance of each individual operating segment, these figures will be presented on a gross segment basis. Slide 24, provides greater details of sales dollars attributable to the volume sales of each of our locations.

Gross sales at Mountain Pass totaled $124.9 million based on total volume of 1,002 metric tons. Gross sales at Molycorp Sillamäe totaled $35.9 million based on total sales of 384 metric tons of rare earth oxide equivalent products and 88 metric tons of rare metals, primarily tantalum and niobium. Gross sales at Molycorp Tolleson totaled $14.4 million, based on approximately 52 metric tons of REO equivalent products that were produced and sold, 87% of Tolleson sales were to Santoku Corporation from whom we purchased the operation. Sales to Santoku remain under contracted prices are alloys at the cost of raw materials plus a premium.

Turning to slide 25, third quarter consolidated cost of goods sold for the company totaled $50.5 million, compared to $42.9 million in the second quarter of 2011, and $7.7 million in the third quarter of 2010. Gross margin percentage for the quarter increased to a record 63.4% across all operating segments. The sequential improvement of 6.5 percentage points over the second quarter, this is despite a one-time adjustment of $10.2 million related to purchase counting at Molycorp Sillamäe.

Molycorp Sillamäe’s gross margin percentage was essentially zero influenced downward by the effect of purchase accounting. As required by GAAP, we valued the inventory acquired at fair value as of the acquisition date and that upward adjustment from historical production cost contributed $10.2 million to cost of goods sold during the quarter. Excluding this one-time expense, Sillamäe’s gross margin percentage would have been 28.9%.

Molycorp Tolleson’s gross margin was 4.3% during the quarter, which is an improvement from the negative gross margin of 8.7% last quarter. As previously mentioned, Molycorp Tolleson is currently primarily producing alloys for Santoku Corporation under a contract that provides a small premium over the cost of raw materials.

Selling, general and administrative expenses for the quarter were $14.3 million, compared to $13.8 million in the second quarter. The slight increase is related to staffing and other costs associated with expanded business operations, including certain costs associated with the administration of Project Phoenix.

Income tax for the quarter was $20.9 million or an effective tax rate of 30.1%. This tax expense compares to $6.6 million tax benefit during the second quarter of the year in which we benefited from the reversal of the majority of the valuation allowance, previously recorded against our deferred tax assets, which are largely related to NOL carry forwards. On a sequential basis, this yields nearly a $28 million change from the second quarter.

Turning to slide 26, net income for the quarter was $48.6 million, the more relevant measures net income attributable to common stock holders, which reflects dividends on our convertible preferred stock and net income, which are attributable to the minority owners of Molycorp Sillamäe. Our net income attributable to common stock holders is $45.3 million in the quarter or $0.52 per diluted share. There were a number of certain one-time out of the ordinary items and non-cash items reported in the quarter as detailed in our non-GAAP reconciliation. Removing these certain non-cash and out of the ordinary items yielded adjusted net income attributable to common stock holders of $58.3 million or $0.67 per diluted share. We are very pleased with the financial performance of the company in the quarter with top line growing approximately 39% and considerable margin expansion as our operating income grew by 72%. We caution you that this level of earnings from our current operations is dependent on continued robust conditions for rare earth pricing, which is affected by many variables that are subject to change.

Our Project Phoenix plan remains fully funded. After the end of the third quarter, our Board of Directors approved an additional $114 million to accelerate the initial start up of Phase 1 operation. This $114 million will be funded from existing cash balances and cash flow from operations. We maintain a solid balance sheet with approximately $562 million in cash and cash equivalents as of September 30.

Year-to-date, our cash flow from operations has provided $28 million to the business. During the quarter, our cash paid for investing activities included approximately $82 million for capital expenditures, most of which related to Project Phoenix, and $20 million are investment in Boulder Wind Power.

Let me turn the call back to Mark to provide production guidance for the remainder of the year and to comment on rare earth market conditions on slide 28.

Mark A. Smith

Thanks Jim. Because rare earth prices are volatile and out of our control once again, we will not provide formal sales or EPS guidance at this time. I would like to provide guidance for the operations that are under our control. We offer a table showing ranges of production in terms of REO equivalent for each of the facilities we now operate.

For the fourth quarter of 2011, we now anticipate a production range of approximately 1,300 to 1,700 metric tons of REO equivalent across all of our facilities. This is a slight decrease from the prior range we provided and primarily reflects necessary equipment downtime at Mountain Pass related to engineering, the acceleration and doing the tie-ins for Project Phoenix.

