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Molycorp, Inc. (NYSE:MCP)

Neo Material Technologies Acquisition Call

March 9, 2012 8:30 AM ET

Executives

Brian Blackman – Senior Manager, IR

Mark Smith – President and CEO

Constantine Karayannopoulos – President and CEO, Neo Materials Technologies

Michael Doolan – EVP and CFO, Neo Materials Technologies

James Allen – CFO and Treasurer

Analysts

Anthony Young – Dahlman Rose

Matthew Gibson – RBC Capital Markets

Paretosh Misra – Molycorp

Colin Rusch – ThinkEquity

Jagadish Iyer – Piper Jaffray

Michael Gambardella – JP Morgan

Daniel Kim – Paradigm Capital

Operator

Good day ladies and gentlemen and welcome to the Molycorp Incorporated to Acquire Neo Material Technologies Incorporated Conference Call. My name is Juanita. I’ll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Brian Blackman, Senior Manager of Investor Relations. Please proceed.

Brian Blackman

Thank you, operator, and good afternoon to everyone. Yesterday, after market close, we issued a press release announcing a definitive agreement under which Molycorp will acquire Neo Material Technologies or Neo Materials. If you have not yet seen the press release, you can find it posted on both companies website at www.molycrop.com/investors and www.neomaterials.com.

As a reminder, today’s call is being webcast and a replay will be archived on the website. For those of you dialed into the call, a slide show that accompanies our prepared remarks is available on either companies websites. 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 two contains the Safe Harbor statement. As always, we need to advise you that some of the information discussed on this conference 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 factors section of Molycorp’s Annual Report on Form 10-K for the year ended December 31, 2011.

On slide three, I’d like to – on the call today is Molycorp’s President and Chief Executive Officer, Mark Smith; and Constantine Karayannopoulos, President and Chief Executive Officer of Neo Materials. Also with us for question-and-answer session is Jim Allen, Chief Financial Officer and Treasurer of Molycorp; and Michael Doolan, Executive Vice President and Chief Financial Officer of Neo Materials.

At this time let me turn the call over to Mark Smith.

Mark Smith

Thank you, Brian, and thank you all for joining us today. This is an exciting day for Molycorp and for Neo Materials. The agenda for our call is shown on slide four. As you all know, yesterday, we announced our signing of definitive agreement to acquire Neo Materials for $1.3 billion.

Today, I’m going to make some opening remarks on this transaction and what it means to our company, I will then introduce Constantine, who is the President and Chief Executive Officer of Neo Materials. At the end, I’ll come back and highlight the rationale behind the combination of our companies and why we see significant opportunities for growth through this transaction.

Moving to slide five. If I had to summarize the most important takeaways from this transaction, it would be these: number one, this transaction will combine Molycorp’s world-class rare earth resource and low-cost production from our Project Phoenix with a proven leader in the development, processing and distribution of technically advanced rare earth products. It would create one of the world’s leading vertically integrated rare earth technology companies with global reach. Number two, this transaction will give Molycorp greater exposure to the world’s largest and fastest growing rare earth consuming market, namely China, which now consumes about 70% of global rare earth production.

Third, this transaction leverages Neo Materials’ existing infrastructure to allow Molycorp to ramp up its overall production once Project Phoenix Phase 2 production begins in 2013. Fourth, it expands Molycorp’s production capabilities to include Neo Materials’ Magnequench patented magnet powder portfolio used to produce neodymium-iron-boron bonded rare earth magnets.

Fifth, it will also give us the ability to produce very high quality gallium, rhenium, and indium as well as zirconium oxide. And finally, the combination is expected to be accretive to Molycorp’s 2012 earnings and cash flow. While we have yet to formally launch the integration process of our two companies, we have already identified significant synergies that can be expected to further strengthen the financial performance of Molycorp in the future.

Let’s move to slide six. Let me cover the key points of the deal structure on slide six. If you have any questions Jim Allen and Michael Doolan can address those during the Q&A portion of our call. The transaction is valued at approximately $1.3 dollars. Under the proposed terms Molycorp will acquire Neo Materials outright at a value of $11.30 Canadian per share.

Neo Material shareholders will have the right to elect their preferred consideration mix of cash and newly issued Molycorp stock with the total consideration being approximately 71% cash and 29% Molycorp stock. To fund the cash portion we intend to use the proceeds from our Molymet private placement of $390 million as well as pursue a debt offering to be led by Morgan Stanley and Credit Suisse.

