MolyCorp Case Part 1
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Uploaded by DrMetalGerbil22
IPO including PE and JP Morgan investors
Mine to Magnets strategy (very money intensive)
1. Modernization of Mountain pass production facility (Project Phoenix)
2. Acquisition of downstream refining and manufacturing capabilities
1.) Project Phoenix
Reserves of 40’000 tons proven, up to 960’000 tons predicted
o
Additional investments needed to cost reduce production 50-70% 2.) Acquisitions
Purchase of 2 manufacturers of rare earth materials (in Arizona and Estonia) for 110 million in 2011. High grade resource, and proprietary low cost materials processing tech, and high margins
through vertical integrations puts Molycorp to the fore front.
Neo Materials the most recent and largest acquisition occurred in June 2012, of a Canadian rare earth processor for 1.5 billion in cash, stock and assumed debt.
o
Through this, Molycorp, acquired the ability to produce ultra high purity, heavy rare earth materials, magnetic powders, and magnets. This allows them to have the industry's broadest coverage and expands into the “heavies” category together with a patented technology platform.
Financing
Convertible Preferred Stock and secondary Stock Offering on Feburary 16 2011
o
Issued 180 million of 5.5% mandatory convertible preferred stock with additional 13.5 million shares of common stock
Convertible Senior Notes and Secondary Stock Offerings on June 15, 2011
o
230 Million of 3.25% convertible senior notes due in 2016 (five year maturity) in unrated
private equity placement. Another secondary offering worth 11.5 Million dollars followed.
Senior Secured Notes on May 25, 2012
o
Issued 650 Million of 10% Senior Secured Notes that were due in 2020, paid interest on semiannual basis. Used to pay for Neo Materials acquisition
The leverage ratio (debt to total capitalization) increased from 0% to 43% in June 2012. However, the leverage ratio on a market value basis (debt to total value) increased to 47%. With production coming online, it is estimated it would drop to the range of 20% to 30%. Future Financing Needs and Options
Still unfinished on its Project Phoenix, projected to require another 289 million of capital expenditures in the second half of 2012 and 25 in 2013. Potential capital expenditure due to interest worth 45 million. Furthermore, due to NeoMaterials acquisition, it had to redeem 230 million of convertible debt that it assumed and repay 33.2 million in other principal obligations.
Options:
Has 369 million in cash in June 2012 but needs 75 million on hand for daily operations.
Bank Loans are a relative unattractive option for long term assets.
Most likely source would be through issuance of new debt or equity, or both
o
Molycorp stock was trading at 11.49, its equity beta was 2.33, paid no dividends, and
the stock volatility assumption used to value its employee stock option was 60% per
year. Example, Molycorp could offer:
Conclusion:
The size of the company's financial need, combined with the uncertainty about the firms projected
revenue concerned many analysts.
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Read the case and then develop answers to the following questions with your team.
(1) What are the key elements of Molycorp's business plan?
Vertical Integration: Increased Production Capacity: Increases In Spot Prices: Strong Positive Cash Flow in Near Future: (2) What are the firm's strengths, or what is the upside on this stock? Why?
Maturity Walls: Aside from their current situation, they don’t have any upcoming maturity walls for any
of their long-term debt. The convertible notes & equities won’t draw too much on cash, though their
current debt (10y maturity) or potentially newly issued debt (5y) will require large interest payments.
Nascent Industry in High Demand: Economic Moat: As shown by the massive amounts of funding required across the industry, there is
certainly an economic moat currently in this market for production. High Margin Manufacturing with Vertical Integration: Strong Projected Future Performance: (3) What are some of the key risks faced by the firm? Why?
1.
Funding Sources & Default Rates:
The straight debt and convertible debt options utilizing bonds
and notes to raise $350 million would not be fully feasible as they are both expected to have a
rating of CCC, considered to be an “extremely speculative” rating level by S&P. With historical
default rates of CCC loans nearing 50% exceeding 5 years and the fact they’ve already raised and
burned 1.5B in the last two funding their acquisitions and projects, they may find it hard to find
appropriate or favorable funding. Furthermore, the deterioration of the market value of
previously issued securities will likely find it harder to find lenders, even with their considerably
attractive pricing and yields. This is reflected in their 10-Q filing on August 2
nd
.
2.
Environmental & Regulatory Concerns:
Another risk that MCP faces is the potentially high
number of environmental regulations and legislature that could hinder their operations. With
such an extensive project that has the potential to increase their operations in the long-run
requiring a significant investment, it would not perform as needed if stricter environmental
regulations were signed into law. This would not only make the investment meaningless, but
also discourage investors away from MCP in the long run as the focus on mining ROEs may not
be as great as it is now.
