Molycorp: Leveraging Processing Capacity

Sep. 12, 2013 12:49 PM ETIQ9 Comments
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Contributor Since 2010

Independent investor with macro concerns.

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.

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