We currently have a financial commitment in place for a bridge facility until the debt offering closes. I’m pleased to note that we are also acquiring a healthy balance sheet. As of Neo’s fiscal year 2011 filing, they had $307 million in cash and cash equivalents and long-term debt of approximately $198 million. Let me reinforce that Project Phoenix funding will not be used for this transaction and we remain very focused on getting to the finish line with our accelerated project schedule.

When the deal closes, we expect there will be 112.5 million shares outstanding on a fully diluted based. Our pro forma ownership structure will consist of 86% to existing Molycorp holders and 14% Neo Material shareholders. As we noted in the press release, we expect this transaction to be accretive to cash flow and earnings. We have also identified immediate synergies in our operations which should lead to further benefits. There are regulatory as well as Neo Material shareholder approvals needed before closing on this deal. And as of now, based on the timeline set forth, we’re expecting to close sometime in the second or third quarter of this year.

Now I would like to turn the call over to my friend Constantine for a few minutes to provide some additional background on Neo Materials. Let me note that Constantine will continue in the new organization as the CEO of Neo Materials. Constantine?

Constantine Karayannopoulos

Thank you, Mark, and hello to all of you who are joining us this morning. This is an exciting time for all of us both as the shareholders and both as the management groups and both as the customer and as well as for me personally. I see the potential our companies have in the market by working together producing and selling a portfolio of sophisticated advanced products to some of the most important global customers anywhere.

Like Mark, I see this as the powerful emerging resources, production and technology creating the best global market coverage in the industry. For those who are new to Neo Materials, I’ll give you a brief overview starting on slide seven. We are based on Toronto, Canada and have operations in 10 countries. We produce, process and develop neodymium-iron-boron magnetic powders, rare earth, zirconium engineered materials and other specialty value added rare and strategic metals.

We have positioned ourselves as a niche provider of advanced materials and rare metals with global distribution access to very demanding global customers. Over the years, we have developed and implemented technological breakthroughs and processing techniques that we believe differentiate Neo from the competition and firmly entrench our position in the market. We have 28 patents today, with four US patent applications pending and numerous foreign counterparts.

We have strong supply chain partners and even stronger customer relationships. We operate two division as shown in slide eight. First, Performance Materials, where our rare earth, zirconium and other rare metals such as gallium, indium and rhenium are produced. There are a number of industry sectors and applications for our products that would primarily build a global customer base with substantial growth in the automotive and electronic industries. Performance Materials account for approximately two-thirds of our business on a revenue basis.

Our other division is Magnequench where we produce our magnetic or neo powders that are used in the production of bonding magnets. That product has grown into many applications since we acquire – since we acquired the business six years ago. Magnequench continues to offer very attractive long term organic growth opportunities.

Our full year 2011 revenue was $800 million with Performance Materials contributing approximately 61% of our sales, 39% from Magnequench. The majority of our business is completed in the Asia-Pacific region with China and Japan accounting for 38% and 46% of sales respectively during 2011.

In terms of production, there is a fairly even split with slightly more tonnage produced from Performance Materials. With a total of the 11 production facilities, two for new powders in Korat, Thailand and Tianjin, China. Two for rare earth and zirconium in Jiyangyin and Zebo both in China and seven rare metals facilities primarily North America and Europe. Our six R&D centers are strategically located in North America, in Europe and in Asia in close proximity to our customers, so we can better work with them and continue to develop specialized niche applications.

A few other points before turning the call back over to Mark, like all the industry we do feel the impact of pricing fluctuations, no one’s immune to this. By combining resources with Molycorp and through continued work with our customers and supply chain partners, we will improve production utilization and offer our customers more reliable and secure resources for end market use. Prior to this announcement, the main intent of Neo Materials’ long-term goal strategy focused on diversification of raw material supply.

I strongly believe that our technological know-how combined with Molycorp’s resources and low cost production in Mountain Pass will strengthen our market position and ultimately elevate the combined organization to significantly stronger strategic and financial position that is far better than either company could have achieved on a stand-alone basis.

Over to you, Mark.

Mark Smith

Thanks, Constantine. Back to slide nine, combined Molycorp and Neo Materials will become a $1 billion plus sales company. Based on the full-year 2011 results for both companies, unaudited pro forma of revenues were approximately $1.2 billion. Both companies are forecasting growth this year albeit on lower product prices. Operating income for the same 2011 period exceeded $425 million and net income was $319 million.

