Though few recognized the latest upcoming capital raise as progressive, once again rare earth producer Molycorp (MCP) left analysts digging into their stances as the company announced yet another plan to boost the balance sheet. On Friday, the company priced its debt and stock offering to be issued. The sale would include at least $360 million in convertible senior notes marked at 6% that are due in 2017, and it will be complemented with an offering of at least 12 million shares of common stock priced at $10/share. Assuming that all over-allotments are exercised, the offering could rake the company more than $550 million in additional capital.
As the U.S. owner of the largest rare-earth deposit outside of China, the company has been undergoing a redevelopment of its mine in Mountain Pass, CA estimated to cost $895 million. It had also acquired $230 million in convertible notes marked at 5% when in this last June it bought the rare earth processor now renamed as Molycorp Canada. The heavy burden of the company's cash payment to Molycorp Canada's noteholders prompted the need for additional capital amidst the ongoing redevelopment.
While the progressive long-term picture still appeared intact, the recent capital raise did little to reassure some analysts. Dahlman Rose downgraded Molycorp to a "Hold" from a "Buy" stating concerns that the large capital raise put into question whether the redevelopment project could be completed in time. The analyst continued by stating that he lowered his expectations of the company's future earnings. In doing so, he lowered his guidance to $0.80 and $1.20 in 2012 & 2013 compared to the prior estimates of $1.70 and $3.50.
In direct contradiction to this lowered estimate, the analyst firm Oracle Investment Research raised its opinion of Molycorp in light of the latest capital raise. Citing company valuation and noting that spot prices of rare earth oxides were stabilizing, Oracle raised the company to a "Strong Buy" from "Buy." The firm believed that this was likely to be the last capital raise for the company and that the timing of the company's production ramp-up appeared fortuitous in light of additional production quota restrictions that were expected for 2013. The firm gave a price target of $50.00/share.
Overall, the split decision between the analysts appear to indicate a higher degree of volatility is likely to ensue if it is not yet already underway. Molycorp's stock fell 11.83% to close at $9.84 on Friday to adjust to the declared offering price. With few seeming concerned about the long-term profitability of the company, investors may wish to take advantage of the increased volatility in the short-term. As of August 19, 2012, the bid on the January '14 $8 puts was at a lucrative price of $2.44. Selling put options could be one way to take advantage of the larger premiums. Provided investors are willing to endure the short-term volatility in exchange for long-term patience, such a strategy could prove to be opportunistic.
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Disclosure: I am long MCP.