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  • Molycorp: Leveraging Processing Capacity 9 comments
    Sep 12, 2013 12:49 PM | about stocks: IQ

    Molycorp: Leveraging Processing Capacity

    The Short, Strange, Trip

    Molycorp started life 5 years ago, as a private venture, when Molycorp Minerals LLC acquired the Mountain Pass facility on September 30, 2008. The investment in Molycorp was private venture capital and the plan to build a modern operation was being developed. On July 29, 2010, an IPO raised $390 million for the proposed Project Phoenix, as about 28 million shares were sold at $14. The timing of the offering was extraordinarily fortuitous, as the Chinese export control was tightening, and rare earth prices were spiking. Owning a resource with a long history of RE production, Molycorp appeared to be in the right place at the right time.

    In 2011, Molycorp acquired the Silmet processing facility and the Tolleson RE metal and alloy facility. Although deviating from the core business plan of building a new mine, these acquisitions were greeted favorably. They also announced the plan to double Project Phoenix and then sold another offering ... this time convertible preferred stock, raising another $200 million.

    In 2012, Molycorp again sold more stock … this time to Molymet, using that cash and stock to purchase Neo Technologies. Again the acquisition was greeted favorably. But by the end of 2012, the construction of Project Phoenix was over budget and behind schedule. An engineering mistake led to a pending $150 million lawsuit. The continuous price declines in RE's meant that legacy operations were at increasing losses, and the cash on hand was critically low.

    2013 began with another stock offering, and a suspension of the 2nd phase of Project Phoenix, returning the plan to the original 19,000 mt per year output.

    All along this path, there has been a constant accessing of the capital markets as bond placements and credit have supplemented the cash burn on capital expenditure and acquisitions.

    It is hard to believe we are approaching the 5th year of the new Molycorp, and have now passed the 3rd year of public ownership of MCP. The actual total spent on construction, acquisitions, modernization, and operations is staggering, and the rare earth price shifts have made many of the Mt Pass metals quite cheap. Many investors look at the expenses, the debt, and the RE market, and reach the conclusion that rare earth businesses outside of China are simply uneconomical. This opinion is strengthened by the nearly equally futile path of Lynas.

    The New Barrier to Entry

    Oddly, all of this meandering, unintended business has led to a point where the most likely result is success. RE prices are not at the staggering levels that led to the MCP highs, and the many rounds of capital raises at those high prices. But the completion of Project Phoenix will leave MCP in possession of a critical asset: an active modern RE processing facility. It cost far too much, was far more difficult to construct, and will undoubtedly have more issues as it moves to final operations.

    The one thing that is in critically short supply is modern processing of RE's. We often hear the catch phrase "rare earths are not rare", and indeed ore deposits in the ground seem abundant. Many analysts look at Mt Pass and compare it to the many other resources, and conclude Mt Pass ore is inferior in composition. Yet the exploration companies with superior resources have low value, simply because they lack what is the MOST critical asset: processing. It does little good to find RE's in a remote area, on sea beds, or in various far-flung corners of the globe, if you cannot economically produce marketable products. And without the dramatic rare earth story that was seen in 2009-2011 with China export quotas inflaming the market, there is not going to be the same investor speculation in projects to build more processing facilities. Processing facilities for RE's will continue to be wildly expensive and difficult to build.

    It is quite possible that if anyone had known the true nature of the challenges and costs faced by Molycorp in building Project Phoenix, it never would have risen from those ashes of Mt Pass. That challenge and cost is now fully demonstrated by the Project Phoenix construction, and by the LAMP construction at Lynas. Any exploration company with a decent resource that is proposing to access capital markets for the billions of dollars necessary is going to face skepticism.

    Another example, Avalon has a proposal to sell $500 million of stock, and presumably to borrow more, to build a processing facility. Of course they may avoid Molycorp's $150 million engineering mistake, or Molycorp's wandering into acquisitions, but the price tag (current estimate: $1.575 billion for 10,000 mt per year production) is still so large and the schedule so long, that the investment basis is very questionable.

    Leveraging Mt Pass

    Mt Pass is still a very valuable source of RE's … a source that led to the construction of one of the few rare earth processing facilities in the world. The operation of Mt Pass mine and sale of REO's from there will be profitable. The profits will be limited by the composition of Mt Pass ore, which has an abundance of RE's with lower prices and lower amounts of the RE's with higher prices. Larger success in near term operational results will depend on the results from the acquisitions made: Silmet, Neo, and Tolleson operations.