3.
Shortage of Cash: The largest and most immediate risk for MCP is their current cash position.
They currently need proceeds to complete Project Phoenix, paydown their debt & other
obligations, account for changes to their Net Working Capital, and pay preferred dividends. As
seen in Exhibit 1, even if they decide to raise 350m in cash proceeds through financing, they will
still be far below the minimum amount for the end of year. They must reevaluate their financial
position or adjust projections & planning.
4.
Entrants into the Industry & Effects on REO Pricing: Upon analysis of the list of other Rare Earth
Element companies, it’s clear to see that each of which are pre-revenue yet have had massive
funding amounts and assets building up. Considering that the industry is so sensitive to
fluctuations in supply and demand (as shown by its response to the Chinese tariffs and export
reduction) they are likely to face increased competition from other producers, thus driving REO
& REE prices down again to pre-2009 levels. Furthermore, they operate upon the assumption
that Chinese tariffs & exports keep the supply low but if these conditions change, they may face
further competition and depressed REO / REE pricing.
5.
Share Dilution:
Considering they’ve already accumulated an approximate 6.8M in option shares
that’ll vest in the coming years (Exhibit 2), the company and its investors are facing share
dilution, which will only be further compounded if they decide to issue common stock or
convertible debt as they’ve speculated.
6.
High Leverage & Interest Expense: On the other hand, if they choose to raise money through
debt, at 10.0% & with an OID fee of 5% (which is considerably high), they’ll have to face interest
payments exceeding 100m each year, a significant cash draw. Regardless, even where they
stand currently, they have cash outflows of 65m each year, purely due to SS Notes, which is a
large portion of their revenue. If they don’t manufacture a turnaround, they are at risk of
default and operating at high leverage also often stymies growth and innovation.
(4) Make an investment recommendation. Should an investor buy Molycorp stock for $11.49 per share
in August 2012? Why or why not?
Hell naw. This bish filed for Chapter 11 in 2014, wiping out shareholders. Just cite reasons above. Also
mention that somehow management underestimated their cash needs, which casts doubt on them. Can
mention that DCF shows high intrinsic value currently but cast doubt on their projections based on stuff.
In 2012 they were investigated by the SEC for misstatements in financial statements. Upload your group's response in a Microsoft Word document. Think of your audience as an investorREO
client or a fund manager that you are working for. Your response should be clearly written and
thoughtfully formatted, with an easy-to-find recommendation. You may wish to include professional-
looking tables or exhibits with relevant data and calculations. Aim to keep your response to 2 pages or
less, not including tables/exhibits/figures. 1. Business Plan
Molycorps, the only rare-earth-materials producer in the Western hemisphere, is poised to expand through a “vertically integrated Mine-to-Magnet strategy that would allow for low-cost production, processing, and distribution of REOs (rare earth oxides)” (Harvard 3). This strategy is divided into two parts, (1) focusing on the modernization of their old Mountain Pass facility, and (2) new acquisitions of “downstream refining and manufacturing capabilities”. Both require heavy capital investments to successfully deploy adding onto a particularly difficult year of where spot price of rare earth materials had fallen “by as much as 85%” in 2011, decreasing Molycorp's internal cash flow tremendously. 2. `Strengths
The potential upside as put by the CEO Mark Smith is being “on the cusp of bringing a decade of innovation, development and hard work... to fruition for our company and shareholders” pointing out that the recent modernizations and acquisitions have positioned the firm strongly for the upcoming years. Project Phoenix as well as the full integration of Neo Material Technologies might be the catalyst that Molycorp needs to take full advantage of being the largest and only western hemisphere producer of REO while also having a complete vertical integration through their mine-to-magnets strategy. Coupled with decreased exports of Chinese REO due to their “demands of domestic industries” the market could continue to tighten until “2015” and show an increased demand for western producers of REOs, due to demands of procurement diversification in response to the risk of potential trade wars between the US and China (Harvard 2). Molycorp is strategically positioned as a prominent producer and
supplier of REOs in the Western Hemisphere. This advantageous positioning, combined with the completion and acquisition of new capabilities and low-cost production, presents a unique opportunity for Molycorp to satisfy the growing demand for risk diversification in the market.
Key Risks
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Exhibits:
Exhibit 1: Estimated Cash Flows EOY 2012
Exhibit 2: Estimated Share Dilution, withholding further issued common stock or convertible securities
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Cost of new equipment and timbers
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$ 67,000
*Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth.
