Shares of rare earths miner and processor Molycorp Inc. fell to a year low of $11.16 in early New York Stock Exchange trading Thursday before recovering slightly to around $11.40, down more than 5% for the day, after the company announced it was selling a combination of stock and debt to fund operations.
The proposed offerings followed the downgrade of the company’s ratings by Standard & Poor’s Ratings Service on Monday to ‘CCC+’ from ‘B’ and the company’s placement on “CreditWatch with developing implications” by the agency.
Molycorp, based in Greenwood Village, Colo., has traded as high as $58.74 in the past year and climbed to a peak above $74 in April 2011, 10 months after its initial public offering at $14. Executives had said earlier this month that they would need to seek financing because cash from operations would be less than previously expected.
Executives said a statement Thursday that the company will offer $150 million in common stock and $300 million in senior notes due in 2017. The sales will rise to $345 million in notes and $172.5 million in stock if the underwriter, Morgan Stanley, exercises full over-allotment options. Another $138 million in shares is also expected to be loaned by Molycorp to Morgan Stanley to be offered publicly.
Executives said the company intends to use the proceeds from the notes and primary shares offering to fund operating expenses, working capital, capital expenditures including work at its Mountain Pass mine in California, and other cash requirements for the remainder of this year and the first six months of 2013.
Molycorp will not receive any proceeds from the shares loaned to Morgan Stanley for public offering but will receive a nominal lending fee which is to be used for general corporate purposes.
Before the financing announcement, Anthony J. Alfidi, founder and CEO of San Francisco-based Alfidi Capital LLC said on his Alfidi Capital Blog that the bloom was coming off the acquisition rose of Molycorp’s purchase earlier this year of Neo Materials, which he had complimented at the IAGS Technology and Rare Earth Metals Center “TREM12” conference in March.
“The company was showing some real strategic thinking by going whole-hog for vertical integration.,” Alfidi said. “The strategic bet for a company like Molycorp is that the long-term added value from tighter integration will generate enough free cash flow to pay down the debt used in that acquisition. The monkey wrench in the formula has been the weakening global demand for high-tech goods that rely heavily on REEs for their capabilities. That hurts demand for Molycorp's ores.”
Alfidi said Molycorp would be a bargain if not for the likelihood of a very serious downturn in Europe and the US. “That would spell further difficulty for any REE producer, no matter how dominant their position,” he said.
Molycorp’s Mountain Pass mine is the largest rare-earth deposit outside of China. The mine is being restarted and is scheduled to produce at a rate of as much as 19,500 tons of rare earth oxides a year by the fourth quarter. Plans are also in place to double that capacity to 40,000 tons by the end of next year.
Phil Burgert is managing editor of ResourceInvestor.com. He can be contacted at firstname.lastname@example.org