As Molycorp ramps up phase 1 production at Mountain Pass, I believe both our top and bottom line performance will increase significantly from these historical pro forma results. Again, with the addition of Neo’s facilities, we will be able to produce more product for a larger set of customers on an accelerated basis. As Constantine alluded to earlier, the bulk of our combined business will remain in Asia with approximately 59% of sales generated from China and Japan over the past 12 months.

Similarly, combined we had more than 60% of our sales derived from rare earth oxides and metals, 26% from rare earth alloys and alloy powders and the remainder in rare metals. This mix may shift quarter-to-quarter based on customer demand, but I believe it’s a fairly good parameter for tracking our business in 2012.

Moving to slide 10, I’ve talked briefly about what this transaction means in terms of our offering and production adding rare earths and alloys, bonded magnet powders and certain rare metals, but it’s really much more than that. What we’re adding is substantive capacity to our vertical integration strategy, which more closely matches our Mountain Pass production capabilities and allows us to reach deeper into end markets on a global basis.

Molycorp is a global rare earths and specialty materials production company. We mine and separate rare earth products into a variety of purity grades. We then upgrade certain products into metals and alloys, which are distributed into centered rare earth magnet production. The combination of Molycorp and Neo Materials expands our fully integrated supply chain leveraging our operating segments in various joint ventures to reach global end markets. One of the biggest selling points of this transaction is that it will provide us with economies of scale and make us one of the world’s most technologically advanced and vertically integrated rare earth companies.

Additionally, we are expanding our processing capabilities into a specialty value-added products through higher purities of rare earths, and we are also expanding our specialty value-added rare metals. For example, we’ll be adding gallium, which can be used in LED lights, semiconductors, solar cells, military applications, circuits, fuel cells, liquid metals and more. Rhenium, which is one of the rarest elements in the earth crust is used primarily in jet engines and mostly in the chemical industry to make lead free high octane gasoline. Because of the low availability relative to demand, rhenium is amongst the most expensive metals in the world.

Neo Materials offers world class recycling of rhenium as well. In indium, another rare element is chemically similar to gallium. Indium’s current primary application is to form transparent electrodes from indium tin oxide in LCDs and touch screens. It is also used in a host of electronics and semiconductors and in LEDs. Through Neo Materials’ Magnequench division, we’ll be adding magnetic powders for use in bonded permanent rare earth magnets that are vital to motors, sensors and electronic products as well as other technologies. This move into the bonded magnet powder space will strongly complement our current joint venture to produce sintered rare earth permanent magnets with Daido Steel and Mitsubishi, they are providing access to both the bonded and sinteric markets.

On slide 11, we outlined some of our strategic integration opportunities. As we evaluated this transaction, we had teams on-site visiting several of Neo’s facilities and meeting with key management to identify both near and long-term synergies. These are growth opportunities, additional growth opportunities as well as ways to leverage our joint cost structures. It’s too early in the process to precisely quantify all the synergies today given that we are very early in the transaction and integration process.

However, we have already identified some synergy benefits that we consider low-hanging fruit. These include an average increase in EBITDA of $100 million per year starting in 2013 primarily related to Molycorp’s ability to send feedstock to Neo Materials’ facilities in Asia. We have already assembled integration teams that will confirm additional synergies that we identified during the due diligence.

On slide 12, for example, we can better optimize the supply chain with near term supply of rare earth concentrates to Neo Materials Zebo facility at ZAMR. This facility currently has available capacity. Similarly we can process our heavy rare earth feed stock in Neo’s JAMR facility. We have rare earth – heavy rare earth concentrates being stored in our Silmet and Mountain Pass facility that we can send to the JMR facility immediately. Better utilization within Neo Materials facilities will provide greater near term sales opportunities and ensure our customers have access to the critical materials they need.

The longer term play is leveraging our low-cost production from Project Phoenix once we ramp up to phase 1 capacity in the fourth quarter this year and phase 2 next year. By optimizing this resource capability, we’ll be able to optimize Neo Materials sales distribution and R&D knowledge.

On slide 13, we show a host of new opportunities for Magnequench as a result of the combined company as well. We will introduce our didymium materials to Neo Materials facilities in Thailand and China to leverage their existing capacity for incremental sales gains. By supplying them with stable feed stock supplies, we can increase production at both facilities and not be restricted due to current supply shortages in the market. From there, we envision building upon their current global market share through increased alloy production, more growth in their powdered magnet business and long-term technology development opportunities to manufacture new materials for use in the bonded magnet global market.

Turning to slide 14, gaining immediate access to the China market is another key selling point of this transaction. China, as many of you know, accounts for approximately 70% of the world’s rare earth demand. With Neo Materials, Molycorp has greater exposure to the world’s largest and fastest growing rare earth market. China, as well as other Asian Pacific nations is clearly the primary hub for rare earth consumption globally.

