Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Brian Blackman - Senior Manager of Investor Relations

Mark A. Smith - Chief Executive Officer, President, Director, Member of Executive Committee and Member of Health, Environment, Safety & Sustainability Committee

Michael F. Doolan - Chief Financial Officer and Executive Vice President

James S. Allen - Chief Financial Officer

Analysts

Colin W. Rusch - ThinkEquity LLC, Research Division

Anthony Young - Dahlman Rose & Company, LLC, Research Division

Paul Forward - Stifel, Nicolaus & Co., Inc., Research Division

Jeffrey Kramer

Paretosh Misra - Morgan Stanley, Research Division

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

Molycorp (MCP) Q2 2012 Earnings Call August 2, 2012 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2012 Molycorp, Inc. Earnings Conference Call. My name is Greta, and I'll be your operator for today. [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, everyone. We just released our financial and operating results for the second quarter of 2012. If you have not yet seen the press release, you can find it posted on the Investor Relations section of our website at www.molycorp.com. This call is being webcast, and a replay in an archived form will be available on the company's website. For those of you who dialed into the call, a slide show that accompanies our prepared remarks is available on the Molycorp website as well under the Investor Relations section. For those of you listening by webcast, the slides will be presented in the webcast player. Please note that you need to advance the slides on your own.

Slide 2 indicates our Safe Harbor statements. And as always, we need to advise you that some of the information discussed on this call -- 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.

We also want to caution you that today's presentation includes discussions of adjusted or non-GAAP financial instruments which reflect how the company's management, directors -- management and directors of Molycorp analyze the business on a daily basis. The adjusted measurements segregate out certain noncash items such as depreciation, amortization, stock-based compensation and certain out-of-ordinary items. Internally, Molycorp management analyzes 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 noncash and certain 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 also be found on our website.

On today's call is Molycorp's President and Chief Executive Officer, Mr. Mark Smith; and our Chief Financial Officer, Mr. Michael Doolan.

At this time, I'd like to turn the call over to Mr. Mark Smith, our CEO.

Mark A. Smith

Thanks, Brian, and good day, everyone. Moving to Slide 4. Slide 4 shows the simple agenda for today's call. I'll begin with some highlights for the second quarter, then provide a business performance overview, including a review of our top 3 business priorities for 2012. Michael will then provide details of our quarterly financials. And finally, I'll make some closing comments before opening up the call for questions.

Let me begin by making one high-level comment. As you review our second quarter results, you'll notice that there's a lot of noise that flows through our financials this quarter. A good portion of this noise is related to the acquisition of Neo Materials, and as with any sizable transaction, much of this is clearly to be expected. But once you sift through the noise related to the acquisition, and then you pull back the additional cost of ramping Project Phoenix up, we can cut to the chase. At the bottom line, we essentially had a break-even quarter. On the top line, sales from the legacy Molycorp business fell as a result of lower cerium volumes and lower pricing for rare earths at the commodity level.

What is really interesting to notice is the top line sales contribution from Neo Materials, which we now refer to as Molycorp Canada. Even though this newly acquired business only contributed 19 days' worth of financial performance in our Q2 numbers, it accounted for $46 million on the top line. The reason behind this is that the Molycorp Canada business focuses on highly engineered advanced materials that have maintained much higher margins within the industry as compared to the commodity-based rare earth products. And the logic makes sense. A highly engineered and customized version of a rare earth product commands higher pricing when compared to a commodity-type rare earth product. These advanced materials are uniquely manufactured for individual customer specifications, which leads to long-term, mutually beneficial customer relationships. And perhaps most important, we've identified growth opportunities with these customers that we can fulfill by combining our reliable, low-cost processing capabilities at Mountain Pass with the high-purity engineered materials expertise within Molycorp Canada.

The need for highly engineered advanced materials is essential and we are assembling the infrastructure to ensure that there is a secure supply of ultrapure advanced materials that Molycorp can bring from its mine to the auto, appliance, specialty chemical health care, semiconductor and electronics industries, among others.

If there's one message I can provide to our shareholders, it is this: We are committed to our strategy, we believe in our plan and we are delivering on our goals of becoming the low-cost producer with the highest margin capture. Bottom line, we are on track.

Now let me shift into some of the key takeaways from the quarter, beginning on Slide 6. Production from Project Phoenix in the fourth quarter of this year remains on track. We recorded Q2 GAAP net sales of $104.6 million based on an average sales price, or ASP, of $52.48 per kilogram of rare earth oxide equivalent. We reported a Q2 GAAP loss of $0.71 per diluted share. However, we reported an adjusted loss of $0.03 on a diluted per share basis, taking into account certain noncash out-of-ordinary business expenses and other operational expansion items, as explained earlier.

Molycorp Magnequench, which produces our newly acquired product line of bonded magnet alloy powders, had a record quarter with 1,880 metric tons of alloy powders sold during the quarter.

And finally, we closed the acquisition of Neo Materials on June 11 and are now producing customer -- custom-engineered, ultra high-purity materials from 13 different light and heavy rare earths elements, yttrium and 5 rare metals.

The core operations to our business remains sound and our vision of building the industry-leading low-cost and high-margin capture rare earth products and technology company continues to resonate strongly.

As we cross the midpoint of 2012, we are observing increased stability in customer orders. While we have noted that the second quarter was softer for traditional commodity-type products, certain rare earth markets are showing improvement. For example, the demand for lanthanum products has picked up substantially as lanthanum pricing has settled in a range that is now economical for FCC catalyst manufacturers. In fact, at this point in time, our lanthanum is oversold when compared to our Phase 1 production capacity. This type of stability within our business allows us to focus on continuing to deliver each of our planned milestones.

