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Molycorp (NYSE:MCP)

Q3 2012 Earnings Call

November 08, 2012 4:30 pm ET

Executives

Brian Blackman - Senior Manager of Investor Relations

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

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

Analysts

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

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

Paretosh Misra - Morgan Stanley, Research Division

Bruce Klein - Crédit Suisse AG, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Molycorp Earnings Conference Call. My name is Derick, 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 Mr. Brian Blackman, Senior Manager of Investor Relations. Please proceed.

Brian Blackman

All right. Thank you, operator, and good day, everyone. We just released our financial and operating results for the third quarter of 2012. Our press release is posted on the Investor Relations section of our website at molycorp.com. This call is being webcast, and a replay will be archived on the Company's website. For those of you who dialed in to the call, a slide show that accompanies our prepared remarks is available on the Molycorp website as well, in the Investor Relations section, of course. For those of you listening by webcast, the slides will be presented in your webcast player. And please note that you need to advance the slides on your own.

During the course of this call, we will make forward looking statements, and I direct you to Slide 2 for our disclaimers. All statements that address expectations or projections about the future are forward-looking statements. Although they are -- they reflect our current expectations, these statements are not guarantees of future performance and involve a number of risks and assumptions. We urge you to review Molycorp's SEC filings for a discussion of some of the factors that could cause actual results to differ materially. We will offer -- we also refer to non-GAAP financial measures, and you can find reconciliations to the most directly comparable GAAP financial measures in our earnings release posted on our website.

Joining us on today's call is Molycorp's President and Chief Executive Officer, Mark Smith; and our Executive Vice President and Chief Financial Officer, Michael Doolan. Let me now turn the call over to Mr. Mark Smith.

Mark Alan Smith

Thanks, Brian, and good day, everyone. Let me start by noting a few highlights of our financial performance for the quarter, which you'll see summarized on Slide 4. We reported net revenue of $205.6 million, a 49% year-over-year increase and a 97% increase over the previous quarter, during which we owned the former Neo Materials, now called Molycorp Canada, for 19 days.

We generated positive cash flow from operations of $17.2 million. We sold 4,391 metric tons of product across our business segments, including 2,768 metric tons of rare earth oxide equivalent products at an average sales price of $43.45 per kilogram, 1,527 metric tons of bonded magnet powders and alloys at an average sales price of $48.98 per kilogram, and 96 metric tons of rare metals at an average sales price of $269.22 per kilogram.

We consider these results to be favorable in light of the current global economic environment. Several of our customers continue to work to deplete large volumes of stock piles, and we are now seeing signs that customers are coming back into the market, which is very positive going forward.

Michael will provide more details on our Q3 financial performance. For my part, I thought it would be most helpful if I address the top 5 areas where we get questions.

Turning to Slide 5. The first area is the progress we're making on Project Phoenix, our top corporate priority. Let me start by saying that I've never been more proud of what our team has accomplished in a single quarter, especially in terms of how this team has worked to overcome every single obstacle in our path to achieving Phase 1 production in the fourth quarter, which we are absolutely on track to deliver.

As you can see on Slide 6, we are well into ramping up operations across the entire project. To date, we have succeeded in bringing 80% of our new facilities at Mountain Pass up to or greater than Phase 1 operational capabilities. These include mining, crushing, milling, floatation, paste tailings processing, paste tailings disposal, combined heat and power production, heavy rare earth concentrate production and water treatment. Our cerium, crack and NdPr units are all operating as designed and are all rapidly closing in on Phase 1 operational capabilities.

As of this week, our new state-of-the-art facility is producing rare earth concentrate at higher than Phase 1 rates. Last week, I was out at Mountain Pass to celebrate over 4 million hours of work on Project Phoenix that has occurred without a lost time accident. I was able to watch our mill and floatation circuits operating at Phase I rates.

As you can see on Slide 7, what caught my attention was the uniformity and dryness of our rare earth concentrate coming off the mill which, at this point, is already greater than 60% total rare earth oxide content. Our freshly produced rare earth concentrate is certainly some of the finest and highest quality concentrate that I have ever seen in my 25-plus years in this business.

Slides 8 through 14 will give you a brief visual tour of the main Project Phoenix facilities at Mountain Pass.