The mineral deposit would be exhausted after four years of mining. At that point, the working capital would be released for
reinvestment elsewhere. The company's required rate of return is 19%.
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Required:
a. What is the net present value of the…
arrow_forward
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Cost of new equipment and timbers
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$ 180,000
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Windhoek Mines, Limited, of Namibia, is contemplating the purchase of equipment to exploit a mineral deposit on land to which the
company has mineral rights. An engineering and cost analysis has been made, and it is expected that the following cash flows would
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Cost of new equipment and timbers
Working capital required
Annual net cash receipts
Cost to construct new roads in three years
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$ 380,000
$ 120,000
$ 135,000*
$ 44,000
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The mineral deposit would be exhausted after four years of mining. At that point, the working capital would be released for
reinvestment elsewhere. The company's required rate of return is 18%.
Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables.
Required:
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Windhoek Mines, Limited, of Namibia, is contemplating the purchase of equipment to exploit a mineral deposit on land to which the
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Cost of new equipment and timbers
Working capital required
Annual net cash receipts
Cost to construct new roads in three years
Salvage value of equipment in four years
$ 360,000
$ 110,000
$ 140,000*
$ 42,000
$
67,000
*Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, Insurance, and so forth.
The mineral deposit would be exhausted after four years of mining. At that point, the working capital would be released for
reinvestment elsewhere. The company's required rate of return is 19%.
Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables.
Required:
a. What is the net present value of the…
arrow_forward
Windhoek Mines, Limited, of Namibia, is contemplating the purchase of equipment to exploit a mineral deposit on land to which the
company has mineral rights. An engineering and cost analysis has been made, and it is expected that the following cash flows would
be associated with opening and operating a mine in the area:
Cost of new equipment and timbers
Working capital required
Annual net cash receipts
Cost to construct new roads in three years
Salvage value of equipment in four years
$ 430,000
$ 215,000
$ 150,000*
$ 63,000
$ 88,000
"Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth.
The mineral deposit would be exhausted after four years of mining. At that point, the working capital would be released for
reinvestment elsewhere. The company's required rate of return is 18%.
Required:
a. What is the net present value of the proposed mining project?
b. Should the project be accepted?
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Windhoek Mines, Limited, of Namibia, is contemplating the purchase of equipment to exploit a mineral deposit on land to which the
company has mineral rights. An engineering and cost analysis has been made, and it is expected that the following cash flows would
be associated with opening and operating a mine in the area:
Cost of new equipment and timbers
Working capital required
$ 440,000
$ 150,000
$ 165,000*
Cost to construct new roads in three years
Annual net cash receipts
Salvage value of equipment in four years
$ 50,000
$ 75,000
*Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth.
The mineral deposit would be exhausted after four years of mining. At that point, the working capital would be released for
reinvestment elsewhere. The company's required rate of return is 18%.
Required:
a. What is the net present value of the proposed mining project?
b. Should the project be accepted?
Complete this question by entering your answers in…
arrow_forward
Windhoek Mines, Limited, of Namibia, is contemplating the purchase of equipment to exploit a mineral deposit on land to which the
company has mineral rights. An engineering and cost analysis has been made, and it is expected that the following cash flows would
be associated with opening and operating a mine in the area:
Cost of new equipment and timbers
Working capital required
Annual net cash receipts
Cost to construct new roads in three years
Salvage value of equipment in four years
$ 330,000
$ 200,000
$ 135,000*
$ 60,000
$ 85,000
*Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth.
The mineral deposit would be exhausted after four years of mining. At that point, the working capital would be released for
reinvestment elsewhere. The company's required rate of return is 18%.
Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables.
Required:
a. What is the net present value of the…
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Check my work
Windhoek Mines, Ltd., of Namibia, is contemplating the purchase of equipment to exploit a mineral deposit on
land to which the company has mineral rights. An engineering and cost analysis has been made, and it is
expected that the following cash flows would be associated with opening and operating a mine in the area:
Cost of new equipment and timbers
Working capital required
Annual net cash receipts
Cost to construct new roads in year three
Salvage value of equipment in four years
$ 410,000
$ 135,000
S 150,000*
$ 47,000
S 72,000
*Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth.
The mineral deposit would be exhausted after four years of mining. At that point, the working capital would be
released for reinvestment elsewhere. The company's required rate of return is 18%.
Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables.