Turning to Slide 7. I'd like to review our top 3 corporate priorities for 2012. Our number one priority is Project Phoenix. Our number two priority is commercializing XSORBX. And our number three priority is the integration of Molycorp Canada. All of these corporate priorities remain on track.

Starting on Slide 8. With regard to Project Phoenix, let me first highlight some recent safety milestones. In July, Project Phoenix exceeded 3 million work hours without a single lost time incident. Also in July, the Mountain Pass facility operations logged their seventh year in a row without a lost time incident. And our Molycorp Metals & Alloys team in Tolleson celebrated their 15th year without a lost time incident in February. These extraordinary safety achievements are not only indicative of how seriously every Molycorp employee takes the value of safety in our company, they also reflect, in my view, a level of excellence in project management, construction and operations performance that we strive to achieve every day. I could not be more proud of the men and women of Molycorp who continue to work so hard on rebuilding and operating Mountain Pass while ensuring that everyone goes home safely each day.

Not surprisingly, I'm on-site at Mountain Pass frequently these days. For any of you that have recently viewed our fly-over video, it's inspiring to see our team move into the final construction stages for these facilities. Our goal of Phase 1 production is within sight.

Moving to Slide 9. Many of you may recall that we began our sequential start of the Project Phoenix during the first quarter, which included launching operations of our mill, the initial crack, paste tailings production and paste tailings permanent disposal facility. These operations allowed us to begin to reduce a bastnasite concentrate, part of which was to be fed into our legacy production facilities while we simultaneously built up a concentrate stockpile to feed our new Project Phoenix separations facilities once they are operational.

With these accomplishments in mind, I'm happy to report another project milestone, the start-up of yet another major production unit within Project Phoenix. Just 2 weeks ago, our cerium production unit began its transition from construction to production and we are now producing from this unit.

Additionally, we announced last quarter the completion of a natural gas lateral pipeline to supply our combined heat and power plant. That facility is now running on pipeline gas and it is proceeding with full start-up and load balancing operations. This shift to natural gas will help us bring our power costs down, moving from approximately $0.16 per kilowatt hour to less than $0.03 per kilowatt hour. This is also a much more environmentally preferred power generation technology given that it will operate at efficiencies of greater than 80%. Decreased energy costs are one of many technological innovations that will help us achieve our low-cost production position.

Slide 10 shows a photo representation of Project Phoenix, with those facilities shown in green that are either mechanically complete or in operational mode and those facilities shown in yellow that are still under construction.

Slide 11 shows the additional milestones that you will see us accomplish on our way to full Phase 1 production. They are full scale operation and integration of our combined heat and power plant; full scale operation of our multistage cracking facility; solvent exchange and heavy concentrate production, which is literally days away from having feed introduced; rare earth oxide separations; and finally, product finishing. We've moved from managing the construction of Project Phoenix into combined construction and phased start-up operations and we're now nearing the finish of this very large and very complex project.

The commercial scale production from our legacy facilities at Mountain Pass continues to experience pressure on margins. However, we are monitoring our cost of sales and our cost of production very closely while at the same time balancing our customers' needs.

One example of this stems from the natural transition and processing previously stockpiled bastnasite to using the new bastnasite concentrate that we're producing for our Project Phoenix mill today. During the second quarter, we depleted the previous stockpiled reserves of bastnasite. As we neared the bottom of our stockpile, our process engineers faced the challenge of working with a lower quality of feedstock. This lower-quality feedstock negatively impacted our production volume from a yield basis and also required more chemical reagents to be used in production. This is a temporary increase in our variable cost structure. However, we are now processing all new feedstock from our new mill. And as noted many times, as more and more Project Phoenix comes online, we expect our production costs to improve.

Moving on to Slide 12. I'd like to discuss our second priority, XSORBX. In our product introduction and commercialization, there continues to make headway in several markets including municipal wastewater, recreational water and the pool and spa markets. Each of these markets has very different distribution dynamics and our commercialization team has methodically evaluated and developed a target approach for each. As we continue to work with distribution partners, we believe that we'll be able to move product efficiently into these markets, markets in which only Molycorp has the access to this demand. The technical merits and efficacy of the XSORBX family of products speak for themselves, particularly as safe, clean water has come to the forefront of awareness within most key target markets. XSORBX's ability to remove arsenic, phosphorus and excess fluoride, to name a few, is a key advantage as compared to traditional water purification solutions. We believe XSORBX will become a bigger part of our offering next year and one of many growth drivers within our company over the longer term.

Let's review our third corporate priority next. I've touched a bit of the benefits we've already realized with our Molycorp Canada acquisition. But on Slide 13, I'll review a few more key areas of the integration to date. The transition and integration process has been focused on continued examination and integration of our supply chains, share growth opportunities, analysis and qualification of feedstocks and the identification of near-term synergies. Our ability to send products and feedstocks to our new assets in China, which we are already doing, gives us the ability to manufacture highly engineered, customized products, which commonly have purity levels in excess of 4 9s or 99.99%.

Moving to Slide 14. Prior to closing the acquisition, we shipped heavy rare earth concentrate from Molycorp Silmet to Molycorp Canada's Tianjin facility in China for processing into ultra-pure advanced materials. We are now developing plans to deploy these high-purity heavy rare earth separations capabilities in other geographies such as Estonia and/or the United States.

I'd also like to note that as of July 27, our ultra-pure advanced materials facility in Zibo, China has been inspected and determined to meet the environmental requirements set forth by the Chinese Ministry of Environmental Protection.