While we do not provide sales guidance, I would like to be clear that this slight decrease in anticipated 2011 production should have no impact on sales volumes. We have also announced an initial production guidance range for full year 2012 of between 8,000 and 10,000 metric tons.

We anticipate providing a breakdown by facility of this production in our year-end results. Let me also comment on and provide some insight into current rare earth market conditions and offer our view of the market for the balance of 2011 on slide 29.

When we last provided a formal overview, our observation was that pricing of Chinese rare earth was beginning to stabilize in September and we were seeing signs of prices firming up. Since that time, China announced plans to implement a new invoicing system designed to help “combat rampant and illegal over-exploitation of the metals."

According to Chinese officials, this includes illegal sales and speculative buying. This system if implemented is supposed to be in place by the first part of 2012. If it is finalized, we believe it is likely that illegal activity will continue between now and the end of the year as businesses that do not expect to receive invoices or export quotas will be selling and buying what they can. This may continue to have relatively short-term impacts on pricing.

However, we have no reason to believe that short-term action will impact long-term supply and demand fundamentals. In fact, we believe suppliers will continue to tighten and prices will remain robust into 2012 and beyond. We’ve found some independent forecast of rare earth supply and demand to be at odds with what we are seeing in the market. As many of you know, Molycorp is the only significant manufacturer of rare earth oxides outside of China. We are actively selling into rare earth markets everyday. Everything we see, leads us to conclude that tight markets and product shortages were going to be with us for the foreseeable future.

On slide 30, we are much less optimistic than some forecasters as to the amount of new rare earth production outside of China that can be expected to come online in the next three to five years, beyond Molycorp and potentially Lynas. Coupled with the steadily growing demand we see from many downstream technologies that require rare earths, and with the continuing growth in China’s consumption of its own rare earth productions, we see a continuing likelihood of very tight markets for most, if not all, rare earth materials. Next slide please.

Really the major factor determining the future of global rare earth supply is China, and as anyone who knows this space knows, Chinese officials continue to warn that lower volumes to the rest of the world and higher prices to all of the world are in their view “irreversible trends.” The Chinese continue to take actions to enforce production quotas and to crackdown of what they consider illegal rare earth production.

For example, in 2011, we’ve seen the Chinese government enforce rare earth production quotas for the first time, raised taxes on in-country producers, announce its intent to issue new regulations with tighten industry entry thresholds for new producers, announced plans to consolidate about 80% of the production from Southern China in the three companies within the next year or two, and create a single government controlled monopoly to mining process or in the north.

They also plan to shutdown or suspend production by producers that operate without a quota or those that exceed their quotas, and they also plan to enforce greater environmental protection on all producers and processors. We also recently saw one of the world’s largest rare earth producers, Baotou Steel Rare-Earth Hi-Tech voluntarily suspend its rare earth smelting and separations for at least one month in an effort to bring stability back to the market. In addition, China Minmetals voluntarily shutdown any further processing of rare earths in their operations in early August, since their production quotas have been met.

On slide 32, you can see that based on market intelligence that we obtained through our sales activities, we expect demand outside of China in 2011 of between 48,000 and 53,000 metric tons of rare earth oxide equivalent. Given that China is exporting about 22,000 tons of REO equivalent in 2011, and given that Molycorp will produce about 5,000 metric tons this year, at least a deficit of rare earth supply outside of China of between 21,000 and 26,000 metric tons this year, that deficit represents between 44% and 49% of the entire rare earth demand outside of China.

Simultaneous with these developments is the ever-increasing consumption by China of more and more of its own rare earth production as shown in slide 33. All of these actions reinforce what Molycorp has been predicting for some years, that China maybe on track to become a net importer of rare earths possibly as early as 2015. While near-term fluctuations of rare earth pricing may continue all of the long-term trends we see point to tight supply and demand along with continued robust pricing.

In closing, and as discussed at the beginning of the call, we remain focused on achieving four principal operational milestones for the remainder of the year, which are shown on slide 34. The first of these is to keep the accelerated Project Phoenix timeline progressing on time and on budget. The second operational goal is to further the engineering for our Phase 2 expansion, so that we have the capability to produce at an annual rate of 40,000 metric tons by the end of the second quarter of 2013 if customer demand warrants.

The third goal for the year is to have 75% or more in the Phase 1 letter of intent product volume into final definitive contracts, and our fourth goal for the year is to continue to explore continued downstream joint venture or acquisition opportunities.

Thank you, and before we open up the call for Q&A, we’d like to remind you some upcoming events. Brian?