Bottom line, this all means that Neo Materials gains a stable supply both in and outside of China while still maintaining and growing their relationships with their customers. And Molycorp gains an outlet for production and processing of current resources and greater financial stability as we ramp up Project Phoenix production.

We’ve covered a lot of areas in a relatively short period of time, but I’d like to reiterate a few closing points on slide 15. Operationally, this deal makes a lot of sense for us because we gain access to the China market and to other key geographics. We pick up additional capacity for our production which will be very meaningful once Mountain Pass is fully operational. We gain access to the production of high purity materials that are in high demand.

We opened up new channels for sales and new vertical markets which might have taken us years to penetrate without this transaction. We gained new bonded magnet powder technology and high purity rare earth processing capabilities and with it, added market share. We gained technological know-how such as intellectual property and specialized skill sets that are in very limited supply.

From a financial standpoint, we picked up meaningful sales and revenue capabilities, we gained near-term earnings and cash flow accretion, we have significant opportunities to grow organically this year and beyond as we integrate our operations and we see significant opportunities for valuable synergies in the future. This transaction simply put as a game changer for Molycorp and one we believe will alter the industry landscape. Both of our companies are market leaders.

Today we not only increase security supply for our customers, we also greatly speed our time to market. Over the next 12 to 24 months, we believe, we can achieve very meaningful growth to drive bottom line performance and greater returns for our shareholders.

Before we go to questions, I’m obliged to remind everyone that this is a definitive agreement and there still are customary closing conditions. We expect to have further investor communications upon closing and throughout the course of the next year as we integrate our operations and capture the potential synergies. Let me also one – let me also answer one question that might be on some people’s mind, why acquire Neo Materials now?

There’s really two compelling answers as to why we made this transaction now. Number one, our customers and end markets have been demanding a reliable source of rare earth products and value-added products. Combining our two companies helps us bring those products to market in a secure and reliable way much more quickly. And number two, the timing is also advantageous as it gives us time to plan and execute the integration of Neo Materials into our company simultaneously with our ramp up of project Phoenix.

At this time, we’ll now open the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you (Operator Instructions). Your first question comes from the line of Anthony Young with Dahlman Rose. Please proceed.

Anthony Young – Dahlman Rose

Hi guys, congratulations on the acquisition. Two questions and they are kind of related. From a regulatory standpoint, Neo Materials has export quarters that allows them to export rare earths out of China. Will the Chinese government like seamlessly honor those quotas? And then two, you will be exporting rare earths from Mountain Pass into China, have you had any conversations with the US government and will they be taking a look at this or are there any concerns there? Yeah.

Mark Smith

Constantine (inaudible), have you answer the China side of the question and then I’ll answer the US side of the question.

Constantine Karayannopoulos

All right. Thanks, Mark. On the first question, clearly we couldn’t have conversations with anyone while until the deal was announced. So we started last night Eastern Standard Time when the press release went out. Our office in Beijing has been having conversations today and we’ll have some conversations with the Chinese regulators.

We think, from a legal perspective, the export qualities are owned by our two joint ventures and their structure and shareholding is not changing. So fundamentally, there is no legal reason why the export quotas would be under review. However, we are having conversations with the various ministries in China that would have input into the overall regulatory framework. The early indications are that there shouldn’t really be any issues with that.

Anthony Young – Dahlman Rose

Okay.

Mark Smith

And Anthony, concerning any U. S issues likewise, we would not able to discuss those before the transaction was announced that we have been in contact with several of the federal agencies here in the United States. We will continue to have those discussions. We don’t anticipate any issues whatsoever because Molycorp will still be able to readily supply the United States market, all of our customers in Japan, all of our European customers and this simply allows us to now expand into the Chinese market, but there should not be any problems making the supply available to everyone just as we have done before.

Anthony Young – Dahlman Rose

Okay. Would you envision possibly transferring any technology into the United States to possibly produce some of the powders here?

Mark Smith

It’s a very good question, Anthony. And the simple answer to that is, that’s all going to depend on what our customers’ needs are and what the supply chain will just as would be in terms of improving overall returns to our shareholders, but we would not hesitate to do that if there were good business reasons to do so.

Anthony Young – Dahlman Rose

Okay. Thanks, guys and congratulations.

Mark Smith

Thanks, Anthony.

Operator

Your next question comes from the line of Matthew Gibson with RBC Capital Markets. Please proceed.