Also, as previously noted, our Molycorp Magnequench business outperformed all expectations with a record second quarter. One key driver behind our success in these bonded magnet powder markets was restocking of material through the hard disk drive manufacturers' supply chains primarily located in Thailand as recovery from the floods last year continues. Though centered in bonded magnet, manufacturers have continued to discuss favorable long-term growth forecasts and we believe we are well-positioned to supply both of these key magnetic markets and their expected growth in demand.

The Molycorp acquisition closed less than 2 months ago, and we are in a much better position to service global customers in both current and new markets. We have facilities in 11 countries and have over 2,650 employees worldwide.

Before I turn the call over to Michael, let me provide an update on 2 key areas where I'm commonly asked questions, that being heavy rare earth and our Project Phoenix capital budget. Our multipronged heavy rare earth strategy, which we announced in September of 2011 is shown on Slide 15. With the addition of Molycorp Canada, we have added a powerful new comment -- component to this strategy: the ability to produce today and bring to market today separated high-purity rare earth materials from the heavy rare earth concentrate that we produced at Molycorp Mountain Pass and Molycorp Silmet or purchased within China. We have been and will continue to produce material amounts of heavy rare earth concentrate from our legacy Mountain Pass operations, which will further increase as Phase 1 production commences in Q4 and even more so as Phase 2 capacities are established in 2013. We believe this incremental production of high-purity rare earth products will be welcomed by the market, but we are pursuing additional heavy supply, even further through the other 4 parts of our heavy rare earth strategy.

The other 4 parts are: first, the recycling of magnets and phosphorus from things like compact fluorescent lightbulbs and LED lights; second is through development and market adoption of technologies that operate with smaller amounts of heavy rare earths; third is through utilizing our new co-cracking technology to process rare earth-bearing minerals, including both bastnasite and monazite at Mountain Pass as well as minerals from other locations with attractive concentrations of heavies; and fourth, identifying and developing new rare earth resources.

With regard to number four, our current exploration program is evaluating 4 separate deposits located around the world. At this point in time, we are likely pulling back the efforts at one of these sites, which is located within close proximity to Mountain Pass. While conclusive lab analytics remain pending, development stage drilling has provided field level information that directionally indicates a developable but a marginal deposit. However, we are continuing exploration efforts at the other 3 sites that we believe have better prospects.

The other area that I want to discuss is our current Project Phoenix capital budget, shown in Slide 16. As indicated in the previous quarter's financial results call, we announced the implementation of cost reduction measures to help mitigate the impact of several potential adverse cost trends related to Project Phoenix. Our capital budget plan for the engineering, procurement and construction, or collectively EPC, of project Phoenix Phases 1 and 2, remains at $895 million. For the remainder of the year, capital expenditures related to Project Phoenix Phases 1 and 2, the commissioning and start-up and other capital projects at our Molycorp Mountain Pass facility are expected to be approximately $289 million on an accrual basis. We expect to fund all of our capital needs from available cash balances, anticipated cash flow from operations and other financing arrangements. Michael Doolan will provide additional details, but we are proactively pursuing alternative financing to ensure these capital expenses and other cash requirements are funded regardless of market conditions.

In short, we remain focused on building the rare earth industry-leading, low-cost and high-margin capture advanced materials company. Our corporate priorities remain on track, and we are committed to our vertical integration strategy. We are only a couple of months away now from the start of Project Phoenix Phase 1 production levels and have assembled the infrastructure to move our low-cost reliable supply of feedstock into the production of high-purity advanced materials.

Now let me turn the call over to our Executive Vice President and Chief Financial Officer, Michael Doolan, for a detailed review of the quarter.

Michael F. Doolan

Thank you Mark, and good afternoon to everyone. Today, we will review our quarterly performance on a consolidated basis followed by segment details. We'll then review our balance sheet and capital requirements.

But first, as I'm sure you can all appreciate and as Mark has mentioned, there's a certain amount of deal noise and the impact of purchase accounting related to the recent acquisition of Molycorp Canada included in this quarter, and I will discuss these as we go through the presentation.

Since the results of Molycorp Canada are only included for 19 days in this quarter, it has been treated as one separate reporting unit while retaining the traditional Molycorp 3 operating segments: Molycorp Mountain Pass, Molycorp Silmet and Molycorp Metals & Alloys or MMA. As the company further integrates Molycorp Canada into existing operations, we anticipate reorganizing the business units into different reportable segments in future periods. A preview of the new operating segments is available on Slide 18.

We are moving away from the current geographic categorization into a grouping by, for lack of a better name, by functional product expertise. And you can anticipate our future statements to reflect 4 operating segments: resources, chemicals and oxides, magnetic materials and alloys and rare metals. Our traditional product disclosure by revenue and volume will change as a result of incorporating Molycorp Canada's product portfolio. We realize -- we believe that this reorganization better reflects our diversified operations and will offer increased transparency into financial and operating performance.

But as a reminder, all year-over-year comparisons include partial period results related to our acquisitions. MMA was acquired in April 15, 2011, and contributed to a partial second quarter in 2011.

Molycorp Canada, as you heard, was acquired in June 11, 2012, and as mentioned, contributed 19 days of financial results to this current year's period.

Moving on to Slide 19, and as Mark noted, we reported $104.6 million in consolidated company sales during the second quarter as compared to $99.6 million during the second quarter of 2011. The increase is related to higher volumes and a product mix, reflecting generally higher sales prices of Molycorp Canada products, offset by lower pricing within our other oxide-based products.

On a consolidated basis, we sold 1,194 metric -- net metric tons of rare earth oxide equivalent products at an average sales price of $52.48 per kilogram. We also sold an additional 93 metric tons of rare metals at an average sales price of $187.85 per kilogram. We note an increasing average sales price, or ASP, sequentially from the first quarter as a result of an improved product mix including higher-margin, value-added custom engineered materials.