Now, as to our production -- as our production ramp has accelerated, it is not surprising that we have encountered some of the same challenges that virtually all new chemical manufacturing plant construction projects encounter during startup and production ramp-up. As many of you saw in our announcement earlier this week, we experienced some defective engineering services on Project Phoenix arising from some subcontractor work. While remediation of these items may increase our overall project costs by up to 14%, everything has been remedied or is on track to be remedied and we see no obstacles to achieving Phase 1 production this quarter.

Our Project Phoenix team has done extraordinary work to overcome these obstacles and keep our production ramp-up successfully moving forward. Let me also add how proud I am of the fact that the project workforce recently exceeded 4.2 million hours in Project Phoenix without a lost time Incident. There is nothing more important to me than seeing all of our employees and contractors able to return home each day safe and sound.

Moving to Slide 15. The second most frequently asked question I get concerns our contracting status for Phase 1 production. We are seeing customer demand beginning to stabilize. And I'm happy to report that we have customer agreements in place or in advanced discussions and product qualification efforts with customers on the sales in excess of our Phase 1 capacity. In lanthanum and NdPr markets, we're seeing demand that will move us into Phase 2 production relatively quickly. With cerium, our commercialization of XSORBX products continues to gain traction in the marketplace.

In short, the combination of our customer agreements and our ability to move product into our own downstream operations is why the volume side of our strategic equation is working out very nicely. We are expecting it to improve further in the fourth quarter and into 2013.

Moving on to Slide 16. The third most frequently asked question I get concerns Project Phoenix management and required capital. We currently expect to incur additional costs on Project Phoenix of up to $150 million, which are largely attributable to the engineering defects I mentioned earlier. To put that into perspective, it represents approximately up to a 14% increase over the project's overall costs. While our goal is always to be able to say we are on budget and on time, we need to keep the recent defective engineering services in perspective. Those of you who have experience in or who have studied the execution of large, capital intensive chemical manufacturing projects like ours, understand that this level of budget variance is remarkably small, particularly when the project is able to remain on time, as ours has to date.

The success of our equity and debt raise in the third quarter placed us in a much more secure position with respect to our CapEx and operating cash needs, which is one reason we expect to be able to absorb the impact of this variance from available cash balances, future cash flow from operations, aggressive budget management and other cash prudent cash management and financing strategies, which we have discussed on previous calls.

Turning to Slide 17. The fourth area where we get the most questions from investors is on XSORBX, our proprietary cerium-based water purification product, which we are commercially introducing in several large-volume markets, including municipal and industrial wastewater treatment, pool and spa water treatment, recreational water and, eventually, drinking water purification.

On Slide 18, you will see what our product development group is now focusing upon, SorbX-100, which helps municipal and industrial wastewater treatment plants more cost-effectively control phosphate levels in discharged water, which can contribute to downstream pollution problems. U.S. EPA data shows that in the United States, there are 3,045 wastewater facilities that are subject to EPA phosphate discharge limits. These plants discharge 17 billion gallons per day of treated effluent. Of those 3,000-plus facilities, there are 186 facilities that are exceeding their permitted discharge limits, discharging more than 500 million gallons per day of treated effluent. Given this level of noncompliance, the need for better solutions to control phosphate discharge limits is clearly acute in this market. And these facilities alone represent a huge potential market for SorbX-100.

Slide 19 depicts this substantial opportunity. We believe all facilities under EPA limits for phosphate, both in and out of compliance, represent a huge market potential for SorbX-100, as these plants seek a more cost-effective and efficient way to reduce phosphate pollution, coagulant usage and sludge volumes.

As shown on Slide 20, our product development group also is commercializing a further refined product for phosphate removal, SorbX-200. This product is for sale in the pool and the spa markets. Discussions are underway with several potential distributors in the United States, Europe and the Middle East. It is important for investors to understand why commercializing our XSORBX family of products is so important. Developing these high-value water treatment markets for our cerium-based products helps to decouple us from future volatility in cerium spot prices and projected market surpluses of this element. It is important to note that these new markets are only open to Molycorp as a result of the intellectual property we have established with these technologies.

If you advance to Slide 21, we'll discuss the fifth most frequently asked question I get. That relates to our mine-to-magnets strategy. The addition of Molycorp Canada has greatly accelerated our vertical integration strategy, as well as enhanced our global footprint and allowed us to enter new high-value custom engineered and specialty product markets. We are now shipping heavy rare earth concentrate product from Molycorp Silmet to Molycorp Canada's Jiangyin facility in China for processing into high purity, custom-engineered heavy rare earth materials. We also are developing plans to deploy these high purity, heavy rare earth separations capabilities outside of China in the 2013 and '14 timeframe.