Matthew Gibson – RBC Capital Markets

Hi, good morning, guys. Most of my questions answered by the prior individual (inaudible). One of you could articulate a little bit more on potential Chinese approvals, one for the scope and magnitude of those approvals would be, could you itemize how you think this is going to be the procedure?

Mark Smith

Constantine, do you want to take that one?

Constantine Karayannopoulos

Sure. Matt, the – as I said from a legal perspective there are no requirements for Chinese approval. However, we will be talking to the regulators and we have been talking to them all day to day in Beijing. So I couldn’t give you a specific step-by-step approach or a list of requirements because from a legal perspective there do not appear to be any legal approvals that are required. We’ll review their joint-venture document, we’ll review the regulations in China on this space.

So these conversations are – with the Chinese regulators are not from the perspective of seeking approval, it’s more of the perspective of what our plans are for the combined company and perhaps even in a more general basis how – what we are trying to do fits with the overall framework of what the Chinese regulators are trying to do with the industry, which is, at least in China, preserve the resource and protect the environment.

And clearly, especially from an environment point of view, this transaction will bring significant benefits to China given the nature of the products that Molycorp produces, the virtual complete lack of any contaminants and deposits as well as the fact that our two plants, our two-joint ventures in China in the rare earth, in our rare earth production plants are state-of-the-art plants and they’re in our view if not the most advanced among the top two or three plants in this sector any way in terms of their environmental performance. So I – as I said, I don’t expect any significant roadblocks.

Matthew Gibson – RBC Capital Markets

Thank you.

Constantine Karayannopoulos

Thanks, Matt.

Operator

Your next question comes from the line of Paretosh Misra with Molycorp. Please proceed.

Paretosh Misra – Molycorp

Paretosh Misra –.

Mark Smith

I think you’re with Morgan Stanley.

Paretosh Misra – Molycorp

Yeah, I hope so. I still have a job. Just going to the issue of patent that Neo Material currently has, I think they expire in 2014. So then why the need to have that technology?

Michael Doolan

These are two different questions, let me jump into here Mark. This are two different questions Paretosh. I mean, there is patents and then there is the technology and technology is much more than patents. The pat – there is one key patent that expires in 2014. Our patent portfolio includes a lot more about things that – perhaps they’re not as broad as 651, the so-called bonded, the so-called neodymium-iron-boron composition patent, but there are other patents that cover niche materials, specific high-performance materials, specific surface treatment of magnetic powers and so on, which will continue to be very useful.

On the technology side of your question, to produce these powders, it’s not enough to just have a patent. I mean, Magnequench has had great success, not only inventing and developing this material, but also developing a process that is extremely sophisticated and it’s extremely difficult to duplicate. So there are all kinds of fundamental technical reasons why Magnequench’s position is very defensible and very advanced. And with that – then these reasons will go way beyond the patent portfolio.

Paretosh Misra – Molycorp

Got it.

Constantine Karayannopoulos

And just to confirm that, Paretosh, in our due diligence effort, we’ve reached the same conclusion that the patent is very nice, but it’s the know-how and the quality assurance program and the high purity of materials that Neo is able to produce for their customers, very demanding requirements that we think will go for beyond the expiration of any patent.

Paretosh Misra – Molycorp

Understood. And second, probably question for Jim, how much equity and debt do you anticipate having to sell to close the deal? Basically I’m just trying to see how you calculate the 112.5 million shares pro forma.

James Allen

Yeah, the equity component will be about 29% of the total consideration and the cash component will be the other 71% or so. So we will use, we will use – for the cash piece, we will – we anticipate completing long-term debt offerings to buy that cash we’ll use some cash that’s available at Neo Materials as well and then cash proceeds from the Molymet investment.

Paretosh Misra – Molycorp

Okay. And last question, what would be your dysprosium or terbium requirements to make these kind of magnets?

Mark Smith

Constantine, you want to answer that one?

Constantine Karayannopoulos

Well, Magnequench producers powders, they – we do not produce magnets, we produce magnetic materials which our customers make magnets out of. In the case of Magnequench, one of the more attractive parts of our business – aspects of our businesses is the fact that the magnetic powder that we produce and therefore the magnets made from these powders, use a lot less dysprosium than the magnets that you probably have in mind, Paretosh, which are so called sintered magnets. And therefore our internal dysprosium requirement is relatively small.

