In the first quarter of 2015, Molycorp (NYSE: MCP) reported higher production volumes from its Mountain Pass rare earth facility in California, and yet posted negative cash flow from operating activities of US$73 million and a loss attributable to common shareholders of US$102 million, or US42¢ per share.
On June 25, the embattled company announced that it had reached an agreement with creditors to restructure US$1.7-billion worth of debt on its balance sheet, and filed voluntary petitions under Chapter 11. The creditors hold more than 70% of the company’s 10% senior secured notes.
The restructuring support agreement also provides financing of up to US$225 million from a group of Molycorp’s creditors, led by JHL Capital Group, JMB Capital Partners and QVT Financial LP. The debtor-in-possession financing will support the company’s operations during the Chapter 11 period. Molycorp’s operations outside of North America, with the exception of non-operating companies in Luxembourg and Barbados, are excluded from the Chapter 11 filings.
President and director of Stormcrow Capital in Toronto Jon Hykawy says the announcement isn’t a surprise, because Molycorp had long passed the point of no return regarding its debt payments.
“Even if production magically increased to 100% nameplate output and the company were selling everything it could make at Mountain Pass at market rates, and their costs had also fallen to forecasted values, they could not generate enough cash flow to make all the debt payments required in the time allowed until those payments were due,” Hykawy writes in an emailed response to questions.
“Given they seem to have support from a large fraction of their creditors to continue operations with an appropriate capital structure, the easiest way to effect those sorts of changes is to do it through Chapter 11.”
The real question, Hykawy says, is whether there is a long-term business in place for Molycorp or any other rare earth company outside of China.
“Last year, I would have said that the answer was obviously ‘yes’ — prices were reasonable and getting slightly better, and ex-China buyers remained adamant that they would prefer supply, albeit at market rates, from non-Chinese producers,” he says. “Now, I am not so sure. Free-on-board China prices have dropped and are dropping further, because buyers seem wililng to take what they need from Chinese firms. If you ask the buyers whether they will take material from non-Chinese sources, the answer is that they absolutely will, providing those sources can get them material at a discount to the price they are currently paying to the Chinese.”
That doesn’t leave much room for margins to justify building any new mines, Hykawy continues. “There are some end-users that would support the right new projects, but the number of such supporting entities is not large.”
Hykawy notes that the biggest issue in the rare earths sector is how to make reasonable margins at present or lower prices. The analyst reasons that if the industry outside China can’t figure out how to drop its costs to levels that at least make it cost-competitive with the Chinese industry, there may never be a complete rare earths industry outside of China.
For the time being, rare earth prices are the same as those used domestically in China, as a result of the removal of export tariffs in May, notes Gareth Hatch, founding principal of Technology Metals Research. “A new resource tax has been applied to upstream concentrates,” he tells The Northern Miner, “but there is little evidence that the cost for this has been passed along to end users at this time.”
As for Molycorp’s financial troubles, Hatch says he hopes the restructuring will lead to a more stable financial structure for the company so that Molycorp can better plan for the Mountain Pass rare earth mine.
“Right or wrong, the psychology of the capital markets is such that the near-term success of the non-Chinese rare-earth sector, at this moment in time, is very much tied to the fortunes of Molycorp.”
Jim Sims, Molycorp’s vice-president of operations, did not return an emailed request for comment by press time.
In the three months ended March 31, Molycorp’s Mountain Pass facility produced 1,479 tonnes of rare earth oxide equivalent, an 11% increase over the fourth quarter of 2014. The company achieved an average selling price of US$30.97 per kilogram, compared with US$36.91 in the fourth quarter of 2014, in a 16% decline. Net revenues for the quarter fell 8% to US$106 million.
In April, Molycorp announced that it would supply rare earth materials to Shin-Etsu Chemical Co., which will produce the rare earth magnets that Siemens AG will use in its high-efficiency, direct-drive wind turbine generators.
Molycorp reported that it was picked to supply rare earth materials partly because of the Mountain Pass facility’s environmental and process innovations. These include its ability to recycle water, regenerate the chemical reagents needed in rare earth production, get power from a high-efficiency, natural gas cogeneration power plant and dispose of mine tailings through a paste-tailings system.
Geoff Bedford, Molycorp’s president and CEO, said in a press release June 25 that the company “expects to exit Chapter 11 with an appropriate financing framework to suppport our business going forward.” He also noted that the Chapter 11 filings did not include Molycorp’s operations in Europe and Asia, which he said are cash-flow positive. He said that all of the company’s facilities in North America and around the world “will continue operating as usual.”
Molycorp employees are working their usual schedules, and the company says that buying goods and services will continue, “with all purchases made after filings are granted a special administrative priority under the law.”
Molycorp has issued a restructuring plan term sheet that outlines the reorganization that management expects to pursue.
The term sheet provides for the discharge of Molycorp’s more than US$700 million in unsecured notes, and calls for holders of the debtors’ US$650 million in 10% senior secured notes “to have their debt exchanged for a majority equity stake in reorganized Molycorp.”