Required:
a. What is the net present…
arrow_forward
Windhoek Mines, Limited, of Namibia, is contemplating the purchase of equipment to exploit a mineral
deposit on land to which the company has mineral rights. An engineering and cost analysis has been made,
and it is expected that the following cash flows would be associated with opening and operating a mine in
the area:
Cost of new equipment and timbers
Working capital "required
Annual net cash receipts
Cost to construct new roads in three years
Salvage value of equipment in four years
$ 430,000
$ 215,000
$ 150,000*
$ 63,000
$ 88,000
*Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth.
The mineral deposit would be exhausted after four years of mining. At that point, the working capital would
be released for reinvestment elsewhere. The company's required rate of return is 18%.
Required:
a. What is the net present value of the proposed mining project?
b. Should the project be accepted?
Complete this question by entering your answers in…
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- Integrative: Complete investment decision With the market price of gold at C$1,562.50 per ounce (C$ stands for Canadian dollars), Maritime Resources Corp., a Canadian mining firm, would like to assess the financial feasibility of reopening an old gold mine that had ceased operations in the past due to low gold prices. Reopening the mine would require an up-front capital expenditure of C$68.4 million and annual operating expenses of C$19.43 million. Maritime expects that over a 5-year operating life it can recover 176,000 ounces of gold from the mine and that the project will have no terminal value. Maritime uses straight-line depreciation, has a 21.06% corporate tax rate, and has a(n) 11.2% cost of capital. a. Calculate the operating cash flows for the gold mine project. b. Depict on a timeline the net cash flows for the gold mine project. c. Calculate the internal rate of return (IRR) for the gold mine project.arrow_forwardIntegrative: Complete investment decision With the market price of gold at CS1,562.50 per ounce (C$ stands for Canadian dollars), Maritime Resources Corp., a Canadian mining firm, would like to assess the financial feasibility of reopening an old gold mine that had ceased operations in the past due to low gold prices. Reopening the mine would require an up-front capital expenditure of C$68.1 million and annual operating expenses of CS19.38 million. Maritime expects that over a 5-year operating life it can recover 173,000 ounces of gold from the mine and that the project will have no terminal value. Maritime uses straight-line depreciation, has a 21.01% corporate tax rate, and has a(n) 10.9% cost of capital. a. Calculate the operating cash flows for the gold mine project. b. Depict on a timeline the net cash flows for the gold mine project. c. Calculate the internal rate of return (IRR) for the gold mine project. d. Calculate the net present value (NPV) for the gold mine project. e.…arrow_forwardExcel Online structured Activity: NPV profiles A company is considering two mutually exclusive expansion plans. Plan A requires a $40 million expenditure on a large-scale integrated plant that would provide expected cash flows of $6.39 million per year for 20 years. Plan B requires a $13 million expenditure to build a somewhat less efficient, more labor-intensive plant with an expected cash flow of $2.91 million per year for 20 years. The firm's WACC is 11%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Open spreadsheet a. Calculate each project's NPV. Round your answers to two decimal places. Do not round your intermediate calculations. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Plan A: $ million Plan B: $ million Calculate each project's IRR. Round your answer to two decimal places. Plan A: % Plan B: % b. By graphing the…arrow_forward
- Excel Online Structured Activity: NPV profiles A company is considering two mutually exclusive expansion plans. Plan A requires a $40 million expenditure on a large-scale integrated plant that would provide expected cash flows of $6.39 million per year for 20 years. Plan B requires a $11 million expenditure to build a somewhat less efficient, more labor-intensive plant with an expected cash flow of $2.47 million per year for 20 years. The firm's WACC is 10%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. X Open spreadsheet a. Calculate each project's NPV. Round your answers to two decimal places. Do not round your intermediate calculations. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Plan A: $ Plan B: $ Calculate each project's IRR. Round your answer to two decimal places. Plan A: Plan B: million millionarrow_forwardNonearrow_forwardIn this assignment you will need to perform an analysis on a hypothetical discovery based on the following information: Field Size 1.4 Tcf Production/Reserve Ratio 7% of the original field size starting producing year 3 Gas Price $3.5/Mcf CapEx $1/Mcf capitalized in 5 years, straight-line depreciation Operating Cost $0.8/Mcf Royalty 10% Government Take 40% Cost recovery limit 60% of gross revenue Discount Rate 10% Income Tax Rate 33% Allow cost recovery carry forward 1. Evaluate the discovery – you need to calculate the total worth, worth to the company, government take, value in terms of entitlement interest and working interest. 2. Evaluate the producing gas reserve – total worth, worth to the company, government take, value in terms of entitlement interest and working interest.arrow_forward
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