At this point, I would like to summarize the deal-related accounting adjustments. As part of our GAAP purchase accounting, we are required to allocate purchase price based on the fair value of Molycorp's assets and liabilities acquired. As a result of our preliminary allocation, we have stepped up the value of finished goods inventory by approximately $24 million and allocated another $480 million to intangible assets. The result of this is that in the first turn of acquired finished goods inventory, there will be a minimal margin and amortization expense on intangibles will increase by approximately $12.5 million per quarter.

As we discuss the financials, I will direct your attention to our consolidated product sales table on Slide 20. And then on Slide 21, second quarter consolidated cost of sales were $108 million -- $108.7 million compared to $42.9 million in Q2 2011. Consolidated gross margin percentage for the quarter was negative $4.1 million. However, included in that number was $8.4 million increased cost of sales related to the stepped-up inventory mentioned earlier that was sold in the 19-day period. The majority of the remaining $15 million of step-up will flow through cost of goods in Q3 as this inventory turns over.

Pressure at the margin line continued as a result of lower production volumes and the transaction costs associated with Molycorp Canada. Cost of sales also included inventory write-downs of $19.5 million.

You will notice within our income statement that we have now separated the depreciation and amortization portion of our cost of sales, and we will continue this presentation on a go-forward basis. Included for the 19 days was approximately $1 million of the increased amortization related to the acquisition.

Now turning to operating expenses. Selling, general and administrative expenses, excluding depreciation and amortization and accretion expense for the quarter, was $23.1 million compared to $10.5 million in the second quarter of 2011. Corporate development during the quarter was $14.9 million compared to $2 million in 2011. The increase in corporate development expenses was primarily related to the acquisition of Molycorp Canada. Research and development, or R&D, during the quarter was $6 million compared to $1.8 million in 2011. We anticipate continuing the separation of R&D expenses on our P&L on a go-forward basis. Corporate development will be broken out when material.

The base level of operating expenses for the second quarter, though, are in line with our expectations and outlook as presented for the full year 2012. We are continually evaluating ways to reduce our operating and cash costs and believe that we have made the appropriate investments to leverage our Project Phoenix infrastructure down the road.

Now moving below the EBIT line on Slide 22. We observed net other expenses of $31 million, primarily the result of a loss on a contingent forward contract to purchase Canadian dollars related to the acquisition of Molycorp Canada.

The company reported a GAAP net loss of $66.9 million. The more relevant measure is net income or loss attributable to common shareholders, which reflects dividends on our convertible preferred stock. Our net loss attributable to common shareholders is $70.4 million or a loss of $0.71 per share, basic and diluted. Removing out-of-ordinary costs, business expansion items and certain noncash items yields at a net -- an adjusted net income of roughly break-even or an adjusted net loss attributable to common stockholders of $3 million, which is after deducting the preferred share dividend or an adjusted non-GAAP loss of $0.03 per share -- diluted share.

We have outlined all of the adjustments that Brian mentioned within our reconciliation table in this afternoon's press release. The majority of adjustments surround onetime transaction costs related to the acquisition of Molycorp Canada. Other significant adjustments included inventory write-downs and write-ups in fair value in Molycorp Canada's inventory that was sold in the 19-day period.

Moving on to Slide 23. We had broken out performance by operating segment. As a reminder, the consolidated financial operating results are presented on a net basis, which removes intercompany sales. Discussion of segment margins, though, is prepared on a gross basis. Gross margin at Mountain Pass for the second quarter was negative 44.7% as compares to a gross margin of 71.5% during the second quarter of 2011. The decrease in gross margin is a result of increased variable and fixed costs, a shift in product mix and decreased pricing for certain products. During the quarter, Mountain Pass produced 670 metric tons of REO equivalent product compared to 815 metric tons during the second quarter of 2011. Production was slightly lower in the quarter as we transitioned from stockpiled bastnasite feedstock to freshly milled bastnasite concentrate.

Production at Silmet was 440 metric tons of REO equivalent during the quarter as well as 181 metric tons of rare metals, slightly higher than the prior quarter. Cost of sales at Silmet was $39.5 million, higher than the prior year period as a result of increased sales costs and inventory write-downs.

Gross margin at Molycorp Metals & Alloys was negative 33.6% during the quarter. Total production during the period was 63 metric tons of rare earth alloys containing 25 metric tons of REO equivalents. In addition, MMA facility produced 6 metric tons of other specialty alloys.

And as a reminder, the 2-year supply contract with Santoku Corporation to supply certain rare earth alloys at prices equal to feedstock costs plus the applicable product premium will come to term in April 2013.

As of June 30, our cash and cash equivalents balance decreased to $369.3 million following the acquisition of Molycorp Canada. The year-to-date change in cash flow from operations was negative $64.4 million.

During the 6 months, we raised net $635.4 million to finance activities and spent over $1 billion in investing activities. Roughly $404 million of these investing activities were related to cash, capital expenditures during the 6 months while $591 million of cash for investments net of the cash acquired went to Molycorp Canada acquisition. Separately, we invested $14.8 million into our magnet production joint venture during the quarter or actually -- sorry -- during the 6-month period.