In fact, the vast majority of our internal dysprosium production is not being used captively of Magnequench because Magnequench doesn’t mean the dysprosium. We sell it as advanced dysprosium mark side formulations to Japanese manufacturers of small chips and other electronic devices. So that’s clearly one of the advantages that Magnequench brings to the table, a lesser degree of dependence on dysprosium for the – to reach the necessary performance of those magnets.

Paretosh Misra – Molycorp

Great. Thanks and good luck, guys.

Mark Smith

(Inaudible).

Operator

Your next question comes from the line of Colin Rusch with ThinkEquity. Please proceed.

Colin Rusch – ThinkEquity

Good morning, gentlemen. Can you talk about the proportion of Neo Materials earnings and that are RMB based and any issues associated with repatriating that cash to support dividend or interest payments?

Michael Doolan

Yes, it’s Michael Doolan. Right now, probably about 60% of our earnings would be Renminbi based. Traditionally, those from a foreign exchange perspective given that historically, the (inaudible) industry has been in China, the prices will move. So, it’s been a natural hedge viz-a-viz the US dollar.

As it relates to your question in terms of repatriation, being sort of the normal dividend type requirements that you are applying in most share restrictions as long as if you’re not impairing the company or when you have the necessary reserves, there is no problem repatriating the funds whatsoever. In our particular structure, there’s two flows, one would bear with holding connects with 5% and the other stream would be 10%, and naturally are the only frictional cost of getting the funds out of China.

Colin Rusch – ThinkEquity

Perfect. That’s very helpful. And then to what extent do within China neodymium prices reflect the current processing cost of neodymium within China and how and when do you see changes as a result of potential environment regulations foreseeing those costs higher?

Constantine Karayannopoulos

Let me take the stop of that. It’s Constantine. The still very attractive margins in the production of neodymium within China, there’s no question that longer term within the Chinese industry has the rest of the rare earth producers hope at the mining level, the concentrate production level and the separation level, as they improve their environmental practices with additional capital expense and operating expenses, there’s no question that those costs will increase.

The – our two plants, our two rare earth production plans have stayed at the forefront of environmental regulation and environmental performance. We do not expect our cost to increase, because our cost, our environmental performance meets and exceeds all the regulations in China. So it’s just a matter of the rest of the industry in China catching up with what we have been doing and I would expect costs, production costs pushed by environmental regulations to continue to increase in China.

Colin Rusch – ThinkEquity

Great. Thanks a lot guys.

Constantine Karayannopoulos

Thanks, Colin.

Operator

Your next question comes from the line of Jagadish Iyer with Piper Jaffray. Please proceed.

Jagadish Iyer – Piper Jaffray

Yeah, thanks for taking my question. Congratulations. Couple of questions. First, Mark, can you tell us how much sales did you do for Neo Materials in calendar ‘11 please.

Mark Smith

I don’t believe we had any sales of materials to Neo Materials in 2011 and that’s one of the reasons why we look forward to 2012 and beyond.

Jagadish Iyer – Piper Jaffray

Okay. So how much does this alter your allocation of Project Phoenix, given that you had recently updated in your earnings about you had 58% contracted out, so how much do you think you would be probably likely using it for downstream for Neo Materials? Any thoughts here please.

Mark Smith

I don’t know that we have an exact number Jagadish, but what we do have is a small remaining amount of material that has not been contracted under our phase 1 of Project Phoenix. And if we take a look at the Neo Materials’ capacities within their respective plants, we do strongly believe that we will be able to utilize a good portion of Project Phoenix phase 2 much faster as a result of this transaction. I don’t have any precise numbers. I would prefer to have our integration teams work those issues to get the precise numbers. But we do know at a high level that we will be getting into phase 2 production faster.

Jagadish Iyer – Piper Jaffray

Okay. One other question from my side also is that how much kind of working capital or cash would you guys be comfortable once the entity becomes, once the acquisition closes, that will make a comfort level of cash that you think bear minimum that you need to really have that. Can you give us some color on that, Jim?

James Allen

Yeah, Jagadish. I think similar to Mark’s response to the prior question, I mean, I think that something that we still need to really work through when we evaluate exactly what volumes are going to be going through, the combined entity and what – I think it’s going to just take a little bit more time to work that out.

Mark Smith

I think for the time being, it’s safe to assume that the working capital required by the individual companies is what we will maintain and then we’ll look at that whole area as an additional synergy capture and I think that there should be some very good synergies to capture there namely the working capital on the Neo side, where Neo has had to purchase their feedstocks on literally month-to-month basis and that does bring up the working capital cost pretty good. So I think we’ll find some very good synergies there, Jagadish.

