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  • Molycorp Is WORTH More Than $1.60!!! 5 comments
    Jul 2, 2014 7:33 AM | about stocks: MCP

    Molycorp is WORTH more than $1.60!!!

    On Jul. 2, 2014 at 4:54 AM ET a person by the handle "Shock Exchange" wrote a piece that seemed to tank the stock -15% in pre-market on just a little under 50k shares trading right in the first hour of pre-market. Now, I usually don't pay much attention to SA articles as "market movers" but given that Mr. SE has been posting nothing but bearish articles (being bearish himself of course), it seemed whoever Mr. SE is, has finally cracked "support". Albeit in the pre-market hours of a holiday week, posting RIGHT BEFORE pre-market... fishy?

    But first, let us look at his "supposed" reasons why he thinks MCP is worth $1.60 a share... and why, if you consider TANGIBLE BOOK VALUE per share, you are looking at a asset with a current valuation of closer to $2.88 a share and a book value closer to $4 per share.

    First Mr. SE's Summary with the key highlights below and my response accordingly:

    Summary

     

    Sans a capital raise, Molycorp is projected to run out of cash in 1Q 2015.

    Management recently received shareholder approval to issue 350 million new shares.

    Given its capital hole, I value the company at $1.60 per share.

     

    For 1Q 2014 Molycorp Inc. (

    MCP) experienced a loss attributable to shareholders of $89 million and cash outflows of $78 million, leaving the company with $236 million of cash on hand. Since, investing in the company has been the equivalent of trying to catch a falling knife - "there is no telling when Molycorp's losses or cash outflows will abate." High level cash flow projections show that sans a capital raise, the company could run out of cash by 1Q 2015.

    First things first. Anyone holding MCP at this stage knows, and has full well known about the cash burn and the need for a capital raise ever since the last conference call. Why else would the stock lose value from +$4/share to $2/share? Reflects the 350m to 700m share dilution that just got approved maybe?

    On June 19th Moody's downgraded the company's debt to Caa2 from Caa1, citing debt levels that could potentially be insurmountable. Within a week the company received shareholder approval to issue 350 million new shares, giving it the flexibility to issue dividends, engage in mergers and acquisitions arrangements or raise new capital. On my previous article, I estimated that the company needed cash on hand that equated to six quarters of "run-rate out flows," or approximately $360 million.

     

    According to the above projections, Molycorp's run-rate or "normalized" out flows are approximately $59 million (reflected in Q1 2015). Six [quarters] of such out flows equates to about $360 million of cash on hand. Assuming Molycorp raises capital at the end of 3Q 2014, it would have cash on hand of about $103 million prior to the raise. Thus, it would need somewhere around $250 - $260 million in fresh capital to help weather the storm. (I think he answered his own question here...)

     

    Supposed "Valuation The following table explains Molycorp's $1.60 per share valuation":

    Book Value

    The company's GAAP book value at 1Q 2014 was about $1.3 billion.

    Reduction of Intangibles and Goodwill

    "Based on their recoverable amounts, Molycorp's $550 - $560 million of goodwill and intangibles are worthless. The $228.8 million in goodwill has been allocated across three segments - Chemical and Oxides ($125.2 million), Magnetic Materials and Alloys ($102.8 million) and Rare Metals ($0.7 million). Magnetic Materials is the only segment that was profitable during the quarter, earning pretax operating income of $9.4 million. My guess is in 2Q 2014 the company will write off all intangibles and all goodwill except the amount allocated to Magnetic Materials; Molycorp will probably make the argument that this segment's value is greater than the goodwill allocated to it."

    This segment value is greater than what you are assuming. Not to mention you have not addressed a spin-off of Neo or the sale/mortgaging of other assets.

    "However, when you also take into account the company's historical operating losses and the fact that Molycorp has mortgaged these assets via long-term debt, all of the intangibles are worthless."

    If you use a present value calculation you can make that conclusion, but I believe investors in MCP see more than the present value of debt on hand.

    Rollforward of 2Q Net Loss

    "We are already through 2Q 2014 and Molycorp has probably experienced another net loss during the quarter. I assumed a loss attributable to shareholders of $89 million - the same amount as 1Q 2014."

    Probably?

    Addback Intangibles Amortization

    The rollforward of the net loss of $89 million for 2Q 2014 includes quarterly intangible amortization expense of about $6 million. That said, to reduce 1Q 2014 book value by [i] the intangible assets and [ii] the $89 million of quarterly losses would double-count the intangible amortization expense.

    Why are you double counting this before any said capital raise?

    Required Capital

    As stated above, I assume Molycorp needs cash on hand that equates to six quarters worth of run-rate cash out flows. Assuming the company raised capital at or near the end of 3Q 2014, it would need to raise about $260 million in additional capital.

    I was thinking closer to $300m, but again this is baked in with the new share issue.

    Adjusted Equity

    After estimating the company's tangible GAAP equity at 2Q 2014 and reducing it for the capital hole of $260 million, I derived an equity value of about $391 million. The equity value divided by 244.7 million shares outstanding values Molycorp at approximately $1.60 per share.

    Present Value equity calculations can be a tricky thing, considering people buy equity not for what they think they company is valued at today, but what it will be worth in 3/6/12 months time. That said, WITH a equity raise, MCP is cash viable and can still function as a normally operating business.

    Conclusion In my estimation, Molycorp needs to raise about $260 million in additional capital in order to sustain itself. That said, I value the company at $1.60 per share. The stock currently trades at $2.57 per share. I advise investors to avoid the stock.

    Source: Molycorp Is Worth $1.60 Per Share Additional disclosure: I am net short on Molycorp

    ... so you post a negative article on the day of the shareholders meeting, on the day of the conference call, and now today at 5am. Remember, as much as there might be some short term relevance to Mr. SA's analysis, be aware, he's short (and won't say from where), and he is a serial poster at the most "opportune" times to try and crush this stock.

    Be wary of when this supposed "analyst" posts. There is more than a bearish analysis here.

    Disclosure: The author is long MCP.

    Additional disclosure: Always consider the authors stance and release times before you look at old analysis...

    Stocks: MCP
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Comments (5)
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  • wantmoremoney
    , contributor
    Comments (10) | Send Message
     
    I agree with you about Shock Exchange abuse and manipulation of stock price for his own benefit. The real problem is with Seeking Alpha, who this past winter shut down posting and "promised" to get rid of these type of posters, but I guess they didn't mean it.
    2 Jul, 08:13 AM Reply Like
  • Adamantium
    , contributor
    Comments (87) | Send Message
     
    Author’s reply » This is Mr. SE http://bit.ly/Z66DRq
    2 Jul, 08:28 AM Reply Like
  • wantmoremoney
    , contributor
    Comments (10) | Send Message
     
    website has Malware installed use caution
    2 Jul, 08:51 AM Reply Like
  • wantmoremoney
    , contributor
    Comments (10) | Send Message
     
    ST removed my warning of SE webpage ,today I couldn't boot up once I did I had a overseas ver of windows running.Had to use backup computer took 3hrs to recover main computer had multiple malware installed SE website was only new website I went to yesterday
    3 Jul, 12:03 PM Reply Like
  • Adamantium
    , contributor
    Comments (87) | Send Message
     
    Author’s reply » I didn't get anything...
    8 Jul, 11:11 PM Reply Like
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