As Mark indicated, the company conducted and completed an extensive formal review of Project Phoenix capital -- of the capital expenditure budget. The result of that analysis shows that the company anticipates no material change to its Project Phoenix EPC capital budget of $895 million, assuming that the measures it has implemented to mitigate certain adverse cost trends are successful. Mark also mentioned the $289 million of anticipated additional capital for Project Phoenix and higher Mountain Pass requirements. Additional capital expenditures for projects related to the balance of the Molycorp operations, which now includes Molycorp Canada, are expected to total approximately $17 million for the balance of the year. To ensure that we have more than adequate cash resources to finance our continued growth, as Mark mentioned, we are exploring a number of financing alternatives, such as potential equipment lease arrangements, asset-backed revolving credit facilities and other debt financing arrangements.

In the meantime, we continue to monitor and control costs and manage working capital levels.

And now just before I turn the call over to Mark, I would just like to add that I'm certainly very pleased to be now part of the Molycorp family and even more exciting is the prospects of the combined organization going forward, and I certainly look forward to reporting back in subsequent quarters to you.

So I'd now like to turn the call over to Mark.

Mark A. Smith

Thanks, Michael, and we certainly welcome you aboard. Continuing on Slide 24, our company and our Board of Directors remain committed to our strategy and we believe that continued execution will allow us to achieve both our near- and long-term goals. As we look to some of the near-term goals for the remainder of the year, we are observing increased demand for our lanthanum, neodymium and praseodymium products. When you factor in the ability to move material from Mountain Pass into our Molycorp Canada supply chain, coupled with existing contracts, we are oversold for these product families versus our Project Phoenix Phase 1 production level.

Concerning production, we are reiterating our 2012 production guidance of 8,000 to 10,000 metric tons of REO equivalent across our Mountain Pass, Silmet and Tolleson operating segments. Our XSORBX commercialization team is on track with its development efforts, and our 2012 target of selling 1,000 metric tons of XSORBX has not changed. Market pricing of rare earth oxides has decelerated its downward curve of 2012, a positive sign, though it is premature to call it a bottom. Near term, customers continue to work through their raw material stockpiles, although each industry segment that uses rare earth elements offers case-by-case insights. We are prepared for continued softness in rare earth oxide demand over the next quarter as customers, primarily in Japan, continue to work through their inventories of stockpiled material. We do not see this as a long-term issue. And as stockpiles are reduced, we believe Molycorp will be the beneficiary of new market demand with its reliable supply capabilities.

On Slide 25, I'd like to discuss some recent market developments in China, which all point to relatively constricted future supply and upward pricing pressure. Our internal intelligence suggests that we will continue to see forced industry consolidation and that Chinese production quotas will remain flat in 2013 at approximately 90,000 to 95,000 metric tons per year. The recently announced rare earth commodity exchange, if successful, could cause upward pressure on prices and we expect to continue to see increasing production costs in China, which are now estimated to be as high as $15 per kilogram. As a result of stricter government mandates, we're seeing tougher environmental regulation, and illegal mining operations remain on the decline. And in another observation, while the WTO case against China by the United States, Japan and EU continues forward, we do not see any outcome of that legal challenge affecting our sales in any material way.

On the upside of these trends for our business, now that we are integrating Molycorp Canada, we have expanded our customer base considerably and remain increasingly insulated from base oxide pricing as we move more and more of our materials into high-purity engineered materials.

In conclusion, we are on the cusp of bringing a decade of innovation, development and hard work by the Molycorp family to fruition for our company and for our shareholders. The next 6 months are perhaps the most exciting and challenging for our company as we ramp up Project Phoenix and fully integrate Molycorp Canada. We remain focused on achieving our goals, and we look forward to bringing our Project Phoenix Phase 1 production online this fall.

We'll now open up the call for questions, operator.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Colin Rusch with ThinkEquity.

Colin W. Rusch - ThinkEquity LLC, Research Division

Can you talk about the number of customers for XSORBX that you have right now and the magnitude of the number of prospects that you're working with at this point?

Mark A. Smith

Yes. Colin, they're almost 2 -- and by the way, there's kind of 2 ways that we have to look at this. When we first started moving XSORBX out into the market, we were really be doing it on a customer-by-customer basis. And what we've discovered is, is that, that's not something that our company understands very well and so we've really moved our sales of these materials into more of a distributor-based program and so the numbers aren't very comparable. But we did have over 25 individual customers for this material last year and early this year. I don't know what the current numbers are because it's very different and we have distributors in between who oftentimes shield that information. But it is a growing list.

Colin W. Rusch - ThinkEquity LLC, Research Division

Perfect. And can you talk about the time line for some of these alternate financing arrangements and the magnitude of what you're attempting to do with finding some other sources of capital or just freeing up some of the capital that you do have?

Michael F. Doolan

Well, we're currently in discussions with a number of our traditional bankers. We actually hope to have something in place before the end of August and really we would be operating within the limits of the trust indenture. So I mean, that's really kind of the bookends that will govern what we can do.

Colin W. Rusch - ThinkEquity LLC, Research Division

Okay. And can you give us a sense of kind of where those conversations are at this point? I mean, that's fairly soon. I mean, is it going to be pretty restrictive in terms of what you can do from an operational level or what are you expecting in terms of the impact on your day-to-day operations?

Mark A. Smith

I would say, Colin, that our goal is to make sure there are no impacts, particularly on the capital side relative to Project Phoenix. So that's our goal. These conversations, several of them have actually been going on for several months, so they're becoming quite mature. And as Michael indicated, we hope to have some of these measures in place as early as the end of this month.

Operator

And your next question comes from the line of Anthony Young with Dahlman Rose.

Anthony Young - Dahlman Rose & Company, LLC, Research Division

Just to -- I'm drilling on the financing just a little bit more. Was just wondering, I mean, are you guys going to attempt to limit that to debt or are all your options open?