Jagadish Iyer – Piper Jaffray

Okay. And last question, this is for Constantine, Constantine, you have joint ventures in China. So how much of those joint ventures, the output of that is being utilized by you and how much of it is being sold domestically in China?

Constantine Karayannopoulos

I assume, Jagadish that you mean that what we utilize internally is what portion of our rare earth output is utilized by Magnequench?

Jagadish Iyer – Piper Jaffray

Yes.

Constantine Karayannopoulos

Okay. About 20% or so of our neodymium and praseodymium is used internally, is sold from our joint ventures to Magnequench. Magnequench does not buy significant amounts of other rare earths, although some of our newer powders use cerium and lanthanum. So still it’s a relatively small fraction of our output that goes from the performance materials to Magnequench.

However, Magnequench is a net – the company is net by our neodymium and praseodymium. We have a fairly clear set up on in terms of who and how the performance materials sales neodymium to and how – and from whom Magnequench buys its neodymium from. Both divisions are free to sell if – from a promise materials point of view, they’re free to sell to the highest paying customers and Magnequench clearly is motivated to buy at the lowest cost possible. So there is an ongoing relationship there internally between the two divisions, but we – ultimately the objective is to maximize the profitability of the company. However, if push came to shove, we could shift more neodymium production internally for Magnequench purposes.

Jagadish Iyer – Piper Jaffray

Okay. Thank you.

Mark Smith

Thanks, Jagadish.

Operator

Your next question comes from the line of Michael Gambardella with JP Morgan. Please proceed.

Michael Gambardella – JP Morgan

Good morning Mark and congratulations on your transaction.

Mark Smith

Thank you, Mike. Thank you.

Michael Gambardella – JP Morgan

I have a question, in terms of the move now to go into China through this transaction, as you know that the Chinese rare earth prices typically had a big discount to the export prices than the rest of the world, I think they’re probably around 50% of the export prices now. So with moving your product now into China, you’re gravitating towards that lower price on that material. And then the other question I had was your comment about the initial Neo entities of $100 million in EBITDA related to sourcing the Neo facilities in China from California, does that mean $100 million is equated to a lower price than the Chinese are supplying them with right now.

Mark Smith

Let me start out on the price issue, Mike. We have always forecast out of Molycorp that we felt that that differential price between FOB China and in-country China was going to go away and it’s just a matter of time. We still have all of our phase 1 contracts that are in place and we’ll realize those FOB China prices until that congruence occurs. And this will now allow us to move additional volumes of material into the Neo Materials manufacturing and processing system which also has, we think, very good margins because they tend to be in the higher purity niche markets for their materials as opposed to the commodity type materials that you’re referring to in terms of those in-country Chinese prices.

So we’re very comfortable with the Neo Materials profit margins that they realize and with the low-cost production that we can now utilize or soon utilize out of Mountain Pass. We think that it really just boils down to higher volumes Molycorp feedstock going into higher margin applications through the Neo Material system. So we’re pretty excited about that.

On the synergies, we’re looking at available capacity that Neo Materials facilities have in China as they’ve been struggling to find feedstock for those facilities and by simply having a secure supply of feedstock into those Neo facilities we can then capitalize on their high purity niche applications and their outstanding customer relations and contacts, and we believe we will be able to move additional volumes of material into the market.

So that’s where those synergies primarily come from and the customers that both of us have been working with for the last few years have really emphasized their need for a secure supply. So we think that the combination of the companies can really provide that security that people have been looking for.

Michael Gambardella – JP Morgan

And just a follow-up question. Within China, Neo and (audio gap) China into the rest of the world is pushed back into China and when that is Neo’s Chinese operations are lower costs feeds, so I don’t (audio gap) exporting into China when Chinese are going to be of closely impacting all of the rest of world because of new capacity in the West. (Audio gap) cost for Neo without spending the material for Neo?

Mark Smith

Michael, I think you might be on a cell phone and you’re breaking up pretty badly, I didn’t get a lot of what you just said, may I suggest that when we meet on Monday morning next week in New York, we can cover that. The reception seems to be a problem right now.

Michael Gambardella – JP Morgan

Oh, sorry about that.

Mark Smith

No problem, Michael. Happy to answer the question, I just can’t hear it.

Operator

Your next question comes from the line of Daniel Kim with Paradigm Capital. Please proceed.

Daniel Kim – Paradigm Capital

Hi, good morning. Thank you. My question is going to really come from the perspective of Neo Materials shareholders. When I look at this transaction, to be blunt, I’m not surprised, but I’m somewhat disappointed, disappointed from the perspective that Neo’s Board feels compelled that they need to sell the company, and number two, when I look at the valuation, to me given Neo’s, what I view as the depressed valuation at current, doesn’t seem like much of a (inaudible) for Neo’s shareholders.