    Long term, the operation of the processing facilities at Mt Pass, Silmet, and in China, will provide a basis for expansion. Not just doubling the Mt Pass facility, but the acquisition of ore deposits with more valuable composition. The Lynas model, with mining and concentrate production in one place, and processing in another, is quite good for RE's. It will be possible as MCP operates profitably, for MCP to move to acquire the best deposits.

    The asset of a production facility is one that has a hidden value. It leads to the ability to bring any deposit to market faster and more cheaply than can be done by inexperienced companies without that asset

    Molycorp is still a very new company. The initial business plan was to develop the Mt Pass ore resource with a new processing facility. That construction plan is now nearing completion. The rare earths market prices have now fallen back, but industrial use and demand will continue. Molycorp deviated from the original plan with several acquisitions. But in many ways, those acquisitions have great potential to contribute to the growth of Molycorp. And the infrastructure that was so difficult to build and acquire, provides a path beyond the normal barrier to entry that other ore deposits face, which allows leveraging that ability with further acquisitions.

    Disclosure: I am long MCP.

    Stocks: IQ
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Comments (9)
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  • GoGowadof100s
    , contributor
    Comments (128) | Send Message
     
    This article is very well written thank you. The bottom line is they need to finish the plant. There cant be anymore delays, accidents, or meteor strikes in the desert. Their cash burn rate and cost of production MUST come down now. Another attempt to access capital markets would crush the stock.
    12 Sep 2013, 04:55 PM Reply Like
  • votingmachine
    , contributor
    Comments (380) | Send Message
     
    Author’s reply » Thanks. I agree that they are at the "show me the money" point. I think the money spent may not justify the money made at Mt Pass, but it HAS to make money and soon.

     

    But once they do turn to a positive profit margin, they have a production advantage that is a fairly large barrier to entry. With such a large infrastructure and with experience at profitable operations, they should be the dominant force in future RE development projects.

     

    Molycorp was lucky ... they had many rounds of financing and are still only at 189 million shares. A company like Avalon which wants to raise $500 million with stock sales, is trying to do so at the (now commonly) diminished prices of rare earth stocks. They are under $0.80 now. A stock sale needs to place 700 million shares to raise that $500 million. And then they still need to borrow.

     

    People often reflect on the entire history of Mt Pass, while ignoring that Molycorp is a new, young company that is just nearing the construction target they set out for. And I think it is clear that Molycorp had lucky timing. That lucky timing seems unlikely for the next generation of mines, which means that with success, Molycorp can control the field.

     

    It isn't a done deal. MCP could still fail. But with the endpoint in sight, it seems that the odds of survival are getting better. And with survival they have a business advantage that is profoundly valuable.
    13 Sep 2013, 11:32 AM Reply Like
  • Flann
    , contributor
    Comments (68) | Send Message
     
    Great job, as always, by Voting machine.

     

    Much is made of MCP "overpaying" for Neo, while ignoring the fact that it was the same rare earths bubble that turned MCP into an acquirer of valuable resources. Without the bubble that set Neo's price, MCP does not have that fortuitous $390 million investment by Molymet.

     

    There are only so many processing plants and so much intellectual property out in the world, and MCP has gobbled up a lot of it.

     

    Agree with article and comments above: time to nail the business plan and turn a profit. And if they do start making money and can acquire other deposits, the growth will be tremendous.
    19 Sep 2013, 01:57 PM Reply Like
  • Flann
    , contributor
    Comments (68) | Send Message
     
    The following related comment was posted by VM last month:

     

    "Jack Lifton disparages MCP and Mt Pass ore. But the fact is that it is an operating processor, that will be operating a completely new, very expensive facility while all these other mineral deposits are nothing but nice rocks. The only rare earth mining company with the size and experience to bring resources to market is MCP. They shouldn't help others they should crush them. Sorry to be cruel but that is how it is.

     

    "Jack is looking at it how MCP can cooperate for mutual advantage. That is not how mining works. Exploration companies get acquired and the processing is done by experienced miners. Look at the value of the exploration companies. What makes sense is not to hand them processing, but to take the best ones over, and make ALL the money for Molycorp."