Our Molycorp Magnequench business is performing to expectations, which Michael will cover in more detail later. Demand remains consistent in the bonded magnet part of our business. It is important to note that our market-leading position with in-bonded magnet powders provides a stable downstream outlet for our rare earths, which tends to be insulated from recent macroeconomic pressures. Both centered and 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 meet their expected growth in demand.

In short, Molycorp Canada has put us in a much better position to service global customers in both current and new markets. We now have facilities in 11 countries and have over 2,700 employees worldwide. The acquisition has been a perfect complement in the effort to advance our vertically integrated mine-to-magnets supply chain. It strengthens our product portfolio, and it makes us the only specialty chemical company in the world that controls a world-class rare earth resource and can offer the right mix of high purity, custom-engineered light and heavy rare earth products to meet our customers' needs.

Finally, we also remain on track with our joint venture partners, Daido Steel and Mitsubishi Corporation, to begin commercial production of next-generation centered neodymium-iron-boron magnets from our state-of-the-art manufacturing facility in Japan, where construction was recently completed. You can see a photo of this facility on Slide 22. The joint venture has been provisionally awarded a supply agreement for a next-generation electric vehicle with a major automotive manufacturer. This is one of what we believe are many customer accounts that are open to us for future business.

Moving to Slide 23. I will summarize by saying that we remain focused on building the rare earth industry's leading low-cost and high-margin-capture advanced materials company. Our corporate priorities remain on track, including our mine-to-magnets vertical integration strategy. We are only a matter of weeks away from full Phase 1 production levels at Mountain Pass, and we have contracted or in advanced discussions with customers for both Phase 1 and Phase 2 volumes.

Finally, we have assembled an outstanding downstream infrastructure to move our low-cost, reliable supply of feed stock into the production of high purity advanced materials for global markets.

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

Michael F. Doolan

Hey, thank you, Mark, and again, good afternoon to everyone. First of all, let me apologize for the way I sound. But as Mark mentions, we have continued to make progress through the third quarter on all of our strategic initiatives.

Project Phoenix is ramping up, and we have made significant traction on commercializing our XSORBX products. And I'm also happy to report that the integration efforts of Molycorp Canada have moved along quite smoothly. Before touching on our operational results, I'd first like to provide an overview of the financing that was completed during the quarter, which you'll see on Slide 25.

As discussed during our midyear update, we went forward with a capital raise of net $528 million, of which approximately $230 million of this was used to redeem the convertible bonds previously issued by Neo Materials. The remaining capital will be used to complete Project Phoenix and to help bolster funds for working capital and for other general corporate purposes. At this point, we are comfortable with the amount of cash on our balance sheet to remove any liquidity concerns prior to full Phase 1 operations of Project Phoenix. We will continue to pursue credit facilities as a prudent business practice -- business practice measure, rather, to manage working capital within the business.

As you review our financials reported in this afternoon's press release, I would like to remind everyone that we have implemented new financial reporting segments, as outlined on Slide 26. We have transitioned from a geographic reporting structure into a functional reporting structure consisting of, one, resources, which is strictly our Mountain Pass operation; two, chemicals and oxides, which is made up of Molycorp Canada and the oxide production from Molycorp Silmet; three, the magnetic materials and alloys, which is comprised of Molycorp Magnequench and Molycorp Metals & Alloys in Tolleson, Arizona; and lastly, four, the rare metals, made up of our rare metals production from Molycorp Silmet and other facilities, which include gallium, rhenium, indium, tantalum and niobium. These segments are reflective of our vertical integration strategy, and we believe will provide added convenience and transparency in the valuation of the performance of our various business units.

Moving on to Slide 27, you will see that on a consolidated basis we reported $205.6 million in revenue for the quarter, which resulted in a GAAP EPS net loss of $0.19 per share. On an adjusted basis, we reported a loss of $0.05 per share.