Brian Blackman

Thank you, Mark. Just to remind everybody that company will be presenting at these upcoming events during the fourth quarter as shown on slide 35. We’ll be participating in six events throughout the remainder of the quarter and hope that we can meet any of you at any given point during that timeframe. At this time, operator I would like to open up the call for a line of questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And first, we’ll go to Anthony Young with Dahlman Rose.

Anthony Young – Dahlman Rose & Co.

Hey guys. Thanks for taking the questions.

Mark A. Smith

Good morning, Anthony.

Anthony Young – Dahlman Rose & Co.

Just on the $114 million that you guys are spending to accelerate the projects or to accelerate Project Phoenix, could you just give a rough maybe a percentage type a third, a third, a third on what some of the major expenses are that require that additional outlay?

Mark A. Smith

I will provide that Anthony, because we haven’t provided that to anyone yet. But let me make a few comments on it. In projects of this size, my experience in, my almost 30 years now of doing projects like this is, whatever you change a project, whether you accelerate it, decelerate it, or whatever the change may be, what is a general rule of thumb number is that you end up with about 15% cost change to your project.

And long behold, even after we spend several months with very detailed engineering estimates being put together and rescheduling of things, we ended up with something that was almost precisely a 15% change. So, that was, I guess kind of interesting to note the general rule versus what we found. The majority of costs that we’re looking at here are related to moving everything forward and having more labor, more overtime to make this happen, having equipment delivered earlier and then we did want to make sure that all of the increased monetary amounts were covered with contingency as well.

Anthony Young – Dahlman Rose & Co.

Okay. And then, with respect to your ceric hydrate sales, you broke it out a little bit differently in your press release than you have in the past, so excuse me if I’m wrong. I mean it seems like you did all your sales go to your Sillamäe facilities and that’s why it look like you don’t have any ceric hydrate sales out of Mountain Pass or how is that working now?

Mark A. Smith

No, that’s a very good analysis in a very short period of time, Anthony. And the good news there and it really is good news is that we’re taking a ceric hydrate material which is a lower purity level, cerium and we’re sending it over to Sillamäe to have it upgraded to cerium oxide or cerium carbonate, where we can get not only higher prices for those higher-purity materials, but we also have many more customers that this material can be sold to. So, this was a purposeful decision that was made to increase the purity levels of the product, increase the number of customers we can sell to, and we will see very good benefits from that here in the future.

Anthony Young – Dahlman Rose & Co.

Okay. So it shouldn’t be viewed as a signal if there is any weakness in the cerium markets?

Mark A. Smith

No, not anything close to that. If anything, this really allows us to introduce our cerium in a much better proactive way, because it actually meets customer specifications.

Anthony Young – Dahlman Rose & Co.

Okay. Thanks for the questions guys.

Mark A. Smith

You bet, Anthony. Thank you.

Operator

And next, we’ll go to Michael Gambardella with JPMorgan.

Michael Gambardella – JPMorgan Chase & Co

Yes. Good afternoon. Thanks for taking my call.

Mark A. Smith

Hi, Michael.

Michael Gambardella – JPMorgan Chase & Co

Hi. I have a question on the recent pricing on rare earth. What are you seeing there, because I heard your comment on cerium, but on the data source we get, it looks like cerium prices are down over 60% from that highs in July. Are you seeing any kind of realizations hitting, downward realizations hitting your P&L?

Mark A. Smith

Well, we have a whole bunch of different ways that we contract material and there is absolutely no doubt that when you look at Asian Metals and Metals-Pages, you will see that reduction from the late July, early August timeframe. But I think that I may look at that reduction a little bit differently, because I’ve been in the business for 25 years, and I saw what cerium prices were for the first 23.5 years of my career here. And when you were selling at average prices that were lower than $3 a kilogram for the better part, now that 23.5 years, the $55 to $60 a kilogram that we are seeing today is still a very, very attractive price, especially considering our low cost production that we have in our company. So, yes, prices are off, where they were in late July, early August when cerium reached a high of $150 a kilogram or more. But I don’t think there is a whole lot of material moving at $150 a kilogram, so I’m not sure how accurate that number would be in terms of what we may ultimately see for price realizations.

Michael Gambardella – JPMorgan Chase & Co

Can you give us a ballpark of what your realizations of cerium were for the quarter in the numbers you just put up?

Mark A. Smith

Jim, do you know what that is? I don’t know what it is off the top of my head, Michael, and we may need to do this offline.