Michael F. Doolan

Well, certainly, our preference is debt. We will keep all of our options open. But certainly, the discussions to date are all debt-related. As I've mentioned in the asset-backed lending and so forth, we've had discussions, which are becoming more mature as we get contract completion with the number of the facilities that have been indiscernible] leaseback.

Anthony Young - Dahlman Rose & Company, LLC, Research Division

And then with respect to the $289 million, I know it gets difficult to parse out the differences between Phase 1 and Phase 2, is there any possibility that you would just complete Phase 1 if these negotiations with lenders or with banks didn't come to fruition and you just produced the 20,000 tons for a period of time and then reevaluate Phase 2 or come back to Phase 2 once operating cash flows have gotten to a point where you get funded internally?

Mark A. Smith

I think the answer to that, Anthony, is that we would probably -- and not probably, we will look to the discretionary capital side of the project list first, trying to protect Phoenix as much as possible and making sure that we finish mechanical completion for Phase 2 production capacity by the end of this year. It is an option that we can elect if we want, but our goal is to make sure that we get this project done.

Anthony Young - Dahlman Rose & Company, LLC, Research Division

Okay, great. And then you talked about $46 million for Neo Materials or Molycorp Canada for the 3 weeks. Can you tell us what the revenue was for the entire quarter for that -- from that division?

Mark A. Smith

We happen to have the ex-CFO here.

James S. Allen

For the second quarter, it's $205 million.

Operator

And your next question comes from the line of Paul Forward with Stifel, Nicolaus.

Paul Forward - Stifel, Nicolaus & Co., Inc., Research Division

You mentioned in the press release that you think that the cash from operations for the rest of 2012 will be less than you had originally anticipated. Looking at the second quarter cash from operations, that was a negative $80 million figure, if I'm calculating that correctly, based on the first and the second quarter reporting. I was just wondering if you could -- there are just so many moving parts here with the Neo integration and the start-up at Mountain Pass. I was just wondering if you could -- and lower rare earths pricing, of course. Wondering if you could give us a little bit of sense of when you're looking at your projections of cash from operations in the second half of the year, how do you think that's going to compare on a sequential basis compared to the second quarter negative figure?

Michael F. Doolan

Certainly, the same pricing pressures are going to exist. I think Mark would say they're going to -- they're essentially stabilizing. I would suggest, though, that you will actually see an increase because you will get the full impact of Molycorp Canada. And there, we have traditionally produced fairly stable cash flows and actually increasing cash flows in a falling market as some of that working capital comes out of the balance sheet. So to answer your question, I would expect improved operating cash flow in the subsequent quarters notwithstanding the current pricing environment.

Mark A. Smith

Correct.

Paul Forward - Stifel, Nicolaus & Co., Inc., Research Division

Okay, that's good. And then also, looking at some of the segment data, I was just wondering if you could give us a little bit of insight into the -- looking at the external sales from Mountain Pass during the second quarter, it dropped down to $16.5 million. The previous quarter had been $44.5 million. And I note now most of that's probably just simply pricing, but I was wondering if you could talk about whether there might have been some -- whether there were some other issues to think about beyond just simply pricing as to why that drop occurred.

Michael F. Doolan

It was a slight drop in volume quarter-to-quarter as well. I think that we mentioned as we moved from the stockpile into the production material...

Mark A. Smith

The fresh material.

Michael F. Doolan

The fresh material. So it really is a combination of price and volume drops -- slight volume drop.

Paul Forward - Stifel, Nicolaus & Co., Inc., Research Division

And would you expect those, some reversal of that in the second half of the year compared to the numbers that we saw in the second quarter or is that probably just until we actually get to Phase 1 full production coming, can we anticipate that the sales be around that level?

Michael F. Doolan

I would suggest it is back-end loaded, but as Mark mentioned, at this point, we're still sticking to the production targets of 8,000 to 10,000. So I think we're quite confident that we should be there. So yes, it'll be better in the second half.

Mark A. Smith

Yes, so, this, Paul, moves around a little bit as well due to product mix. There can be one quarter where you're selling more cerium and lanthanum and a little less NdPr. And then the next question quarter, your NdPr will pick up and your cerium may go down. So you get a little bit of fluctuation from that as well.

Paul Forward - Stifel, Nicolaus & Co., Inc., Research Division

Can you talk a little bit about the -- I mean, certainly that's good to see the 8,000 to 10,000 tons guidance unchanged for the year, but I was wondering if you could talk a little bit about how that's -- whether there's going to be some significant lag between the actual -- the production start-up at Mountain Pass and then the actual revenue recognition as the material is placed into the market with some lag.

Mark A. Smith

Yes, I think that's just a given. Once you produce these materials, there's a lag to get them packaged and out the gate. To a large extent, these products then move overseas, which takes time. And then once the customer receives it, they have a period of time in which to pay their bill. So it's kind of a natural course of business and we will see that delay. I don't think there's anything abnormal about it. It's very, very normal.

Michael F. Doolan

No, we bake that lag into our -- the models that we've been referring to, so we don't anticipate cash flow until the latter part of Q1 and into Q2.

Paul Forward - Stifel, Nicolaus & Co., Inc., Research Division

And well, just lastly, you talked about Phase 2 and really, so far, no real change to the overall CapEx budget or necessarily the timing of the startup of Phase 2. I was just wondering if you could talk a little bit about assuming that you secure the necessary customer commitments for Phase 2 and you secure the financing here to whatever you need to complete Phase 1 and then proceed into 2013. I was just wondering if you could talk about the -- as it stands right now, when would you expect during 2013 some of the Phase 2 volumes we would actually be able to see that production?