Let me move to our revenue buildup shown on Slide 28. Product volumes during the quarter have increased on a year-over-year basis. This is largely as a result of the Molycorp Canada acquisition. We tend to observe a slight seasonal uptick in Q3. This continued to be the case for many product lines sold into electronics, although we believe that the benefit was equally offset by macroeconomic headwinds in both Asia and Europe. Selling prices were down compared to the prior year period. This was significant within our resources segment, as prices during 2011 were driven to an historical peak as a result of premiums related the Chinese export quotas and other speculative purchases.

Volume shift within our Resources segment were also down slightly compared to the prior year period, primarily due to limited bastnasite feed stock. We have now completely transitioned to using fresh earth ore -- fresh rare earth ore, sorry, and concentrate. Chemicals and oxides pricing, though, were more resilient within the segment. These average selling prices were down 10% compared to the prior year period. While the 10% drop in pricing is by no means minor, on the whole, it shows the defensive nature of these value-added products. We believe this is a particularly encouraging trend as we get to increased production volumes. Overall volumes for this segment increased 5-fold compared to the prior year period.

One final note on pricing. The product mix within the magnetic materials and alloys has changed dramatically from the prior year period as a result of our bonded magnetic powders. We sold more than 1,500 metric tons of magnetic material at an average selling price of $48.98. New applications adopting our Neo powders has increased, particularly in the home appliance industry. And our teams are working diligently to continue this increased penetration of bonded Neo powders.

Now flipping to the cost side of the P&L. The higher production cost base at Mountain Pass continued into the quarter, but are improving as we're able to spread our costs across increasing production ramp-up of Project Phoenix. Our fixed cost structure today is currently rightsized for a full Phase 1 operation, and is largely in place for a full Phase 2 production as well. At the end of the third quarter, we had a total of 365 employees at our Mountain Pass facility, compared to 117 for the prior year period.

As we have previously discussed, our production costs per kilogram will decrease substantially as we exit the year at an anticipated Phase 1 production rates. We incurred an operating loss of $40.3 million for the quarter. Administrative expenses roughly doubled compared to the prior year period, in line with the increased headcount from Molycorp Canada, and increased depreciation, which accounted for approximately $20 million. Other factors contributing to the quarter's operating loss were inventory write downs of $15 million and an overhang from the Molycorp Canada acquisition of an $18 million impact due to purchase accounting. These last 2 items have been appropriately removed in our calculation of adjusted non-GAAP earnings, as detailed in our press release.

One other unusual item during the quarter related to taxes. As you see, our effective tax rate was 32%. However, we also released certain tax provisions during the quarter, which had an additional impact of $15.1 million. Receiving our high-tech status for 2011 at our Jiangyin facility in China is responsible for $13 million of this release.

Net income was down substantially as compared to the prior year period. And as we continue with our production ramp-up at Project Phoenix, we believe that customer agreements for the Phase 1 material will provide a healthy base for improved profitability.

As mentioned, we generated just over $17 million of operating cash flow during the quarter, and had $436 million in cash and cash equivalents on hand as at September 30. Our consolidated top line expenditures were $196 million on an accrual basis. And for the fourth quarter, we expect to incur cash capital expenditures of approximately $180 million.

I would now like to turn the call back to Mark before we start our question-and-answer period.

Mark Alan Smith

Thank you, Michael. Let me speak for a minute to global trends on rare earth supply, as shown on Slide 29. As many of you have probably seen in the news media, production from China continues to be significantly reduced. Chinese government officials are stepping up their efforts to enforce tougher environmental regulation and to curb illegal mining. And both of these efforts, in conjunction with production quotas, are putting pressure on production. In addition, a growing number of China's largest producers have recently halted production or are in the process of halting production, including Baotou Steel Rare-Earth, China Minmetals, China Nonferrous Metals and Chalco Rare Earth. Government and industry leaders in China acknowledge that these and other actions are being implemented for the express purpose of stabilizing or strengthening prices for all rare earth products.

In summary, on Slide 30, Project Phoenix is on track for Phase 1 run rates in the fourth quarter. Our off-take contracting efforts remain on track and we are seeing customer demand beginning to stabilize. As we execute our global vertical integration plan and move further downstream into highly engineered materials, we will continue to see solid revenue from our Molycorp Canada operations and we will increasingly realize the benefits of Project Phoenix and the ramping up of our low-cost production volumes. This combination should result in higher sales and gross margins and both improved and sustainable bottom line performance.