Michael Gambardella – JPMorgan Chase & Co

Okay. And just last question. Could you give us an update on the costs that you expect with the new facility, the retrofitted facility? I mean do you still think the costs should be somewhere inline where the cost estimates were on the SRK report?

Mark A. Smith

Yeah. We haven’t changed that number at all. We still expect $2.77 a kilogram for average cost of production coming out of Mountain Pass.

Michael Gambardella – JPMorgan Chase & Co

Okay. Thanks lot, Mark.

Mark A. Smith

You bet Michael. Take care.

Operator

And next, we will go to Jagadish Iyer with Piper Jaffray.

Jagadish Iyer – Piper Jaffray

Yeah, thanks for taking my question, Mark. Two questions I wanted to ask you. First is that, it’s kind of challenging to provide pricing guidance on fourth quarter, but can you give us, given your slide about the shortage threat about 29,000 metric tons and now that we are six weeks into the quarter, can you give us an idea of how the pricing has trended from the end of third quarter until now please.

Mark A. Smith

I guess what we’ve seen so far, Jagadish is the stabilization of prices kind of where they are right now. And the interesting thing to is that, it’s amazing how loud the market was when prices reached their peak in late July and early August, and how quite everyone got when prices got back down to the range that they are now. In another words, people are back in the market, they’re buying these materials and a lot of the really painful price, we were hearing from our customers seem to have been addressed with this more rational pricing environment we’re in now.

Jagadish Iyer – Piper Jaffray

Second one is that, I wanted to find out, you had indicated about 75% of your volumes on Project Phoenix to be completed by the end of the year. What is holding up now that you have only 47%, what gives you the confidence that you will be able to accomplish that before the end of the year given that, we are only six weeks before the end of the year.

Mark A. Smith

That’s a great question. And what gives us a great deal of confidence is that the process of qualifying your material is a very, very lengthy process. And we are in this very final stages of most of these qualification tests with our customers, and that means we then turn to the commercial and legal discussions on the contract.

And in fact, for the most part, most of the commercial discussions have already occurred and it’s really just a matter of getting the final written contract signed between the parties. But this qualification process is not to be taken lightly. You don’t just make an oxide material and then sell it to a customer. You actually have to make your material, provide them with qualification samples, they check it for the specifications, but they also run it through qualifications to make sure that your material will work in their process and that does take a great deal of effort and a great deal of time. I’m just glad that Molycorp is actually in a position to produce these samples for qualification purposes.

Jagadish Iyer – Piper Jaffray

I just, if I may, or just a quick follow up on one thing on the Sillamäe. I just wanted to find out is that a cost advantage that you guys have in refining over there compared to here, please?

James S. Allen

I’m not sure I would say that there is a cost advantage, but there certainly is a know-how and technology advantage. We obviously are working very hard as part of the transition to make sure that the technology between Mountain Pass and Sillamäe and back is shared as broadly and as widely as we can. So, what you’ll in effect see is, we’ll be working very, very hard at the Sillamäe operation to advance many of the technologies that we’ve developed at Mountain Pass so we can lower their costs. But we’ll also be bringing back a lot of the technology and producing know-how that Sillamäe has so that Mountain Pass can make higher and higher purity materials. So, it will be a very good exchange between the two.

Jagadish Iyer – Piper Jaffray

Okay, thank you.

James S. Allen

You bet, thank you.

Operator

(Operator Instructions) We’ll now go to Paretosh Misra with Morgan Stanley.

Paretosh Misra – Morgan Stanley

Hi, Mark.

Mark A. Smith

Hi, Paretosh. How are you today?

Paretosh Misra – Morgan Stanley

Good. How are you?

Mark A. Smith

Very well, thanks.

Paretosh Misra – Morgan Stanley

Just I wanted to make sure I understand this correctly. On slide 23, you have 934,000 ton of sales and then on the production – on the quarterly production table you have a 1,228 a 1000 ton of REO, that’s the production and then so the remainder is an inventory or how do I reconcile this?

Mark A. Smith

Yeah. That would be the difference. And actually, I think that and I guess probably Jim have addressed this slide.

Paretosh Misra – Morgan Stanley

Yeah.

Mark A. Smith

I think the issue is net versus gross.

James S. Allen

Yeah. Paretosh, I’m sorry. You’re talking about the 1,002 two metric tons?

Paretosh Misra – Morgan Stanley

Yeah. 1,228 metric tons on...

Mark A. Smith

(Inaudible) for reduction.

James S. Allen

Yeah. That’s a net versus the gross issue there, Paretosh. The 934 are the net metric tons sold out of Mountain Pass, or out of the total facilities, 934 metric tons REO equivalent.