Mark A. Smith

Well, Paul, as you know, we have a goal for 2012 of contracting all Phase 1 production to the rest of the world and this was prior to our acquisition of Molycorp Canada. So theoretically, if we achieve that goal, and I have every reason to believe that we will, then we'll take that 100% contract level -- and remember, there is a wedge that we've reserved for XSORBX. But if we take that 100% contracting level and then we feed the Molycorp Canada infrastructure as well, we will immediately be into at least a portion of our Phase 2 capacity. And the beauty of the Project Phoenix design relative to Phase 2 is that we can really move that production level up and down as the market demands and we don't really suffer any efficiency loss as a result of that.

Operator

[Operator Instructions] And our next question comes from the line of Jeff Kramer with Morgan Stanley.

Jeffrey Kramer

Just with regards to the financing you're looking to raise, can you give us the numbers, how much you're looking to raise or what the shortfall is that you need to plug?

Michael F. Doolan

I mean, again, I think we'll be opportunistic in terms of what's available at what rates. I mean, the models, again, it's there. It's all scenario-based depending on price. I mean, our models suggest we don't have a cash issue. But I don't think that would be prudent to advance on that. And as I mentioned earlier, we're really -- I mean, we're constrained in terms of what the indenture will allow for, so -- and there's a number of buckets [indiscernible] within the indenture and we'll work within those, so that's really the cap that we would be governed by. Obviously, on an asset based, we would be governed by advance rates, our inventory receivables and so forth. So at this point, as Mark said, we're exploring all options. And on leaseback of equipment, again, it's really all predicated on the value of the equipment and the advance rate that they'll give us.

Jeffrey Kramer

Okay. And I guess if prices remain where they are right now, would you help us out with an EBITDA forecast for the second half of the year or do you have some kind of look forward on where you might expect earnings? I guess when I look EBITDA with a lot of the add-docs [ph] that you presented in the release, I come up with about $17 million. If your run rate 2Q for Neo gets about $37 million, I mean, is that kind of we're looking at for the third and fourth quarters? Or can you just kind of touch on that?

Michael F. Doolan

As a new kid, I'm not going to stick my neck out, but I'll look at Mark. I mean, I don't traditionally we've provided that kind of guidance, but I'll...

Mark A. Smith

We have not provided that kind of guidance, Jeff, and I'll just apologize for that. But we're of the opinion that until we get Project Phoenix up and running, the EBITDA portion of our business is very hard to predict with any accuracy. So what we do predict is the volume of production that we will put out or make as a company and that's as far as we're going on predictions at this point in time. I will, however, say that our goal, once we get Project Phoenix up and running, will be to provide a lot more transparency into expected earnings with price assumptions involved and production assumptions. So we are going to go that direction, but I just think at the stage we are, that's a very difficult parameter to put out on the table.

Michael F. Doolan

I believe you will also see, as I mentioned, more sort of operating clarity as we migrate to the new operating units that [indiscernible].

Jeffrey Kramer

Okay, I understand. Can you maybe just touch on where, for you, the basket of production you see for the balance of the year? Where you see pricing per kilogram and where you see cost -- maybe cost per kilogram trend in the second half? I know you have some production ramping up. Do you have some goals, and maybe for the fourth quarter particularly, would you achieve the run rate towards the 19,000?

Mark A. Smith

Let me first say that the production itself will be strictly in line with the natural distribution of the rare earth elements in the ore body at Mountain Pass. So that's pretty straightforward. The next part is very difficult to answer because there's a huge difference between where Molycorp was prior to the acquisition of Molycorp Canada versus where we are today. Where we are today is that we have the infrastructure in place and an outstanding marketing system in place that can move high-purity engineered materials out into the marketplace, which are not reflected in any Metal-Pages or Asian Metal's price sheets that you can look at. And just to provide a little more substance on that, and I won't provide exact numbers, but the average sales price for rare earth-based products out of Neo Materials prior to the acquisition was over $100 per kilogram. That's significantly above what we reported on a combined basis for the second quarter, which was slightly over $50 per kilogram. So I provide those 2 numbers just so you can get a sense of the improvements that we expect as we move into this high-margin capture portion of our business, otherwise known as Molycorp Canada.

Jeffrey Kramer

Okay, just a quick clarification on that last point. I was just actually thinking specifically of Mountain Pass where -- on the cost front, if you could?

Mark A. Smith

I'm not sure I follow, Jeff.

Jeffrey Kramer

Just thinking about cost per kilogram at Mountain Pass, where you see that trending to in the second half of the year with the increased production?

Mark A. Smith

What I've said out in the market is, is that we're probably going to be something in the $10 to $12 per kilogram range by the end of this year. Once we have the CHP in full force and effect, producing our own power, once we have the production rates up high enough to spread units of production over fixed costs more adequately, but we will be having to purchase reagent materials through the end of this year yet. So we won't get that full cost savings that we will realize ultimately with having our own Chlor-Alkali unit, but we'll see a significant difference compared to today.

Operator

And your next question comes from the line of Paretosh Misra with Morgan Stanley.

Paretosh Misra - Morgan Stanley, Research Division

Just a question on the Chlor-Alkali unit that you just mentioned, what's the time line on that? Is that still early next year or is that one of the items that you might, if you have to cut CapEx so that so that could get deferred for later?

Mark A. Smith

Let me answer the first part. The first part is, is that unit is scheduled to be in production about the 1st of March. It's late February, early March. So it's soon is the point. I think we're probably very close to the point where that would be a very difficult item to do anything with in terms of capital savings because the majority of the hard assets associated with that unit are actually on-site already and it's really just a matter of labor to finish it out. So it's certainly an option, but I'd say not a high probability.