So at the end of the day when I look at the combination of these two companies, I look at Molycorp stock, which has clearly been under pressure for sometime and I look at Neo, which is not in a combination of cash and stock. Constantine, I need to put you on the spot, but why would Neo’s Board unanimously approve a transaction whereby they would now be taking shares of a company that clearly is lowered on the value chain than yourselves, and as such, what I would view at this count to what I think the true value of the stock is?

Constantine Karayannopoulos

Thanks, Dan. I don’t feel like you’re putting me on the spot, fair question, I couldn’t disagree more with your date, but let me try to answer it. I think this – in terms of valuation, let’s talk about markets in general, and all you have to do is look at our charts and with the exception of a couple of weeks in April, our stock has inflated over 10 bucks, and we have, I mean, as recently as October, we traded below six.

So yes, I do agree with you that the company in turn believes worth more, however, the markets never seem to agree with that for whatever reason, and I think some of the reasons have been the fact that we have not been in control of our raw material supply and this deal clearly solves that problem, and I think, overall it’s good for both sets of shareholders because what’s created here, we firmly believe that is greater than simply the sum of the parts.

Looking Molycorp as a company that’s further down, further back in the value chain, I think it’s the wrong way to look at it because when you look and you, I think, you should be able to reach that conclusion when you look today how the margins break between the mining versus the refining sector in our business, clearly the bulk of the margins are in the mining part. So, yes, it may be closer to the resource in terms of the supply chain, but in terms of bottom line performance that’s probably when you want to be right now and probably in the foreseeable future.

Now, how did the board reach that conclusion? Clearly and as I’ve mentioned in a couple of interviews since last night, the company was not for sale, we were approached by Molycorp, they put an offer on the table that we felt was compelling, it was at a 40% premium, and I can bet you dollars to donuts that had this deal not been done and our shareholders somehow found out that there was a company out there offering a 40% premium to our shareholders for the company and this board having rejected it, I can bet you that we would have been crucified for turning it down and not letting to shareholders decide if they want this deal.

Regardless, there was a process that was followed by the board that was beyond reproach, we looked at all the – we looked at possible alternatives, we concluded that this was a very compelling deal from a financial perspective as well as from an industrial logic perspective and after a long and careful deliberation with a lot of financial advice, we reached this conclusion, I guess our shareholders will have a chance to either agree or disagree with it. But we think this is still a very fair deal for both sets of shareholders and it serves the interest – both of the shareholders, the current set of shareholders as well as the long-term industrial logic behind the combination of the two companies.

Daniel Kim – Paradigm Capital

I appreciate that Constantine. I guess where I disagree is understanding where the share price performance has been. If we look back just six months ago, shareholders voted, to the contrary, where they put $200 million into your companies. At that time the stock price was $10, converting at 13 to 18. So clearly shareholders at that time thought there is a lot more upside and they provided a big boost in terms of where they put their – voting to where their dollars where. So to me it’s not really a question, but I think Neo is really a crown jewel within the rare earth industry and it’s a real shame from my perspective to see it being sold to another entity in this manner.

Constantine Karayannopoulos

Well, Dan, as much as I like to agree with you most of the time, I have to disagree with you on this one. The shareholders, first of all, it was bondholders that came in, last May, June they do have an option and then all the shareholders have an option of staying in or selling at a very compelling premium. I’d be happy to take this offline perhaps, because – over to you Mark.

Mark Smith

All right. Thank you, Constantine.

Operator

This is all the time we have for questions, I would now like to turn the call back over to Mark Smith for any closing remarks.

Mark Smith

Okay. Thanks, operator. I’d like to thank everybody for joining us this morning. I’ll finish this call by going back to what I said at the start which is that we’re very excited about this transaction and the game changing results that we’ll see. We believe that we’re bringing into the Molycorp family the right resources in Neo Materials and that our combination will build shareholder value by combining the best skill sets and capabilities that currently exist in both companies.

The timing is right and we will now be poised to fully implement our supply chain strategy with a level of processing infrastructure that matches the potential production capabilities of Mountain Pass. Both companies share a strong commitment to product quality, customer service, technology, innovation and a corporate culture that focuses first and foremost on the safety of our workers. I’m very excited about this and will continue to communicate ongoing basis. Thank you again everybody and I hope you have a good day.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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