     

    [My extreme distaste for Jack Lifton and how he plays the objective observor while being a paid hack for MCP's competitors helped burn this comment into my brain.]
    20 Sep 2013, 12:23 AM Reply Like
  • votingmachine
    , contributor
    Comments (380) | Send Message
     
    Author’s reply » I was trying to distill some thoughts I had, in this blog, including some of my thinking in comments like that one. The RE companies are young. There are many with resources and few with production. The cost of production is much higher than most investors anticipated.

     

    Mt Pass ore does get disparaged, although I think it is adequate for a nice business basis. I don't see how the exploration companies can fund construction of processing, especially once Molycorp and possibly Lynas are producing large amounts of RE's.

     

    Jack's comments are based on his preference for ore deposits. And it would be possible to arrange a mutually profitable relationship between MCP processing and ore deposit mining. But the point I made there was that mutual advantage is not as good for MCP as controlling all of the advantage. If the juniors cannot fund the development step, then they will follow the typical exploration company path, and sell the claims to an operating miner.
    20 Sep 2013, 10:10 AM Reply Like
  • Flann
    , contributor
    Comments (68) | Send Message
     
    During the Smith era, which you were here for, the conference calls always included references to deposits MCP was on the verge of acquiring (as well as their own -- hey, we forgot we had HREEs -- deposit). If they begin to turn a profit, they can relax and wait and make the right acquisitions at the right times. And there will be no rush, as there will be few, if any, competitors for deposits. And after 4 or 7 or 10 years of struggling along, juniors will have lost delusions of untold riches, and count themselves lucky when purchased.

     

    I am fascinated by the entire story (e.g., Chinese manipulation creates a bubble where prices rise 35x-40x over 2 years, inadvertantly inspiring an epic criminal enterprise, which undermines an entire mining sector!), and, thus far (on paper, certainly), MCP is one of the great losers in the story.

     

    But because of the combination of the difficulties in building Phase 1 and the bottoming of rare earth prices and MCP's share price, MCP ends up with a brilliant/transparent CEO, a stunningly undervalued processing plant, and intellectual property that analysts and experts, like Lifton, never acknowledge. These advantages will either never be matched by competitors, or, if they are, not easily, not cheaply, and not soon. I look forward to the continuing story... and while I love the chance to continue investing in an undervalued company, I would, however, like to someday take some money out...
    20 Sep 2013, 11:25 AM Reply Like
  • votingmachine
    , contributor
    Comments (380) | Send Message
     
    Author’s reply » People overlook how recent these events are. The RE business is not as established as other minerals (copper, gold, iron, etc). Those have very well established economic feasibility and the development path is generally understood. Those crazy prices set off a wave of exploration, and fueled the construction of Project Phoenix and Lynas' LAMP.

     

    Prices appear to be stabilizing now, and two new supply houses are about to ramp up (I'm assuming LAMP eventually is a go). The exploration and potential exploitation of resources made sense with the high RE prices. But now there are getting to be many resources that are getting defined enough to consider the development ... and I just don't see how they can do it. The cost of production facilities is just such a huge barrier. And the recent history of price swings makes any plan that won't sell RE's for several years a lot more risky. Especially with new supply about to hit the market.

     

    I don't mean to repeat the blog thesis ... I think we are in agreement, the value of facilities is generally ignored and yet that appears to be the limiting component in the RE marketplace.

     

    I certainly hope that the next few quarters support my expectation that Molycorp will begin earning money at Mt Pass, and I also am optimistic that the worldwide operations should begin to show more profits. They need to turn that corner. If they do, there should be some stock profits on the table for you. We all would like to see that.
    20 Sep 2013, 03:57 PM Reply Like
  • votingmachine
    , contributor
    Comments (380) | Send Message
     
    Author’s reply » I now see the lawsuit against M&K Engineering is for $37 to $45 million, not the $150 million I used in this blog. It was a memory error as I did not fact check that number. In looking at the lawsuit reports on 9-23, I discovered the error.
    23 Sep 2013, 10:57 AM Reply Like
  • GoGowadof100s
    , contributor
    Comments (128) | Send Message
     
    VM,

     

    Any thoughts on current share price after they announced facility build completion and Molymet seemingly ready to infuse more capital?
    11 Oct 2013, 04:54 AM Reply Like
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