Brian Blackman

Thank you, Mark. And operator, we'd now like to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is coming from the line of Michael Gambardella from JP Morgan.

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

Mark, when did you guys first realize that the project would be $150 million over what you thought?

Mark Alan Smith

Well, this has been an ongoing process, Mike. And first of all, let me apologize for what appeared to be a cut-off of the phone from last quarter's phone call in Q&A period. That was certainly not our intent and I apologize for anything that may have happened as a result. The part of this we can only talk to so much because it is in litigation. But we had a subcontractor that started to give us some problems the latter part of May. We removed that subcontractor from the site and started investigating our -- the issues associated with that. And in the latter part of the summer, first part of the fall, is when we finally got to the point where we understood what we were dealing with. We were able to make adjustments to the project schedule and make sure that everything stayed on time.

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

You knew about the $150 million when you released earnings last quarter?

Mark Alan Smith

No, we did not know that, Michael. We were finishing up the investigations about that timeframe. And you can see, we just filed the lawsuit against the subcontractor earlier this week, or late last week, I guess it was. So a lot of this has really come together in the third quarter timeframe, particularly in October.

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

Okay. So last quarter, when you released, you said you had $306 million, I believe, in total CapEx in the second half of this year. And then you had also $200 million of accrued CapEx. Now you have an additional $150 million that you didn't know about back last quarter?

Mark Alan Smith

No, I think the numbers that we're showing now, correct if I'm wrong, Michael, are $174 million accounts payable. No, no, that's the amount of CapEx that will be spent in the fourth quarter.

Michael F. Doolan

Which is cash in the fourth quarter is $170 million. Another $305 million cash for 2013. To reconcile that back, I think your $306 million, I have $304 million, was $289 million on an accrual basis. And I apologize, but we've moved to a cash because I think that's simpler for everybody to understand. But $289 million plus $25 million was the $304 million, and then another roughly $200 million of accounts payable that you referred to, for $504 million, $505 million. We are now saying that we're -- if you look on a cash basis, we have $475 million to lay out, of which though we have -- we did spend money in Q3, which is noted. But then if you take that expenditure and then add back the $100 million to $150 million, you're back -- it reconciles the number back.

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

So I mean, the right way to think about it is, if you had, like, $304 million last quarter when you released for the second half, plus $200 million, right?

Michael F. Doolan

Plus $200 million, right.

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

That's $504 million. Now plus another $150 million, that's $654 million from last quarter?

Michael F. Doolan

Right.

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

In CapEx, that's how much you have.

Michael F. Doolan

Right. That's correct.

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

A little over a year ago, you came out with a release, I think it was in October of 2011, where you said we're going to pay an additional $114 million in costs for the project to accelerate it by one quarter. And I mean, what's the status of that? That doesn't seem to have materialized.

Mark Alan Smith

No, I think it's materializing -- I think it's materializing quite well, Michael. What we said the $114 million would do was to affect both Project Phoenix Phase I and Phase 2. Phase 1 was going to be brought up by about one quarter, that still is the case. And Phase 2, most importantly, was going to be brought up a full half a year. And we are still on target to complete construction so that we can produce at Phase II levels, or at least have the construction part of that done, by the end of this year, which is a full 6 months early. That's all well in hand.

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

Okay. I was under the understanding when you said it, that you were going to have Phase 1 up by the beginning of the fourth quarter.

Mark Alan Smith

I apologize for any confusion with that. I think what we've been saying is that we will have Phase 1 up and running in the fourth quarter. And we still are on track to achieve that.

Operator

Your next question is coming from the line of Paul Forward from Stifel, Nicolaus.

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

I wanted to ask you about the Project Phoenix. On Slide 8, you've got the layout of the site, and you're showing operational mode, commissioning mode and some parts approaching completion. I just wanted to see, when you talk about being able to produce at full Phase 1 production rates by the end of the quarter, that doesn't necessarily mean that all of those areas in yellow are fully completed, is that correct? Is that...

Mark Alan Smith

That's correct, Paul. There's a certain portions of the project that we don't need to have up and operational to achieve those types of production rates. For instance, the Chlor-Alkali facility. We can purchase the acid and base materials that we need to provide for production at Phase 1 levels without utilizing the Chlor-Alkali facility. However, we all know and understand, and that's why we're working so hard to finish the construction on that part of the project, because that will be a significant reduction in cost -- production costs for us once we bring that online.

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

So when you're commissioning the areas, the NdPr separation facility and the water treatment facility, that's when you can come out with a press release and say, "We are now producing at full Phase 1 rates," and that's just in the next few weeks, I'm guessing?

Mark Alan Smith

Yes, that would be an accurate statement.

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

Okay. I just want to ask about customer agreements. I think you had talked about 79% of Phase 1 is under customer agreement. And you're now at levels where, in lanthanum and NdPr, you're going to have -- you're seeing commitments from customers that you would need to have Phase 2 production rates at least partially in place in order to meet those commitments. Does that imply then, when you look at the 79%, that's really the cerium that's the bulk of that, the 21% that hasn't yet been placed with customers?

Mark Alan Smith

Actually, part of that is cerium. There are small pieces of that, that are also NdPr. But that doesn't really concern us very much because what we have contracted doesn't include the amount of NdPr that we will need to send to our Magnequench subsidiary, which then takes us well over Phase 1 rates for NdPr. Lanthanum is actually much the same. It's overcommitted right now, and we are into Phase 2 production requirements for that, or at least part of that production capability. And that's because the FCC catalyst business is very robust right now.

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

And is that -- do you have enough commitments, in looking at the lanthanum and the NdPr, to say that you're willing to go ahead and push through for Phase II production rates at some point in 2013? Or is there any hesitancy on your part to kind of make that commitment today that you're ready to go to Phase 2 full rates based on current customer demand levels?

Mark Alan Smith

There are a lot of things that we have to balance there, Paul. First and foremost, I'll say that our job is to make sure that our customers are as happy as they can be and that we deliver product to them on time and on specification. So that'll be our first consideration. But we also do have to consider the natural distribution of the elements, the rare earth elements in the ore body. And we need to be careful that we don't overproduce NdPr and lanthanum in a way that gives us an excess of cerium. So that's why we're working -- continuing to work very hard on the XSORBX commercialization, because we feel that if we combine the XSORBX commercialization with the existing markets for cerium on the spot market, that being glass polishing and catalytic converters, the catalyst in the automobile catalytic converters, that we can move pretty much as much cerium as we want to as well. But we have to make sure that all these things come together from a timing standpoint to make it as efficient as possible.

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

Okay. And also wanted to -- I think, the 79% commitment level from Phase 1, I -- just from memory here, in past quarters, I think you've talked about a 78% approximate level. I was just wondering was there any -- did you have any significant new commitment levels occur or commitments from customers for the Phase 1 production occur during the quarter? And I guess I'd say also, has there been any -- is there a netting effect, where maybe past commitments have been modified and then you have some new commitments during the quarter? Or is there just some minor level of new commitments to act on to what had already been in place?

Mark Alan Smith

Yes, we did, I think we reported -- in the first or second quarter this year, we reported a modification to one of our large lanthanum contracts which, if memory serves me well, dropped the total from 78% to 72%. And so now we're back up to 79%. There's a number of contracts that have made up the extra 7%. But we have also finalized some discussions with our lanthanum party where they want that 25% back. So as that contract gets signed and finalized, our numbers will continue to grow and get higher than the 79%.

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

Okay, that's good. And maybe lastly, I just wanted to ask about now that you've had a full quarter of production as an integrated company, I just wanted to ask about where you see the synergies from the Neo acquisition shaping up relative to what your expectations had been at the time of the announcement of the merger.

Mark Alan Smith

Yes, it's a great question, Paul. First of all, let me say how happy I am with the integration of these 2 companies and the stability that the Molycorp Canada portfolio brings to us as a company. It's just a really good thing for us to have, especially as we're finishing up a very large capital project. The synergies are right in line with everything that we had expected at the time of the acquisition. I think that the one thing that we have to watch because it is -- it creates a level of sensitivity to those synergies, is prices. And as prices go lower, those synergies are also going to go lower. As prices go higher, those synergies grow remarkably. So we're monitoring that. A lot of this really comes into play in terms of synergy realization in 2013, once Project Phoenix is up and running and we can move those feedstocks fully into Molycorp Canada.

Operator

Your next question is coming from the line of Paretosh Misra from Morgan Stanley.

Paretosh Misra - Morgan Stanley, Research Division

Just, again, wanted to make sure I got the CapEx numbers right. So you have about $180 million for fourth quarter. And for next year, it would be $200 million plus $150 million, or am I missing something here?

Michael F. Doolan

No, I think the $180 million is the $170 million that we referred to for Phoenix plus just $10 million of additional capital. That's for Q4. And then $305 million is the cash expenditures for next year. And that is taking into consideration the engineering overrun that Mark spoke about earlier.

Paretosh Misra - Morgan Stanley, Research Division

Got it. So it includes Neo. And it includes any other sustaining CapEx?

Michael F. Doolan

No, we're still -- those numbers are really all for Project Phoenix. Sustaining capital, we mentioned in the last quarter, and what we've seen so far is still basically around the $40 million level.

Paretosh Misra - Morgan Stanley, Research Division

Okay. Anything else? Any other major item for next year?

Michael F. Doolan

No, I mean -- I'll mention this now, but we're currently in the process of putting all of our 2013 budgets together. So the operating groups will be coming back with their wish lists. And we'll have to review those and obviously analyze those in the context of our available resources. But in terms of sort of any metrics for 2013, we'll report back on our next call after we've have the budget approved by our Board.

Paretosh Misra - Morgan Stanley, Research Division

Understood. And just going back on the sales contracts, and I apologize if you answered that, but the 21% that is not contracted, is that all cerium?

Mark Alan Smith

No, it's not all cerium. There's a little piece of NdPr as well. But again, that doesn't concern me right now, Paretosh, because the 79% figure that we put out there does not include moving any NdPr to Magnequench, which they can take 100% of Phase 1 if we want.

Paretosh Misra - Morgan Stanley, Research Division

Got it. Okay, and one final question. Let's say you have some delays in optimizing NdPr circuit. Could you sell your 60% concentrate in the market, maybe to a third-party refiner?

Mark Alan Smith

The answer is yes, but another piece of this downstream strategy we're putting together is that we can move a lot of our concentrate materials to both the Zebo facility, the Molycorp Zebo -- Molycorp Canada Zebo facility in China, as well as the Silmet facility in Estonia. So we've got plenty of outlets there that don't give us any level of concern in terms of fulfilling that full Phase 1 or possibly higher.

Operator

Your next question is coming from the line of Bruce Klein from Crédit Suisse.

Bruce Klein - Crédit Suisse AG, Research Division

I'm just wondering, just can you talk a little about just real pricing? I know the basket is down a little bit. What you're sort of seeing now in terms of pricing? And as the customer inventory destocking, you get the sense that how recently did sort of that end and why? And then secondly, just the inventory and purchase accounting charges, will they continue or is that the last of it? Or help us with that, please?

Mark Alan Smith

You want to answer the second one?

Michael F. Doolan

I'll deal with the second one first because it's easier. Basically, there is just under $1 million left. And that will -- it's probably already flushed through in the fourth quarter. That would be the end of it. I mean there'll be ongoing depreciation and amortization, but that's going to be going on for the next number of years. But in terms of the one-offs, yes, there's just under $1 million left.

Mark Alan Smith

And then as to the working inventories and pricing, I wouldn't say that, that is 100% behind us just yet, Bruce. But it is certainly improving, and it's moving fairly rapidly right now. And the reason we know that is that we are starting to move materials back into the companies that had these very high levels of working inventory. So we feel pretty good about that. The other piece here is the prices that you asked about. And as I'd mentioned, the Chinese producers are living up to their production quotas. And the Chinese government is enforcing those quotas. All of that is really for the express purpose of stabilizing this market and increasing prices. And we're starting to see the impact from that, at least on an initial basis, as the prices of our materials almost across the board have gone up in the last 2 weeks. So we'll continue to monitor that situation, but it does seem to be fairly stable as we're heading towards the end of the year.

Operator

And at this time, I would like to turn the call back over to Mr. Brian Blackman for any closing remarks.

Brian Blackman

I'd like to thank everyone for joining us on today's call. We look forward to reporting back our progress in next year. And as a reminder, Molycorp will be presenting at the following upcoming conferences: On November 28, we'll be in New York at the Goldman Sachs Metals and Mining Conference; on November 29, we'll be at the JP Morgan SMid Cap Conference, also in New York; and then on December 6, we'll be in London at the Morgan Stanley Digging Deeper Conference. Thanks, again, everyone, and we look forward to reporting to you our year-end results early next year.

Operator

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.

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