Paretosh Misra – Morgan Stanley

Got it. And so did you build up any inventory during the quarter?

Mark A. Smith

No. As a matter of effect I believe that we sold a lot of inventory, because if I recall the numbers, it was 1,400 some in sales and 1,200 in production.

Paretosh Misra – Morgan Stanley

Got it. All right, guys. Thank you.

Mark A. Smith

Thank you, Paretosh.

Operator

And next, we’ll go to Luisa Moreno with Jacob Securities.

Luisa Moreno – Jacob Securities Inc.

Hello.

Mark A. Smith

Hi.

Luisa Moreno – Jacob Securities Inc.

Hi, Mark. I have first of all, I wanted to congratulate Molycorp for the progress that you have made in producing oxide and metals to Sillamäe as you say it, and I think that’s pretty significant given that you’re one of the few companies outside China doing that?

Mark A. Smith

Thank you.

Luisa Moreno – Jacob Securities Inc.

My question however is going to be focused on the heavy rare earth comment that you made?

Mark A. Smith

Yes.

Luisa Moreno – Jacob Securities Inc.

And so you said that Moly has a few options. And so, you listed recycling, looking at your deposit and as well as looking at the positive near by Mountain Pass and as well as looking around the world. So my question is, at this point, I don’t know if you have an answer, but at this point, which one is the most important or most advanced is to look outside perhaps the recycling or is perhaps the deposit that you have identified at near or at Mountain Pass?

Mark A. Smith

Actually an interesting answer here Luisa is, going to be that the most advanced of the four part Heavy Rare Earth Strategy is the new cracking technology that Molycorp has developed, where we will be able to now process the full content for ore body out of Mountain Pass which includes bastnasite and monazite. That cracking technology has worked out very, very well at every level that we tested it, and we now have the commercial scale unit that is expected to be online in December sometime and we are very excited to watch that continue to be successful and to be able to produce more heavy rare earths from our own Mountain Pass deposit. The second most advanced would be the real local heavy rare earths laden deposits that we have found…

Luisa Moreno – Jacob Securities Inc.

Okay. Regarding the monazite that you have that you’re processing, you’re planning to combine or mix with the bastnasite. So my understanding is that, you also have a thorium there, as it’s usually found with the monazite. How much thorium do you have and how are you addressing that?

Mark A. Smith

The monazite, bastnasite combinations has always existed in the Mountain Pass open pit mining operations. So we’ve always had this very, very low-level signature of uranium and thorium in our ore body. What we did in the past because of some processing limitations of trying to do, trying to crack bastnasite, monazite together was that we actually in the milling process discarded the monazite material and it went out to our tailings basin and then we only processed the bastnasite material.

With the new cracking process, we can now keep the monazite in the process stream and process it along with the bastnasite, but we don’t expect any additional amount of uranium or thorium as a result of this, because the uranium and thorium numbers that we use were the total numbers in the ore body anyway.

Operator

Thank you. And now we’ll go to Dan Mazer with Harvest Capital.

Dan Mazer – Harvest Capital

Good afternoon. Thanks for taking my question. Earlier today, one of the companies that has been granted Chinese quotas publicly stated that they saw there is a pretty good chance at the second half quotas, some of the second half quotas may go unused by the end of the year. And just want to get your thoughts on this if that appears to suggest that there is maybe currently a limited supply deficit for rare earths or maybe there’s something else going on like demand disruption or production just for supply chain (inaudible) would love your thoughts on that?

Mark A. Smith

Well, I think to some extent, this is also being addressed by several of the other programs that China has in place one of which is production quotas. There are several, three mines for example in the south that were shut down by the government, because they met their production quotas. Minmetals voluntarily shut down in August, I believe it was. So, another position on that would be that maybe these materials aren’t available for export. So I think we really have to kind of sit back and see what’s going to happen. I know that one thing we’ve learned in our 60 years of business here is, it’s very, very hard to understand precisely what’s going on in China and the best thing you can do is to continue to monitor the situation very, very closely and be ready to act very quickly.

Operator

(Operator Instructions) And we have no further questions in queue. I’ll now turn the call back over to Brian Blackman for any additional or closing remarks.

Brian Blackman

Thank you operator. And I’d like to thank everyone again for joining us this afternoon on today’s call and we look forward to reporting our full year results next year.

Mark A. Smith

Thank you everyone.

Operator

Once again, this does conclude today’s conference. We do thank you all for joining us.

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