Operator

And your next question comes from the line of Michael Gambardella with JPMorgan.

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

I have to say, Mark, I'm a bit shocked at this call because it seems to be a total disconnect from what the management is saying and what you put down in your outlook where you say cash flow will be less than we expect. And then you say we will need to secure additional financing for a substantial portion of our remaining 2012 CapEx of $300 million. And I'm just a little bit confused by some of the commentary, which really doesn't seem to take that statement that carefully. And I'm just wondering you raised debt a few months ago at around 10% coupon when things were a heck of a lot better and you didn't have this information out there. And you issued equity to Molymet a few months back, which was at $31, but they're down over 50%. I'm just wondering where are you going to raise the capital to finish the project? And in terms of finishing Phase 1 versus Phase 2, I thought the way you had it planned, the CapEx was -- and the equipment integration was integrated. The Phase 1 and Phase 2 were put in together so you could optimize the economies of scale of building this thing, so you really can't just build Phase 1 and then stop at Phase 2. So I'm just concerned here because it just seems like the outlook section of your release sounds much dire in terms of the company's ability to actually finish the project. And given the financings that you've already done, I'm just wondering at what cost are you going to be able to finance this?

Mark A. Smith

Let me address the Phase 1, Phase 2 construction piece and then Michael can address the finance piece. The Phase 1, Phase 2, to a large extent, is interrelated, Mike, just as we've indicated before, but it doesn't mean it's 100% integrated. An example of that would be our CHP unit, the combined heat and power plant. We have a unit 1 and we have a unit 2. We don't need unit 2 to be built immediately. We can use unit 1 between now and whenever we decide to build unit 2 and we've kept our electrical connection with the local utility as a backup, so we've got that option available to us and that means we don't have to install 2 extra turbines plus the backup generators that have to go with it. So there are multiple pieces in a complex project like this. So there are still things that can be managed if we need to manage them, but our goal is to finish that construction. I want to emphasize that. And then Michael, I'll have you address the finance.

Michael F. Doolan

Yes, certainly. And I think -- I mean, part of the disconnect, maybe I'll apologize for that, the former Neo perhaps were a little bit overly conservative. But in terms of raising the finance, I mean, first of all, with the acquisition of Neo Materials, now Molycorp Canada, it brings a whole new the asset base. I mean, prior to the acquisition, we would have been a DD credit rating. We have substantial assets, as well as the inventories and so forth within the existing Molycorp group. So in terms of looking at asset-backed lending, there is sufficient inventory, receivables and so forth globally that we're looking to negotiate advance rates and so forth on. As far as the equipment leaseback, I mean, clearly there is substantial pieces and valuable equipment now at Mountain Pass related to Project Phoenix. So there are certainly a number of options out there that, as we said, we are exploring. So the comment I made earlier about cash flow being better in the second half than the first, I think that's true because of Molycorp Canada. But the forecast that Mark worked on originally had different pricing assumptions, which unfortunately have just not come to pass. I mean, we all see what's happening to the rare earth pricing. So I think what we're saying is we certainly have sufficient cash flow for our operations, but it is a big $289 million plus some others. So we just want to make sure that we do have the adequate cash resources to cover that off. And we'd rather do it now than to be in a place when you're really strapped and then -- and the whole point is we don't want to make some of those hard -- being in a position where we have to make those hard decisions to defer Phase 2 or what have you. So I think right now, we're talking to former lenders of materials that know us well in former geographies and we're now obtaining them on what Molycorp also adds to the -- there's a very valuable resource there, so...

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

Well, let me ask you this. In your statement later on in the outlook where you say, if we are unable to raise sufficient capital, we will implement a short-term business plan for 2012 where you will cut discretionary, nondiscretionary CapEx. How much can you cut?

Mark A. Smith

On the discretionary side, $75 million, I think, is probably an accurate number. And then on the Project Phoenix side of things, Michael, I would have to talk to our Project Phoenix team to get a better feel for that. But I mean, a cogen unit -- do you remember what that was, Jim, $50 million? I mean just as an example, $50 million to $75 million.

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

I mean I think the cogen unit was supposed to be like $170 million, wasn't it originally?

Mark A. Smith

No, I think that's too high. I think that the cogen unit in total for both units was probably closer to $100 million to $120 million.

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

But you originally said without -- I mean, without the cogen unit, you're on the very end of the power grid to L.A. and you can't afford to do that, have any interruption.

Mark A. Smith

Agreed, Michael. And if the goal here is to try to point out everything like this, then we probably ought to take it off-line because this is going to go on for a long time. But we are on the end of the grid line and that's why we want to put CHP in because it was actually primarily driven on reliability concerns. But what we can do with -- we have extra power associated with the unit 1, so we can feed part of the Phase 2 operations with the power from unit 1. And then we can also direct the local utility power to the units that don't require the super high reliability like solvent exchange. So the wonderful thing about this whole Project Phoenix that we're putting in is that we really thought about all of these things far in advance so that we could build flexibility into it and we have a lot of different options that we can use.

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

What are the big cost overruns that you seem to be having here then for these shortfalls in funding?

Mark A. Smith

I don't think that we're talking about any cost overruns, Mike. I think when we take a look at what we've said in the past, we want to use our existing balance sheet, the finances that we've raised and operating cash flows. When we model out different scenarios associated with that, there are cases where the cash flow is positive the whole time and there are cases when it's negative. And so what we want to do, as a prudent business measure, is to make sure that we are addressing these matters on a proactive basis in advance so that we can continue to do exactly what we said we're going to do.

Operator

Thank you very much. This concludes the day's conference. Thank you for your participation. You may now disconnect. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Molycorp Management Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts