Exhibit 99.1

 

Upon the formation of Molycorp, LLC on September 9, 2009, all members of Molycorp Minerals, LLC contributed their member interests to Molycorp, LLC in exchange for member interests in Molycorp, LLC. That exchange was treated as a reorganization of entities under common control and Molycorp Minerals, LLC is the predecessor to Molycorp, LLC. Accordingly, all financial information of Molycorp, LLC for periods prior to its formation is the historical financial information of Molycorp Minerals, LLC. Molycorp Minerals, LLC acquired the Mountain Pass, California rare earth deposit and associated assets from Chevron Mining Inc., a subsidiary of Chevron Corporation, on September 30, 2008.

 

The selected consolidated financial data as of and for the years ended December 31, 2010 and 2009, and for the period from June 12, 2008 (Inception) through December 31, 2010 has been derived from Molycorp, Inc’s audited consolidated financial statements and the related notes included elsewhere in this Exhibit. The selected consolidated financial data for the period from June 12, 2008 (Inception) through December 31, 2008 has been derived from Molycorp, LLC’s audited consolidated financial statements and the related notes.

 

Molycorp, Inc. was formed on March 4, 2010 for the purpose of continuing the business of Molycorp, LLC in corporate form. On April 15, 2010, the members of Molycorp, LLC contributed either (a) all of their member interests in Molycorp, LLC or (b) all of their equity interests in entities that hold member interests in Molycorp, LLC (and no other assets or liabilities) to Molycorp, Inc. in exchange for shares of Molycorp, Inc., and, as a result, Molycorp, LLC became a wholly owned subsidiary of Molycorp, Inc. Accordingly, all financial information of Molycorp, Inc. for periods prior to the corporate reorganization is the historical financial information of Molycorp, LLC.

 

As a limited liability company, the taxable income and losses of Molycorp, LLC were reported on the income tax returns of its members. Molycorp, Inc. is subject to federal and state income taxes and will file consolidated income tax returns. If the corporate reorganization had been effective as of January 1, 2009, our net loss of $28.6 million for the year ended December 31, 2009 would have generated an unaudited pro forma deferred income tax benefit of $11.3 million for the year ended December 31, 2009 assuming a combined federal and state statutory income tax rate. However, as realization of such tax benefit would not have been assured, we would have also established a valuation allowance of $11.3 million to eliminate such pro forma tax benefit.

 

The financial data for all periods prior to April 15, 2010 gives retroactive effect to the corporate reorganization as if it had occurred on June 12, 2008.

 

The selected consolidated financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the notes thereto included elsewhere in this Exhibit.

 

 

 

 

 

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Exhibit. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates and beliefs and involves risks and uncertainties. Our actual results could differ materially from those discussed in these forward-looking statements as a result of various factors, including those discussed below, under the headings “Risk Factors” and “Special Note Regarding Forward-Looking Statements” in our Annual Report on Form 10-K for the year ended December 31, 2010 and in other parts of this Exhibit.

 

Overview

 

Presentation

 

Molycorp Minerals, LLC, a Delaware limited liability company formerly known as Rare Earth Acquisition, LLC, was formed on June 12, 2008 to purchase the Mountain Pass, California rare earth deposits and associated assets, or the Mountain Pass facility, from Chevron Mining Inc., a subsidiary of Chevron Corporation, on September 30, 2008. Molycorp, LLC, a Delaware limited liability company, which was the parent of Molycorp Minerals, was formed on September 9, 2009. Molycorp, Inc. was formed on March 4, 2010 as a new Delaware corporation that did not, prior to the date of the consummation of its initial public offering, conduct any material activities.

 

On April 15, 2010, the members of Molycorp, LLC contributed either (a) all of their member interests in Molycorp, LLC or (b) all of their equity interests in entities that hold member interests in Molycorp, LLC (and no other assets or liabilities) to Molycorp, Inc. in exchange for shares of Molycorp, Inc. Class A common stock. Additionally, all of the holders of profits interests in Molycorp Minerals, which were represented by incentive shares, contributed all of their incentive shares to Molycorp, Inc. in exchange for shares of Molycorp, Inc. Class B common stock. As a result, Molycorp, LLC and Molycorp Minerals became subsidiaries of Molycorp, Inc. On June 15, 2010, Molycorp, LLC was merged with and into Molycorp Minerals.

 

On July 9, 2010, Molycorp, Inc. completed a 38.23435373-for-one stock split, which has been retroactively reflected in the historical financial data for all periods presented. On August 3, 2010, Molycorp, Inc. completed its initial public offering of common stock. In connection with its initial public offering, Molycorp, Inc. issued 29,128,700 shares of common stock at $14.00 per share. Total net proceeds of the offering were $378.6 million after underwriting discounts and commissions and offering expenses payable by Molycorp, Inc. Immediately prior to the consummation of Molycorp, Inc.’s initial public offering, all of the shares of Class A common stock and Class B common stock were converted into shares of common stock.

 

In the first quarter of 2011, Molycorp, Inc. completed a public offering of its 5.50% Series A mandatory convertible preferred stock, $0.001 par value per share. In connection with the offering of its Series A mandatory convertible preferred stock, Molycorp, Inc. issued 2,070,000 shares of Series A mandatory convertible preferred stock for $100.00 per share. Total net proceeds of the offering were $199.6 million after underwriting discounts and commissions and offering expenses payable by Molycorp, Inc. Each share of the Series A mandatory convertible preferred stock will automatically convert on March 1, 2014 into between 1.6667 and 2.0000 shares of Molycorp, Inc.’s common stock, subject to anti-dilution adjustments. At any time prior to March 1, 2014, holders may elect to convert each share of the Series A mandatory convertible preferred stock into shares of common stock at the minimum conversion rate of 1.6667 shares of common stock per share of Series A mandatory convertible preferred stock, subject to anti-dilution adjustments. The Series A mandatory convertible preferred stock is not redeemable.

 

On April 1, 2011, Molycorp Minerals, LLC completed the acquisition of a 90.023% controlling stake in Molycorp Silmet AS, one of only two rare earth processing facilities in Europe, in a transaction valued at approximately $89 million. Molycorp acquired 80% of the outstanding shares of Molycorp Silmet AS from Silmet Grupp in exchange for 1,593,419 shares of Molycorp common stock. Silmet Grupp will retain a 9.977% ownership interest in Molycorp Silmet AS. Molycorp acquired the other 10.023% from Treibacher

Industrie AG for $9.0 million in cash. The Molycorp Silmet AS acquisition provides Molycorp with a European base of operations and doubles Molycorp’s current rare earth production capacity from approximately 3,000 mt per year of REO equivalent to approximately 6,000 mt. Molycorp Silmet AS will begin sourcing rare earth feed stocks for production of its products primarily from the Mountain Pass facility. Molycorp Silmet AS’s main focus will be on the production of rare earth oxides and metals, including didymium metal, a critical component in the manufacture of NdFeB magnets. Molycorp Silmet AS’s manufacturing operation is located in Sillamäe, Estonia. Molycorp Silmet AS currently sells products to customers in Europe, North and South America, Asia, Russia, and other former Soviet Union countries.

 

On April 15, 2011, Molycorp completed the acquisition from Santoku of all the issued and outstanding shares of capital stock of MMA in an all-cash transaction for $17.5 million. The acquisition provides Molycorp with access to certain intellectual properties relative to the development, processing and manufacturing of neodymium and samarium magnet alloy products. As part of the stock purchase agreement, Santoku will provide consulting services to Molycorp for the purpose of maintaining and enhancing the quality of Molycorp’s products. On the same date, Molycorp entered into a non-exclusive marketing and distribution agreement with Santoku for the sale and distribution of neodymium and samarium magnet alloy products.

 

Our Business

 

We are the only REO producer in the Western hemisphere and own one of the world’s largest, most fully developed rare earth projects outside of China. Following the execution of our “mine-to-magnets” strategy and completion of our modernization and expansion efforts, we expect to be one of the world’s most integrated producers of rare earth products, including oxides, metals, alloys and magnets. Our rare earths are critical inputs in many existing and emerging applications including: clean energy technologies, such as hybrid and electric vehicles and wind power turbines; multiple high-tech uses, including fiber optics, lasers and hard disk drives; numerous defense applications, such as guidance and control systems and global positioning systems; and advanced water treatment technology for use in industrial, military and outdoor recreation applications. Global demand for REEs is projected to steadily increase both due to continuing growth in existing applications and increased innovation and development of new end uses.

 

Our goals are to:

 

 

We have made significant investments, and expect to continue to invest, in developing technologically advanced and proprietary applications for individual REEs. Under our “mine-to-magnets” strategy, we plan to integrate the rare earths supply chain: mining; oxide processing; production of metals and alloys; and production of rare earth-based magnets. We are in the process of modernizing and expanding our production capabilities at our Mountain Pass facility, and our recent acquisitions of Molycorp Silmet AS and MMA provide us with additional capacity for the production of REOs as well as the ability to produce rare earth metals and alloys.

 

Our vision is to be the rare earth products and technology company recognized for its “ETHICS” — Excellence, Trust, Honesty, Integrity, Creativity and Safety. Since July 2005, the Mountain Pass facility has not had a lost-time accident and has received the coveted “Sentinels of Safety” award from the MSHA for three of the last six years.

Our Mine Process and Development Plans

 

We recommenced mining operations in December 2010 and are preparing to recommence milling operations, which we expect to occur in the first quarter of 2012. Recommencement of mining and milling operations is coincident with our initial modernization and expansion plan, which will give us the capacity to efficiently produce at a rate of approximately 19,050 mt of REO per year by the end of 2012. Additionally, upon the completion of our capacity expansion plan, we expect to have the ability to produce up to approximately 40,000 mt of REO per year by the end of 2013. Prior to the expected completion of our initial modernization and expansion efforts, we expect to produce approximately 3,000 mt per year in the aggregate of cerium products, lanthanum concentrate, didymium oxide and heavy rare earth concentrates from stockpiled feedstock.

 

We currently produce rare earth metals outside of the United States through a third-party tolling arrangement. Additionally, the acquisition of Molycorp Silmet AS provides us with a European base of operations and doubles our current rare earth production capacity from approximately 3,000 mt per year of REO equivalent to approximately 6,000 mt. Through our acquisitions of Molycorp Silmet AS and MMA in April 2011, we added facilities and equipment for metal conversion and alloy production within the Molycorp organization. We intend to transport cerium, lanthanum, neodymium, praseodymium, dysprosium, terbium and samarium oxide products from our Mountain Pass facility to our Molycorp Silmet AS and MMA facilities where we will produce rare earth metals and alloys.

 

In December 2010, we entered into a non-binding letter of intent with Hitachi to form joint ventures for the production of rare earth alloys and magnets in the United States and to acquire a license for certain technology related to the production of rare earth metals, alloys and magnets. We have completed a joint feasibility study with Hitachi and we are currently negotiating the joint venture agreements.

 

Our proposed joint ventures with Hitachi would provide us with additional access to the technology, people and facilities to convert our rare earth materials into rare earth alloys and high-performance permanent rare earth magnets required for production of hybrid and electric vehicles, wind power turbines, high-tech applications and numerous advanced defense systems on which the U.S. economy and national security depend. The consummation of such joint ventures, in conjunction with our current modernization plans and our recent acquisitions of Molycorp Silmet AS and MMA, is expected to provide us with the capability to mine, process, separate and alloy individual REEs and manufacture them into neodymium iron boron, or NdFeB, magnets. This downstream integration would make us the only fully integrated producer of NdFeB magnets outside of China, helping to secure a rare earth supply chain for the Rest of World.

 

We anticipate the cost to restart mining operations, construct and refurbish processing facilities and other infrastructure at the Mountain Pass facility and expand into metal and alloy production in connection with our initial modernization and expansion plan to be approximately $531 million through 2012. Additionally, we estimate, based on consultation with our project manager, that we will incur approximately $250 million of capital costs through 2013 in connection with the second-phase capacity expansion plan. Our estimated capital expenditures of $781 million do not include corporate, selling, general and administrative expenses, which we estimate to be an additional $20 million to $25 million per year. We expect to finance our remaining capital expenditures under the initial modernization and expansion and the second phase expansion plans as well as our working capital requirements, with our available cash balances of $492.5 million as of March 31, 2011, net proceeds from our private placement of convertible senior notes, anticipated revenue from operations and additional traditional debt financing, project financing, and/or government programs, including the U.S. Department of Energy, or DOE, loan guarantee program. We submitted a Part I application on June 2010 for up to $280 million. On July 21, 2010, the DOE deemed our application eligible for submission of a Part II application, which was submitted on December 31, 2010. Due to program and resource constraints, our application under Section 1705 of the DOE loan guarantee program, or LGP, was put on hold on May 10, 2011. At that time, DOE advised us that our project may be eligible for funding under Section 1703 of the LGP. We are currently evaluating our options under the LGP and we expect to conclude on the best course of action in the near term. On December 10, 2010, we entered into a memorandum of understanding with Sumitomo pursuant to which Sumitomo agreed to, among other things, purchase $100 million of Molycorp,

Inc.’s common stock and arrange for $30 million of debt financing. Sumitomo is currently conducting a due diligence review and the consummation of these transactions with Sumitomo is subject to the satisfaction of numerous conditions and finalization of definitive agreements.

 

Our Products and Markets

 

Since our acquisition of the Mountain Pass facility, we have been producing and selling small quantities of certain rare earth products from our pilot processes using stockpiled feedstocks. The purpose of this effort has been to significantly improve our solvent extraction technology and to develop other key technologies that will be utilized in the new process. In the first quarter of 2010, we completed our initial pilot processing of stockpiled lanthanum rich feedstock to produce didymium oxide (a combination of neodymium and praseodymium) and a higher purity lanthanum concentrate than we previously produced. Lanthanum products processed from the stockpiled material, which we sell to customers in the fluid catalytic cracking industry, has been our largest source of revenue to date.

 

We commenced a second pilot processing campaign in the second quarter of 2010 in an effort to commercially demonstrate our new cracking technology and to further optimize our processing technologies and improve recovery rates compared to historical operations at the Mountain Pass facility. Due to the success of this effort, we are producing cerium and lanthanum products, as well as didymium oxide from bastnasite concentrate stockpiles. In July 2010, we began selling our didymium oxide primarily to customers in the magnet industry. During the third quarter of 2010, we began selling our cerium products to customers in the automobile emissions catalyst production industry and we completed our initial sale of XSORBX^® to the water treatment industry. Additionally, in the fourth quarter of 2010, we commenced production of didymium metal from our oxide through a third-party processor and began selling this product primarily to customers in the magnet industry during the first quarter of 2011. Also, in the first quarter of 2011, in anticipation of our acquisition, AS Silmet commenced contract tolling for us of mixed rare earth carbonates into lanthanum oxide, cerium carbonate, neodymium and praseodymium, which we began selling in 2011. With these products, we have begun expanding and diversifying our product mix and our customer base. As a result of these events, our product mix has been diversified and we are realizing revenue growth from increasing sales volumes and higher REO pricing.

 

Key Industry Factors

 

Demand for Rare Earth Products

 

Global consumption of REEs is projected to steadily increase due to continuing growth in existing applications and increased innovation and development of new end uses. For example, the integration of rare earth permanent magnet drives into wind power turbines has substantially reduced the need for gearboxes, which increases overall efficiency and reliability. If Mountain Pass and other rare earth projects do not commence production when anticipated, there will continue to be a gap between current and forecasted demand and supply. We believe that this anticipated market dynamic will underpin continued strong pricing.

 

As a result of the global economic crisis, rare earth product prices declined by approximately 50% during 2008 and through the third quarter of 2009. According to Metal-Pages, from October 2009 through March 2011, prices for rare earths have risen by approximately 1,500% on average. Furthermore, over the same period, prices for some of the most common rare earths (cerium oxide, lanthanum oxide, neodymium oxide and praseodymium oxide) have risen by more than 2,000% on average.

 

Supply of Rare Earth Products

 

China has dominated the global supply of REOs for the last ten years and, according to IMCOA, it is estimated that China accounted for approximately 97% of global REO production in 2008. Even with our planned production, global supply is expected by analysts to remain tight due to the combined effects of growing demand and actions taken by the Chinese government to restrict exports. The Chinese government heightened international supply concerns beginning in August 2009 when China’s Interior Ministry first signaled that it would further restrict exports of Chinese rare earth resources. Citing the importance of REE availability to internal industries and the desire to conserve resources, the Chinese government has announced export quotas, increased export tariffs and introduced a “mining quotas policy” that, in addition to imposing export quotas and export tariffs, also imposes production quotas and limits the issuance of new licenses for rare earth exploration. On July 8, 2010, China’s Ministry of Industry and Information Technology issued the export quota for the second half of 2010, which reduced exports by 72% compared with the second half of 2009 and 40% for the year ended December 31, 2010 as compared to the year ended December 31, 2009. On December 28, 2010, China’s Ministry of Industry and Information Technology further reduced the export quota for the first half of 2011, reducing exports by 35% compared with the first half of 2010 and 20% for the twelve months ended June 30, 2011 as compared to the twelve months ended June 30, 2010. Actual exports of rare earth ores and metals from China, however, continue to exceed export quotas mandated by the Chinese government. In response to this trend, China’s Ministry of Commerce announced on May 19, 2011 that it would further tighten its control over rare earth metals by expanding its export quota system and imposing higher taxes on rare earth ores. China’s internal consumption of rare earths is expected to continue to grow, leaving the Rest of World with less supply during a period of increasing global demand. China also dominates the manufacture of rare earth metals, producing substantially all of the world’s supply, and the manufacture of NdFeB magnets, producing approximately 80% of the world’s supply. Neither capability currently exists in the United States.

 

China has announced a national stockpile program, as has South Korea. Additionally, Japan has increased its national stockpile program. In December 2010, the U.S. Department of Energy released a study concluding that five rare earth metals, including dysprosium, neodymium, terbium, europium and yttrium, are critical to clean energy technologies in the short term due to their importance to the clean energy economy and risk of supply disruption. The report emphasizes that diversified global supply chains for these critical materials are essential, and calls for steps to be taken to facilitate extraction, processing and manufacturing in the United States. Additionally, the U.S. Department of Defense is conducting a study to determine its rare earth requirements and supply chain vulnerabilities and whether to build a strategic stockpile. These stockpile programs will likely accelerate the pace of the current and projected global REE supply deficit.

 

As a result of the internal industrial development, as well as economic, environmental and regulatory factors in China, there is uncertainty with respect to the availability of rare earth products from China. Although Chinese production of rare earth materials is increasing, export quotas imposed by the Chinese government are decreasing, thus reducing the amount of rare earth materials that China may export to the rest of the world. This reduction is occurring at a time when the demand for REEs is growing significantly.

Factors Affecting Our Results

 

Modernization and Expansion of Mountain Pass Facility

 

We anticipate a dramatic change in our business and results of operations upon the completion of our planned modernization and expansion of our Mountain Pass facility in connection with our initial modernization and expansion plan and the commencement of metal, alloy, and magnet production in 2012. For example, we expect to produce and sell a significantly expanded slate of products, including specialty cerium products for water treatment, neodymium and praseodymium metal, neodymium iron boron and samarium cobalt alloys for magnets, europium, gadolinium, and terbium oxides for phosphors, and dysprosium and terbium for magnets.

 

We acquired the Mountain Pass facility on September 30, 2008 from Chevron Mining Inc., which became the owner of the Mountain Pass facility in 2005 after Unocal Corporation merged with Chevron Corporation. Unocal Corporation had suspended most operations at the Mountain Pass facility by 2002 and, except for pilot processing activities, they remained suspended under Chevron Mining Inc.’s ownership. Additionally, significant reclamation work was completed at the Mountain Pass facility under Chevron Mining Inc.’s ownership.

 

We plan to utilize the assets we acquired from Chevron Mining Inc. as a foundation to build an integrated rare earth products and technology company, which requires considerable additional capital investment. We believe the application of improved technologies, along with the capital investment, will allow us to create a sustainable business by cost effectively producing high purity rare earth products. Between now and the start-up of the new processing facility, we anticipate further diversifying our product line through the production of samarium/europium/gadolinium concentrate from bastnasite concentrate stockpiles. Upon completion of the modernization and expansion of the Mountain Pass facility, we expect to produce lanthanum, cerium, praseodymium, neodymium, samarium, europium, gadolinium, terbium, dysprosium and yttrium in various chemical compounds and/or metal forms, including alloys. In addition to the modernization and expansion of the Mountain Pass facility and our acquisitions of Molycorp Silmet AS and MMA, we expect to significantly broaden our operations through the addition of a number of downstream activities and products, including rare earth metal production and NdFeB and samarium cobalt alloys. We intend to use some of the NdFeB alloy and dysprosium metal product in a magnet production facility, which we anticipate developing through a joint venture arrangement. Accordingly, upon full implementation of our “mine-to-magnets” strategy, we expect our new products to have significantly more applications and a broader market base than our current products.

 

Revenues

 

In the second quarter of 2010, we commenced a second pilot processing campaign to commercially demonstrate our new cracking technology and to further optimize our processing technologies and improve our recovery rates compared to historical operations at the Mountain Pass facility. Due to the success of this second pilot processing campaign, we are producing cerium and lanthanum products as well as didymium oxide from bastnasite concentrate stockpiles. In the fourth quarter of 2010, we commenced production of didymium metal from our oxide through a third-party processor. In the first quarter of 2011, AS Silmet commenced tolling for us of mixed rare earth carbonates into lanthanum oxide, cerium carbonate, neodymium and praseodymium. The addition of these new products has significantly increased the diversity of our product mix. The following is a summary of the percentage of revenue by significant product line for the three months ended March 31, 2011 and 2010.

 

 

Our product mix is determined by a combination of global and regional supply and demand factors. Pricing of our product is usually set based on market prices for the month prior to shipment with a price floor, and in certain instances, with a price cap. Our revenue increased significantly for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010, due to the combination of a general increase in the market prices of REOs, and higher sales volumes of ceric hydrate and didymium products, which have significantly higher values than the lanthanum products that comprised substantially all of our sales in 2010. Sales for the three months ended March 31, 2011 included 696 mt of REOs, including purchased REOs, at an average price of $37.73 per kilogram compared to sales of 423 mt of REO at an average price of $7.13 per kilogram for the three months ended March 31, 2010. The quantities we sell are determined by the production capabilities of the Mountain Pass facility and by demand for our product, which is also influenced by the level of purity and consistency we are able to achieve. Our revenue also includes sales of finished products acquired as part of our acquisition of the Mountain Pass facility.

 

Pursuant to a contract with one of our principal customers, we are supplying a significant amount of our REOs, through mid-2012 at market-based prices subject to a ceiling based on market prices at June 1, 2010 (currently in effect), and a floor. Under a second contract, we will supply the same customer with approximately 75% of our phase one lanthanum product production per year at market-based prices subject to a floor for a three-year period commencing upon the achievement of expected annual production rates under our initial modernization and expansion plan, which may be extended at the customer’s option for an additional three-year period. Upon execution of definitive agreements pursuant to our memorandum of understanding with Sumitomo, we also expect to provide Sumitomo with approximately 1,500 mt per year (and following completion of our initial modernization and expansion plan, approximately 1,750 mt per year) of cerium and lanthanum-based products and 250 mt per year of didymium oxide for a period ending five years after the completion of our initial modernization and expansion of the Mountain Pass facility, at market-based prices subject to a floor. Although prices for REOs have generally increased since October 2009, this increase followed a period of generally lower prices corresponding with the global financial crisis beginning in 2008. Many factors influence the market prices for REOs and, in the absence of established pricing in customer contracts, our sales revenue will fluctuate based upon changes in the prevailing prices for REOs. We use various industry sources, including certain publications, in evaluating prevailing market prices and establishing prices for our products because there are no published indices for rare earth products, including alloys or magnets.

 

We expect our quarterly production for the rest of 2011 to range from approximately 40% to 50% higher than the first quarter due to increased processing capacity from the recent acquisitions of Molycorp Silmet AS and MMA and increased production from our Mountain Pass facility. Substantially all of our lanthanum production in 2011 (which accounts for approximately 60% of our production and is expected to be approximately 1,250 mt for the remainder of 2011), will be sold pursuant to the contract with one of our principal customers described above under which our pricing is subject to a price ceiling, which was set based upon market prices at the time the contract was entered (and which is well below current prices); production of our remaining materials will generally be sold based on prevailing market prices. Accordingly, our ability to realize prevailing market prices in the near term is limited due to that sales contract with one of our principal customers for our lanthanum product, which reverts to prevailing market pricing upon the completion of the initial modernization and expansion plan at Mountain Pass.

 

Cost of Goods Sold

 

Our cost of goods sold reflects the cost allocated to our inventory acquired as part of our acquisition of the Mountain Pass facility and, with respect to our recent sales of lanthanum and cerium products and didymium oxide, the subsequent processing costs incurred to produce the product. Because many of our costs are fixed costs as opposed to variable costs, as our production increases or decreases, our average cost per metric ton decreases or increases, respectively. Primary production costs include direct labor and benefits, maintenance, natural gas, electricity, operating supplies, chemicals, depreciation and amortization and other plant overhead expenses.

Currently, our most significant variable costs are chemicals and electricity. In the future, we intend to produce more of our chemicals at a plant on-site, which will reduce our variable chemical costs. We also intend to build a co-generation facility to provide power. Following such steps, natural gas will substantially replace third-party electricity costs and become one of our most significant variable costs.

 

We expect our labor and benefit costs to increase through 2013 due to the addition of personnel and consultants required to increase production to a rate of approximately 19,050 mt of REO per year by the end of 2012 in connection with our initial modernization and expansion plan and up to approximately 40,000 mt of REO per year by the end of 2013 in connection with our capacity expansion plan. In addition to volume fluctuations, our variable costs, such as electricity, operating supplies and chemicals, are influenced by general economic conditions that are beyond our control. Other events outside our control, such as power outages, have in the past interrupted our operations and increased our total production costs, and we may experience similar events in the future.

 

Selling, General and Administrative Expenses

 

Our selling, general and administrative expenses consist primarily of: personnel and related costs; legal, accounting and other professional fees; occupancy costs; and information technology costs. We continue to experience increased selling, general and administrative expenses as we expand our business and operate as a publicly traded company. These expenses include increasing our staffing as we construct our new facilities and pursue other business development activities to execute our “mine-to-magnets” business plan. We have also experienced additional legal, compliance and corporate governance expenses, as well as additional accounting and audit expenses, stock exchange listing fees, transfer agent and other stockholder-related fees and increased premiums for certain insurance policies, among others. We have also incurred significant professional fees and other costs in connection with the business acquisitions that we completed in April 2011.

 

Income Taxes

 

Prior to our corporate reorganization, we operated entirely within limited liability companies, which were not directly liable for the payment of federal or state income taxes and our taxable income or loss was included in the state and federal tax returns of Molycorp, LLC’s members. Molycorp, Inc. is subject to U.S. federal and state income taxes. For the three months ended March 31, 2011, we incurred $0.2 million in income tax expenses and have placed a 100% reserve on our deferred tax assets.

 

Environmental

 

Our operations are subject to numerous and detailed international, national, federal, state and local environmental laws, regulations and permits, including those pertaining to employee health and safety, environmental permitting and licensing, air quality standards, GHG emissions, water usage and disposal, pollution, waste management, plant and wildlife protection, handling and disposal of radioactive substances, remediation of soil and groundwater contamination, land use, reclamation and restoration of properties, the discharge of materials into the environment and groundwater quality and availability.

 

We retain, both within Molycorp and outside Molycorp, the services of reclamation and environmental, health and safety, or EHS, professionals to review our operations and assist with environmental compliance, including with respect to product management, solid and hazardous waste management and disposal, water and air quality, asbestos abatement, drinking water quality, reclamation requirements, radiation control and other EHS issues.

 

We have spent, and anticipate that we will continue to spend, financial and managerial resources to comply with environmental requirements. For example, we have acquired enough air emission offset credits for both our initial modernization and expansion plan and our second phase capacity expansion plan at our Mountain Pass facility. In addition, in the quarter ended March 31, 2011 and 2010, we incurred operating expenses of approximately $1.0 million and $1.3 million, respectively, associated with environmental compliance requirements at our Mountain Pass facility. The costs expected to be incurred as part of our on-going remediation at our Mountain Pass facility, which is expected to continue throughout the Mountain

Pass facility’s operating, closure and post-closure periods, are included as part of our asset retirement obligations. See “— Critical Accounting Policies and Estimates — Reclamation.” We anticipate the need to dispose of a portion of the wastewater in one of our evaporation ponds in order to repair recently detected lining tears. We estimate the wastewater transportation and disposal costs associated with this repair to be approximately $0.8 million in 2011. In addition, while our chlor-alkali plant is being constructed, we intend to remove and dispose of any wastewater generated in excess of our evaporation capability at an off-site location as a result of which we may incur additional significant costs.

 

We cannot predict the impact of new or changed laws, regulations or permit requirements, including the matters discussed below, or changes in the way such laws, regulations or permit requirements are enforced, interpreted or administered. Environmental laws and regulations are complex, change frequently and have tended to become more stringent over time. It is possible that greater than anticipated environmental expenditures will be required in 2011 or in the future, including in connection with our acquisitions of Molycorp Silmet AS and MMA. We expect continued government and public emphasis on environmental issues will result in increased future investment for environmental controls at our operations. Additionally, with increased attention paid to emissions of GHGs, including carbon dioxide, current and future regulations are expected to affect our operations. We will continue to monitor developments in these various programs and assess their potential impacts on our operations.

 

Violations of environmental laws, regulations and permits can result in substantial penalties, court orders to install pollution-control equipment, civil and criminal sanctions, permit revocations, facility shutdowns and other sanctions. In addition, environmental laws and regulations may impose joint and several liability, without regard to fault, for costs relating to environmental contamination at our facilities or from wastes disposed of at third-party waste facilities. The proposed expansion of our operations at the Mountain Pass facility is also conditioned upon securing the necessary environmental and other permits and approvals. In certain cases, as a condition to procuring such permits and approvals, we are required to comply with financial assurance requirements. The purpose of these requirements is to assure the government that sufficient company funds will be available for the ultimate closure, post-closure care and/or reclamation at our facilities. We typically obtain bonds as financial assurance for these obligations and, as of March 31, 2011, we had placed a total of $27.4 million of surety bonds with California state and regional agencies for our Mountain Pass facility. These bonds are collateralized by $18.2 million in cash, which we have placed in an escrow account. These bonds require annual payment and renewal. The EPA has announced its intention to establish a new financial assurance program for hardrock mining, extraction and processing facilities under the Federal Comprehensive Environmental Response Compensation and Liability Act, or CERCLA, or the “Superfund” law, which may require us to establish additional bonds or other sureties. We cannot predict the effect of any such requirements on our operations at this time.

 

Impact of Inflation

 

The cost estimates associated with the modernization and expansion of the Mountain Pass facility described under the heading “— Liquidity and Capital Resources” have not been adjusted for inflation. In the event of significant inflation, the funds required to execute our business plan over the next few years could increase proportionately. This could delay or preclude our business expansion efforts, or require us to raise additional capital. In addition, historical inflation rates have been used to estimate the future liability associated with our future remediation and reclamation obligations as reflected in the asset retirement obligations in our consolidated financial statements included elsewhere in this Exhibit. If inflation rates significantly exceed the historical inflation rates, our future obligations could significantly increase.

 

Foreign Currency Fluctuations

 

Substantially all of our product sales are denominated in U.S. dollars, so we have minimal exposure to fluctuations in foreign currency exchange rates. Our results are indirectly influenced by currency fluctuations, as the relative cost of our exports for a foreign buyer will increase as the U.S. dollar strengthens and decrease as the U.S. dollar softens in comparison to the applicable foreign currency.

Results of Operations

 

Three Months Ended March 31, 2011 and 2010

 

 

Revenues

 

For the three months ended March 31, 2011 and 2010, our sales were $26.3 million and $3.0 million, respectively. This significant increase in revenue is due to the combination of a general increase in the price of REO products, as well as our diversification into new products, such as ceric hydrate and higher sales volumes of cerium and didymium products, which have much higher sale prices per kilogram than the lanthanum products that comprised substantially all our sales in 2010. The following is a summary of the revenue percentages by significant product for the three months ended March 31, 2011 and 2010.

 

 

Our product mix is determined by a combination of global and regional supply and demand factors. Pricing of our product is usually set based on market prices for the month prior to shipment with a price floor, and in certain instances, with a price cap. Lanthanum sales for the three months ended March 31, 2011 consisted primarily of lanthanum oxide, which has a relatively higher sales price per kilogram compared to sales for the three months ended March 31, 2010, which consisted primarily of lanthanum concentrate that has a relatively lower sales price per kilogram. Both ceric hydrate and didymium products, which have a relatively higher sales price per kilogram as compared to our other products, accounted for 30% and 18%, respectively, of our total revenue for the three months ended March 31, 2011 as compared to zero and 3% for the three months ended March 31, 2010, respectively. With the commencement of our second pilot processing campaign, the production of lanthanum concentrate has been replaced by lanthanum chlorohydrate, which is a more marketable product. In total, for the three months ended March 31, 2011, we sold 696 mt of REO products at an average sales price of $37.73 per kilogram compared to sales of 423 mt of REO products at an average sales price of $7.13 per kilogram for the three months ended March 31, 2010. We anticipate cerium products, including XSORBX^®, lanthanum products and didymium products to make up a significant percentage of our total revenue until we complete the modernization and expansion of the Mountain Pass facility.

Cost of Goods Sold

 

Our cost of goods sold was $16.7 million and $6.0 million for the three months ended March 31, 2011 and 2010, respectively. The higher costs for the three months ended March 31, 2011, compared to the three months ended March 31, 2010, were due to higher sales and higher production costs. Lower of cost or market inventory write-downs were $0.6 million for the three months ended March 31, 2011 and 2010, respectively.

 

Total production costs charged to inventory were $7.9 million and $3.0 million for the three months ended March 31, 2011 and 2010, respectively. Inventory purchases were $6.0 million and $0.2 million for the three months ended March 31, 2011 and 2010, respectively. The primary products we purchased during those periods were lanthanum oxide, cerium oxide, didymium metal and praseodymium oxide.

 

The following is a summary of the production and purchased quantities in mt by significant product for the three months ended March 31, 2011 and the corresponding production and purchased quantities for the three months ended March 31, 2010 (in mt).

 

 

Production costs charged to inventory were higher during the three months ended March 31, 2011 as compared to the three months ended March 31, 2010, due to increased production levels. We expect to attain increased production levels throughout 2011.

 

Chemical costs allocated to production were $2.3 million and $0.4 million for the three months ended March 31, 2011 and 2010, respectively. Chemical costs in the first quarter of 2011 were higher compared to the same period in 2010 due to higher production levels, despite improved processing techniques that reduced chemical usage, and an increase in prices for chemicals.

 

Labor costs, including related employee benefits, allocated to production were $2.7 million and $1.9 million the three months ended March 31, 2011 and 2010, respectively. As of March 31, 2011 we had a total of 165 employees compared to 114 employees at March 31, 2010, which led to higher wage and employee related benefit expenses. During the first quarter of 2011, we also experienced increase in labor costs as compared to the first quarter of 2010, due to the annual wage increase required under our union contract in March 2011.

 

Maintenance costs, including maintenance labor and supplies, were $0.7 million and $0.5 million for the three months ended March 31, 2011 and 2010, respectively. Utility charges, which primarily include electricity, were $0.8 million and $0.4 million for the three months ended March 31, 2011 and 2010, respectively.

 

Other costs allocated to production, including depreciation, were $4.7 million and $2.4 million for three months ended March 31, 2011 and 2010, respectively. These costs were higher in the first quarter of 2011 due to the significant increase in depreciation expense from the placement of assets into service of over $7.0 million related to the second pilot processing campaign during the second quarter of 2010. These assets are being depreciated over a 32-month period as they will be decommissioned with the full restart of the mine at the end of 2012.

 

In March 2010, we also began blending our existing didymium oxide inventory, which, prior to blending, contained varying percentages of neodymium and praseodymium, to create a more consistent content which better meets customer specifications. As of March 31, 2011, approximately 500 mt were blended. Blended inventory is reclassified from work in process to finished goods.

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses (excluding share-based compensation) were $8.3 million and $4.5 million for the quarters ended March 31, 2011 and 2010, respectively. Beginning in the first quarter of 2010, we experienced a significant increase in professional fees primarily due to increasing our staffing as we prepared to start construction of our new facilities in January 2011 and other business development activities to execute our “mine-to-magnets” business plan. We have also experienced increased spending for accounting, information technology consulting and engineering services.

 

In addition, we recognized $2.9 million and $0 in share-based compensation in the three months ended March 31, 2011 and 2010, respectively.

 

Net Losses

 

Since our inception and our acquisition of the Mountain Pass facility, we have incurred significant net losses. Our net losses for the three months ended March 31, 2011 and 2010 were $2.2 million and $7.7 million, respectively.

 

Capital Expenditures

 

Our capital expenditures, on an accrual basis, totaled $41.3 million and $3.4 million for the three months ended March 31, 2011 and 2010, respectively. Most of the capitalized costs incurred during the three months ended March 31, 2010 are related to our second pilot processing campaign, which commenced in April 2010, and most of the capitalized costs for the three months ended March 31, 2011 relate to our modernization and expansion project at the Mountain Pass facility.

 

Outlook for the Remainder of 2011

 

For the next three quarters of 2011, we anticipate China-based producers and suppliers will continue to limit the quantity of REOs available outside of China, supporting strong pricing for REOs. We believe this trend will create opportunities for us to increase sales volumes and improve pricing terms for our products. While we expect the recent earthquake/tsunami in Japan and its aftermath may have a short term negative impact on market demand in the second and third quarters, we expect full recovery of demand by the fourth quarter. While the REO products we are currently able to produce remain limited by the capability of our existing production facilities, we anticipate further expanding our products and markets throughout the remainder of the year, including market penetration of our XSORBX^® technology into the water treatment industry. We also anticipate supplying Molycorp Silmet AS and MMA with rare earth concentrates and REOs from our Mountain Pass facility to utilize their production capabilities and maximize value from these acquisitions. We believe that our revenue for the next nine months will be sufficient to fund our operating activities for the remainder of the year, which includes corporate selling, general and administrative expense.

 

Capital Investments

 

We are incurring significant capital expenditures under our plan to modernize and expand our Mountain Pass facility, as well as consistent expenditures to replace assets necessary to sustain safe and reliable production. Most of the facilities and equipment acquired in connection with the acquisition of the Mountain Pass facility are at least 20 years old. We are executing an accelerated modernization plan that includes the refurbishment of the Mountain Pass mine and related processing facilities through 2012 in order to increase REO production. We expect to incur approximately $531 million in property, plant and equipment additions in connection with our initial modernization and expansion plan prior to December 31, 2012, and up to an additional $250 million in property, plant and equipment to build additional production capacity in connection with our capacity expansion plan, prior to December 31, 2013.

 

All of the amounts for future capital spending described above are initial estimates that are subject to change as the projects are further developed. Total capital spending in 2011 is expected to be approximately $295 million.

Results of Operations

 

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

 

 

Revenues

 

For the years ended December 31, 2010 and 2009, our revenues were $35.2 million and $7.1 million, respectively. This significant increase in revenue is due to the combination of a general increase in the prices of REO products and our diversification into new products, such as cerium hydrate and didymium oxide, which have much higher sales prices per pound than the lanthanum products we produced and sold in 2009. The following is a summary of the revenue percentages by significant products for the years ended December 31, 2010 and 2009.

 

 

Lanthanum sales in the year ended December 31, 2010 consisted primarily of lanthanum oxide, which has a relatively higher sales price per kilogram compared to sales in the year ended December 31, 2009, which consisted primarily of lanthanum concentrate that has a relatively lower sales price per kilogram. Both ceric hydrate and didymium oxide, which have a relatively higher sales price per kilogram as compared to our other products, accounted for 24% and 23%, respectively, of our total revenue for the year ended December 31, 2010 as compared to zero for the year ended December 31, 2009. With the commencement of our second pilot processing campaign, the production of lanthanum concentrate has been replaced by lanthanum chlorohydrate, which is a more marketable product. In total, for the year ended December 31, 2010, we sold 1,883 metric tons of REO products at an average sales price of $18.67 per kilogram compared to sales of approximately 1,302 metric tons of REO products at an average sales price of $5.45 per kilogram for the year ended December 31, 2009. We anticipate cerium products, including XSORBX^®, lanthanum products and didymium oxide to make up a significant percentage of our total revenue until we complete the modernization and expansion of the Mountain Pass facility.

 

Cost of Goods Sold

 

Our cost of goods sold was $37.6 million and $21.8 million for the years ended December 31, 2010 and 2009, respectively. The higher costs for the year ended December 31, 2010, compared to the year ended December 31, 2009, were due to higher sales and higher production costs, including costs associated with the

transition to our second pilot processing campaign. These increased costs were partially offset by a decrease in our lower of cost or market inventory write-downs from approximately $9.0 million for the year ended December 31, 2009 to $2.5 million for the year ended December 31, 2010. Lower of cost or market write-downs were higher for the year ended December 31, 2009 as compared to the year ended December 31, 2010, due to lower market prices for certain products in 2009. During the fourth quarter 2010, an additional write-down of inventory of $1.0 million was recognized due to Bastnasite density survey results. Our processing facility was shut down during March 2010 due to high water levels in our evaporation ponds. In April and May 2010, operations were limited during the start-up phase of our second pilot processing campaign, which decreased production volumes during the first and second quarters of 2010. As a result of the shut down, labor, maintenance and other costs, such as depreciation expense, normally charged to inventory were expensed as period costs and are reflected in our higher cost of goods sold for the year ended December 31, 2010 compared to the same period in 2009.

 

Total production costs charged to inventory were $16.9 million and $23.4 million for the year ended December 31, 2010 and 2009, respectively. Inventory purchases were $9.3 million and $0.2 million for year ended December 31, 2010 and 2009. The primary products we purchased during those periods were lanthanum oxide, cerium oxide, didymium oxide metal and praseodymium oxide.

 

The following is a summary of the production and purchased quantities in metric tons by significant product for the year ended December 31, 2010 and the corresponding production and purchased quantities for the year ended December 31, 2009 (in metric tons).

 

 

Production costs charged to inventory were lower during the year ended December 31, 2010 as compared to the year ended December 31, 2009, due to the plant shut-down and start-up of the second pilot processing campaign, as discussed above. We expensed $11.0 million of production-related costs that would have otherwise been charged to inventory if we maintained normal production levels during this time period. We expect to attain increased production levels during 2011.

 

Chemical costs allocated to production were $4.2 million and $6.7 million for the year ended December 31, 2010 and 2009, respectively. Chemical costs in the year ended December 31, 2010 were lower compared to the same period in 2009 due to lower production levels primarily during the first and second quarters and improved processing techniques that reduced chemical usage.

 

Labor costs, including related employee benefits, allocated to production were approximately $9.0 million and $9.2 million for the year ended December 31, 2010 and 2009, respectively. During the year ended December 31, 2009, labor costs include a bonus, which was granted to all union employees who worked on our NFL pilot processing development project of $1.4 million. The bonus was paid in March 2010. In the third quarter of 2010, union workers and other employees at our Mountain Pass facility received additional bonuses totaling approximately $0.2 million. Higher labor costs during the year ended December 31, 2009 were primarily attributable to the above mentioned bonus granted to all union employees on the NFL pilot project.

 

Maintenance costs, including maintenance labor and supplies, were $2.2 million and $1.9 million for the year ended December 31, 2010 and 2009, respectively. Utility charges, which primarily include electricity, were $2.1 million and $2.0 million for the year ended December 31, 2010 and 2009, respectively.

 

Other costs allocated to production, including depreciation, were approximately $10.5 million and $5.2 million for the year ended December 31, 2010 and 2009, respectively. These costs were higher in 2010 due to the significant increase in depreciation expense from the placement of assets into service of over $7.0 million related to the second pilot processing campaign.

In March 2010, we also began blending our existing didymium oxide inventory, which, prior to blending, contained varying percentages of neodymium and praseodymium, to create a more consistent content which better meets customer specifications. As of December 31, 2010, approximately 500 metric tons were blended. Blended inventory is reclassified from work in process to finished goods. We began selling the blended didymium oxide inventory in August 2010. In addition, we began shipments of didymium oxide inventory to an off-site processing facility to be converted into metal. Sales of didymium metal, which is processed offsite, commenced in the fourth quarter of 2010.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses (excluding share-based compensation) were $18.8 million and $12.4 million for the year ended December 31, 2010 and 2009, respectively. Beginning in the first quarter of 2010, we experienced a significant increase in professional fees primarily due to increasing our staffing as we prepared to start construction of our new facilities in January 2011 and other business development activities to execute our “mine-to-magnets” business plan. We have also experienced increased spending for accounting, information technology consulting and engineering services.

 

Share-based Compensation

 

Our share-based compensation expense was $28.7 million and $0.2 million for the years ended December 31, 2010 and 2009, respectively. Share-based compensation for the year ended December 31, 2010 is primarily associated with incentive shares granted November 1, 2009 which, on the grant date, were classified as a liability and valued at zero dollars using the intrinsic value method. In connection with the corporate reorganization and initial public offering on August 3, 2010, these shares were ultimately converted into 2,232,740 share of restricted common stock, 744,247 of which vested immediately with an additional 744,247 shares vesting on September 30, 2010 and the remaining shares vesting on the six-month anniversary of the initial public offering.

 

On November 4, 2010, the Compensation Committee of the Board of Directors approved a grant of 37,500 shares of restricted stock, with a three-year vesting period, to certain of our executive officers and a director.

 

Although we anticipate additional share-based awards in 2011, we expect share-based compensation to decrease through 2011 as the final vesting period for the incentive shares was completed on February 3, 2011.

 

Operating Losses

 

Since our inception and our acquisition of the Mountain Pass facility, we have incurred significant operating losses. Our operating losses for the years ended December 31, 2010 and 2009 were approximately $51.2 million and $28.6 million, respectively.

 

Capital Expenditures

 

Our capital expenditures, on an accrual basis, totaled $38.6 million and $7.1 million for the year ended December 31, 2010 and 2009, respectively. Most of the capitalized costs incurred during the year ended December 31, 2010 are related to our second pilot processing campaign, which commenced in April 2010, and the startup of our modernization and expansion project at the Mountain Pass facility. These costs were primarily associated with engineering and consulting fees.

 

Related Party Transactions

 

In May and July 2009, Molycorp entered into transactions with a stockholder under which it borrowed an aggregate $6.6 million, secured by certain product inventories. Borrowings under this agreement required interest at a variable rate of LIBOR plus one percent. On November 15, 2009, the stockholder converted outstanding advances plus accrued interest totaling $6.8 million into 2,303,033 shares of Molycorp common

stock (giving effect to the Corporate Reorganization and the conversion of Class A common stock into common stock in connection with the IPO) in settlement of the obligation.

 

In June 2010, we borrowed approximately $5.0 million from Traxys North America (“Traxys”), the parent of one of our stockholders, TNA Moly Group, LLC. This borrowing was secured by certain product inventories and it carries an initial annual interest rate of 6%. The interest rate is based on a three-month LIBOR plus a margin, which is subject to change every three months. No adjustments have been made to the interest rate since the agreement was signed. Both parties have agreed that 50% of all didymium oxide sales will be subject to this agreement. As such, we have made principal and interest payments of $1.1 million and $0.2 million, respectively for the year ended December 31, 2010. As of December 31, 2010, the outstanding note payable to Traxys under this agreement was $3.1 million and $1.3 million in accounts payable related to the sales made, but not remitted to Traxys and affiliates as of December 31, 2010.

 

During 2010, we have jointly marketed and sold certain lanthanum oxide, cerium oxide and erbium oxide products with Traxys and its affiliates. Per the terms of the arrangement gross margin is split equally once all the costs associated with the sale are recovered by both parties. As a result of this arrangement, we recorded a related party receivable and a payable of $116,000 and $120,000 respectively. In addition, during 2010 we made purchases of lanthanum oxide and cerium oxide from Traxys and affiliates in the amount of $2.5 million. These products were subsequently sold to our customers. We have recorded a payable to Traxys and affiliates associated with these product purchases of $0.3 million as of December 31, 2010.

 

Year Ended December 31, 2009 Compared to Period from June 12, 2008 (Inception) to December 31, 2008

 

Due to the timing of our formation on June 12, 2008 and completion of the acquisition of the Mountain Pass, California rare earth deposit and associated assets from Chevron Mining Inc. on September 30, 2008, the results of our operations for the year ended December 31, 2009 are not directly comparable to our results of operations for the period from our inception on June 12, 2008 to December 31, 2008, which we refer to as the period ended December 31, 2008. We did not have any revenue or cost of goods sold until the fourth quarter of 2008. Accordingly, the following discussion focuses on significant trends in our revenues, cost of sales and other operating expenses.

 

 

Revenues

 

For the year ended December 31, 2009 and for the period ended December 31, 2008, our revenues were approximately $7.1 million and $2.1 million, respectively. Sales of lanthanum accounted for 91% and 72% of our sales for the year ended December 31, 2009 and the period ended December 31, 2008, respectively. There is a limited market for our lanthanum and two customers together comprised 82% and 72% of our total product revenue for the year ended December 31, 2009 and the period ended December 31, 2008, respectively.

We anticipate lanthanum and didymium oxide to make up a significant percentage of our total sales until we complete the modernization and expansion of the Mountain Pass facility, at which time we will no longer manufacture those products. We sell 100% of our lanthanum to customers in the United States.

 

Upon completion of the modernization and expansion of the Mountain Pass facility and the full implementation of our “mine-to-magnets” strategy, we expect to produce cerium, lanthanum, neodymium, praseodymium, samarium, dysprosium and terbium oxide and metal products, europium and gadolinium oxide products and NdFeB and samarium cobalt alloys. We intend to use some of the NdFeB alloy and dysprosium metal product in our magnet production plant. Our new products are expected to have significantly more applications than our current products, exposing us to a larger population of potential customers.

 

Cost of Goods Sold

 

Our cost of goods sold for the year ended December 31, 2009 and for the period ended December 31, 2008 totaled approximately $21.8 million and $13.0 million, respectively. Included in the cost of sales for the year ended December 31, 2009 and the period ended December 31, 2008 are write-downs of inventory to estimated net realizable value of $9.0 million and $9.5 million, respectively. Our principal production costs include chemicals, direct labor and employee benefits, maintenance labor and materials, contract labor, operating supplies, depreciation, utilities and plant overhead expenses.

 

Total production costs charged to inventory were $23.4 million and $5.5 million for the year ended December 31, 2009 and the period ended December 31, 2008, respectively. We produced 1,542 mt of lanthanum and 544 mt of didymium oxide in 2009 and 363 mt of lanthanum and 45 mt of didymium oxide in the period ended December 31, 2008. Inventory purchases were $0.2 million and $0.7 million for the respective periods. We primarily purchase lanthanum oxide, cerium oxide and praseodymium oxide that undergo further processing either at our facility or at an off-site location.

 

Our chemical costs were $6.7 million and $1.9 million for the year ended December 31, 2009 and for the period ended December 31, 2008, respectively. Unit chemical costs do not vary significantly based on production volumes and are primarily driven by market prices. In 2008, the most significant chemical cost related to caustic soda, representing approximately 57% of total reagent costs. We launched a program in 2009 that has allowed us to lower the quantity and costs associated with the use of caustic soda in our production process.

 

Labor costs, including related employee benefits, allocated to production were $9.2 million and $2.0 million for the year ended December 31, 2009 and the period ended December 31, 2008, respectively. Included in the labor costs is a bonus, which was granted to all union employees for working on our NFL pilot processing project, of $1.4 million and $0.3 million for the year ended December 31, 2009 and the period ended December 31, 2008, respectively. The bonus was paid out in March 2010.

 

Maintenance costs, including maintenance labor and supplies, were $1.9 million and $0.5 million for the year ended December 31, 2009 and the period ended December 31, 2008, respectively. Maintenance costs remained consistent throughout this time period.

 

Other costs allocated to production include depreciation charges of $3.7 million and $0.9 million for the year ended December 31, 2009 and the period ended December 31, 2008, respectively. Depreciation allocated to products is primarily related to buildings, equipment and machinery used in the production process. We also accrued waste disposal charges of $1.5 million as of December 31, 2009 for disposal of by-products of production that are potentially hazardous.

 

Selling, General and Administrative Expenses

 

Our selling, general and administrative expenses for the year ended December 31, 2009 and for the period ended December 31, 2008 totaled $12.4 million and $2.8 million, respectively. Legal and accounting fees were $1.8 million and $0.5 million, respectively. Other consulting expenses, primarily related to engineering and technical consultants were $1.6 million and $0.5 million. These costs related primarily to engineering and resource studies as well as process development projects. Costs associated with research and development projects were $1.5 million and

$0.4 million and primarily are attributed to labor costs and materials and supplies. Management salaries and related benefits not capitalizable in inventory were $2.5 million and $0.9 million for the respective periods.

 

Operating Losses

 

Since our inception and our acquisition of the Mountain Pass facility, we have incurred significant operating losses. Our operating losses for the year ended December 31, 2009 and for the period ended December 31, 2008 were $28.6 million and $14.1 million, respectively. We have funded these operating losses entirely with proceeds from equity contributions from our initial investors.

 

Capital Investments

 

We expect to make significant capital expenditures under our plan to modernize and expand our Mountain Pass facility, as well as consistent expenditures to replace assets necessary to sustain safe and reliable production. Most of the facilities and equipment acquired in connection with the acquisition of the Mountain Pass facility are at least 20 years old. We have developed an accelerated modernization plan that includes the refurbishment of the Mountain Pass mine and related processing facilities beginning in 2010 through 2012 in order to increase REO production. We expect to incur approximately $531 million in property, plant and equipment additions in connection with our initial modernization and expansion plan prior to December 31, 2012, and up to an additional $250 million in property, plant and equipment additions to build additional production capacity in connection with our capacity expansion plan, prior to December 31, 2013.

 

All of the amounts for future capital spending described above are initial estimates that are subject to change as the projects are further developed. Total capital spending in 2010 of the Mountain Pass mine and related processing facilities was $31.4 million, of which $1.3 million is considered a down payment of the contract. Additional capital spending in 2010 of $7.2 million related to other capital expenditures.

 

For the year ended December 31, 2010, we recognized a $3.1 million, net of depreciation, impairment expense associated with the mill and crusher, including the associated asset retirement cost, as a result of our decision to replace rather than refurbish these assets.

 

Liquidity and Capital Resources

 

Under our current business plan, we intend to spend approximately $531 million through the end of 2012 to restart mining operations, construct and refurbish processing facilities and other infrastructure at the Mountain Pass facility and expand into metal, alloy and magnet production in connection with our initial modernization and expansion plan. In addition, we expect to spend approximately $250 million in capital costs to expand production capacity through the end of 2013.

 

We expect to finance our remaining capital expenditures under the initial modernization and expansion and the second phase expansion plans as well as our working capital requirements, with our available cash balances of $492.5 million as of March 31, 2011, net proceeds from our private placement of convertible senior notes, anticipated revenue from operations and traditional debt financing, project financing, and/or government programs, including the DOE loan guarantee program. We submitted a Part I application on June 2010 for up to $280 million. On July 21, 2010, the DOE deemed our application eligible for submission of a part II application, which was submitted on December 31, 2010. Due to program and resource constraints, our application under Section 1705 of the DOE loan guarantee program, or LGP, was put on hold on May 10, 2011. At that time, DOE advised us that our project may be eligible for funding under Section 1703 of the LGP. We are currently evaluating our options under the LGP and we expect to conclude on the best course of action in the near term. On December 10, 2010, we entered into a memorandum of understanding with Sumitomo pursuant to which Sumitomo agreed to, among other things, purchase $100 million of Molycorp, Inc.’s common stock and arrange for $30 million of debt financing. Sumitomo is currently conducting a due diligence review and the consummation of these transactions with Sumitomo is subject to the satisfaction of numerous conditions and finalization of definitive agreements.

Our estimated capital expenditures of $781 million do not include corporate, selling, general and administrative expenses, which we estimate to be an additional $20 million to $25 million per year. We currently expect that the cash acquired as part of our purchase of the controlling stake in Molycorp Silmet AS on April 1, 2011 and of all the issued and outstanding shares of capital stock of MMA on April 15, 2011, will be retained within those companies to fund their respective working capital needs.

 

Contractual Obligations

 

As of December 31, 2010, we had the following contractual obligations:

 

 

 

 

 

 

During the three months ended March 31, 2011, we made payments for certain purchase obligations of $27 million, and entered into additional purchase obligations for materials and services from vendors, net of payments and accrued liabilities, of approximately $61 million. These obligations will be primarily paid by the first quarter of 2012.

 

Off-Balance Sheet Arrangements

 

As of the date of this Exhibit, our only off-balance sheet arrangements are the operating leases and purchase obligations included in “— Contractual Obligations” above. Prior to September 13, 2010, our only off-balance sheet arrangement in addition to the operating leases included in “— Contractual Obligations” above, was our agreement to compensate our initial investors for providing collateral relating to our bonding obligations to various government agencies. In February 2009, the members of Molycorp Minerals incurred certain costs in providing letters of credit and/or cash collateral to secure surety bonds issued for the benefit of certain regulatory agencies relating to our Mountain Pass facility closure and reclamation obligations. The total amount of collateral provided by them was $18.2 million. In accordance with our agreement, we paid each stockholder a 5% annual return on the amount of collateral provided resulting in an aggregate payment of approximately $0.8 million for interest accrued through September 13, 2010.

 

Critical Accounting Policies and Estimates

 

Revenue and Costs of Goods Sold

 

Revenue is recognized when persuasive evidence of an arrangement exists, the risks and rewards of ownership have been transferred to the customer, which is generally when title passes, the selling price is fixed or determinable and collection is reasonably assured. Title generally passes upon shipment of product from our Mountain Pass facility. Prices are generally set at the time of or prior to shipment. Transportation and distribution costs are incurred only on sales for which we are responsible for delivering the product.

 

Cost of goods sold includes the cost of production as well as inventory write-downs caused by market price declines. Primary production costs include labor, supplies, maintenance costs, depreciation and plant overhead.

 

Reclamation

 

Our asset retirement obligations, or AROs, arise from our San Bernardino County conditional use permit, approved mining plan and federal, state and local laws and regulations, which establish reclamation and closure standards for all aspects of our surface mining operation. Comprehensive environmental protection and reclamation standards require that we, upon closure of the Mountain Pass facility, restore the property in accordance with an approved reclamation plan issued in conjunction with our conditional use permit.

 

Our AROs are recorded initially at fair value, or the amount at which we estimate we could transfer our future reclamation obligations to informed and willing third parties. We use estimates of future third party costs to arrive at the AROs because the fair value of such costs generally reflects a profit component. It has been our practice, and we anticipate it will continue to be our practice, to perform a substantial portion of the reclamation work using internal resources. Hence, the estimated costs used in determining the carrying amount of our AROs may exceed the amounts that are eventually paid for reclamation costs if the reclamation work were performed using internal resources.

 

To determine our AROs, we calculate the present value of the estimated future reclamation cash flows based upon our permit requirements, which is based upon the approved mining plan, estimates of future reclamation costs and assumptions regarding the useful life of the asset to be remediated. These cash flow estimates are discounted on a credit-adjusted, risk-free interest rate based on U.S. Treasury bonds with a maturity similar to the expected life of the asset.

 

The amount initially recorded as an ARO for the Mountain Pass facility may change as a result of changes to the mine permit, and changes in the estimated costs or timing of reclamation activities. We periodically update estimates of cash expenditures associated with our ARO obligations in accordance with U.S. GAAP, which generally requires a measurement of the present value of any increase in estimated reclamation costs using the current credit-adjusted, risk-free interest rate. Adjustments to the ARO for decreases in the estimated amount of reclamation costs are measured using the credit-adjusted, risk-free interest rate as of the date of the initial recognition of the ARO.

 

At December 31, 2010, our accrued ARO obligation was $12.5 million. Of this amount, approximately $5.4 million is associated with the demolition and removal of buildings and equipment, approximately $4.0 million is associated with groundwater remediation and $3.1 million is associated with the remediation of tailing ponds, removal of land improvements and revegetation.

 

Property, Plant and Equipment

 

Property, plant and equipment associated with the acquisition of the Mountain Pass facility is stated at estimated fair value as of the acquisition date. Expenditures for new property, plant and equipment and improvements that extend the useful life or functionality of the asset are capitalized. Depreciation on plant and equipment is calculated using the straight-line method over the estimated useful lives of the assets. Maintenance and repair costs are expensed as incurred.

 

Reserves, Mineral Properties and Development Costs

 

Mineral properties represent the estimated fair value of the mineral resources associated with the Mountain Pass facility as of the acquisition date. We will amortize such mineral properties using the units of production basis over estimated proven and probable reserves.

Inventory

 

Inventories consist of work-in-process, finished goods, stockpiles of bastnasite and lanthanum concentrate and materials and supplies. Inventory cost is determined using the lower of weighted average cost or estimated net realizable value. Inventory expected to be sold in the next 12 months is classified as a current asset in the consolidated balance sheet. Cash flows related to the sale of inventory are classified as operating activities in the consolidated statements of cash flows.

 

Write-downs to estimated net realizable value are charged to cost of goods sold. Many factors influence the market prices for REOs and, in the absence of established prices contained in customer contracts, management uses Metal-Pages as an independent pricing source to evaluate market prices for REOs at the end of each quarter. Metal-Pages is a widely recognized pricing source within our industry, which collects and summarizes data from rare earth producers in China and Europe. We make appropriate modifications to the Metal-Pages prices, when applicable, to account for differences between the REO grade of our inventory and the REO grade assumed in the corresponding Metal-Pages price.

 

We evaluate the carrying value of finished goods and materials and supplies inventories each quarter giving consideration to slow-moving items, obsolescence, excessive levels and other factors and recognize related write-downs as necessary. Finished goods inventories that may not meet customer specifications or current market demand, and quantities that exceed a two year supply, generally require write-downs to estimated net realizable value.

 

We evaluate our stockpiled concentrates each quarter and recognize write-downs as necessary to adjust the carrying value to estimated net realizable value. Our analysis utilizes current market prices from Metal-Pages and estimated costs to complete the processing of our concentrates to REOs. Costs associated with the processing of concentrates through our planned modernized facilities are based on internal and external engineering estimates and primarily include labor and benefits, utilities, chemicals, operating supplies, maintenance, depreciation and amortization and plant overhead expenses. Our estimated costs per kilogram of REO to be produced in our modernized facilities are significantly lower than our current production costs per kilogram, resulting in a higher carrying value for our stockpiled concentrates. The use of new and proprietary technologies will allow us to improve our process recoveries and substantially reduce our water consumption. We will reduce our energy costs through the use of a natural gas powered co-generation power plant that will be installed as part of our modernization project. Additionally, we intend to produce our own hydrochloric acid and sodium hydroxide and recycle our acid and base, thereby reducing our cost of reagents. We estimate, based upon our current business plan and estimated future demand for the component rare earth elements to be recovered, that our inventory of stockpiled concentrates will be fully utilized in the production of our rare earth products by March 31, 2013.

 

Asset Impairments

 

We account for asset impairment in accordance with ASC 360, Property Plant and Equipment. Long-lived assets such as property, plant and equipment, mineral properties and purchased intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is considered to exist if the total estimated future cash flow on an undiscounted basis is less than the carrying amount of the related assets. An impairment loss is measured and recorded based on the discounted estimated future cash flows. Changes in significant assumptions underlying future cash flow estimates or fair values of assets may have a material effect on our financial position and results of operations.

 

Factors we generally consider important in our evaluation and that could trigger an impairment review of the carrying value of long-lived assets include the following:

 

 

 

The recoverability of the carrying value of our mineral properties is dependent upon the successful development, start-up and commercial production of our mineral deposit and the related processing facilities. Our evaluation of mineral properties for potential impairment primarily includes assessing the existence or availability of required permits and evaluating changes in our mineral reserves, or the underlying estimates and assumptions, including estimated production costs. The determination of our proven and probable reserves is based on extensive drilling, sampling, mine modeling, and the economic feasibility of accessing the reserves. Assessing the economic feasibility requires certain estimates, including the prices of REOs to be produced and processing recovery rates, as well as operating and capital costs. The estimates are based on information available at the time the reserves are calculated.

 

Although we believe the carrying values of our long-lived assets were realizable as of the relevant balance sheet date, future events could cause us to conclude otherwise.

 

Recent Accounting Pronouncements

 

In December 2010, the FASB issued ASU 2010-29: Disclosure of Supplementary Pro Forma Information for Business Combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments affect any public entity as defined by Topic 805 that enters into business combinations that are material on an individual or aggregate basis. Molycorp is evaluating the potential impact of adopting this guidance on the Molycorp’s consolidated financial position, results of operations and cash flows.

 

 

 

To the Shareholders of Molycorp, Inc.:

 

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Molycorp, Inc. and its wholly-owned subsidiaries (a development stage company) at December 31, 2010 and 2009, and the results of their operations and their cash flows for the years ended December 31, 2010 and 2009, the period from June 12, 2008 (Inception) through December 31, 2008 and cumulatively for the period from June 12, 2008 (Inception) through December 31, 2010, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

 

Denver, Colorado

March 9, 2011, except for Note 13 for which the date is as of May 24, 2011

MOLYCORP, INC.
(A Company in the Development Stage)

Consolidated Balance Sheets

 

 

See accompanying notes to the consolidated financial statements.

MOLYCORP, INC.
(A Company in the Development Stage)

Consolidated Statements of Operations

 

 

 

 

See accompanying notes to the consolidated financial statements.

MOLYCORP, INC.
(A Company in the Development Stage)

Consolidated Statement of Stockholders’ Equity

 

 

See accompanying notes to the consolidated financial statements.

MOLYCORP, INC.
(A Company in the Development Stage)

Consolidated Statements of Cash Flows

 

 

See accompanying notes to the consolidated financial statements.

MOLYCORP, INC
(A Company in the Development Stage)

Notes to Consolidated Financial Statements

 

 

Molycorp, Inc. was formed on March 4, 2010 for the purpose of continuing the business of Molycorp, LLC in corporate form. On April 15, 2010, the members of Molycorp, LLC contributed either (a) all of their member interests in Molycorp, LLC or (b) all of their equity interest in entities that held member interests in Molycorp, LLC (and no other assets or liabilities) to Molycorp, Inc. in exchange for Molycorp, Inc. Class A common stock. Accordingly, Molycorp, LLC and Molycorp Minerals, LLC became subsidiaries of Molycorp, Inc. (the “Corporate Reorganization”). On June 15, 2010, Molycorp LLC was merged with and into Molycorp Minerals, LLC. On July 9, 2010, Molycorp, Inc. completed a 38.23435373-for-one stock split, which has been retroactively reflected in the historical financial data for all periods presented. On August 3, 2010, Molycorp, Inc. completed its initial public offering (“IPO”) of common stock. In connection with its IPO, Molycorp Inc. issued 29,128,700 shares of common stock at $14.00 per share (including 1,003,700 shares issued in connection with the underwriters’ option to purchase additional shares). Total net proceeds of the offering were approximately $378.6 million after underwriting discounts and commissions and offering expenses payable to Molycorp, Inc. Immediately prior to the consummation of the IPO, all of the shares of Class A common stock and Class B common stock were converted into shares of common stock. The conversion ratios for the Class A common stock and the Class B common stock have been retroactively reflected in the historical financial information for all periods presented. Molycorp, Inc., together with its subsidiaries is referred to herein as the “Company” or “Molycorp.”

 

Molycorp Minerals, previously known as Rare Earth Acquisition LLC (which was formed on June 12, 2008), acquired the Mountain Pass, California rare earth deposit and associated assets (the “Mountain Pass facility”) and assumed certain liabilities from Chevron Mining, Inc. (“Chevron”) on September 30, 2008.

 

The Mountain Pass facility is located in San Bernardino County, California and is the only significant developed rare earth resource in the western world. Rare earth elements (“REEs”) are a group of specialty elements with unique properties that make them critical to many existing and emerging applications including:

 

 

The REE group includes 17 elements, namely the 15 lanthanide elements, which are lanthanum, cerium, praseodymium, promethium (which does not occur naturally), neodymium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium, and lutetium, and two elements that have similar chemical properties to the lanthanide elements — yttrium and scandium. The oxides produced from processing REEs are collectively referred to as rare earth oxides (“REOs”). Bastnasite is a mineral that contains REEs.

 

Operations at the Mountain Pass facility began in 1952 under Molybdenum Corporation of America (“MCA”). MCA was purchased by Union Oil of California (“Unocal”) in 1977. In 2002, mining operations were suspended at the Mountain Pass facility primarily due to softening prices for REOs and a lack of additional tailings disposal capacity. Chevron Corporation purchased Unocal in 2005.

MOLYCORP, INC
(A Company in the Development Stage)

Notes to Consolidated Financial Statements — (Continued)

 

Prior to the acquisition, operations at the Mountain Pass facility had been suspended with the exception of a pilot processing project to recover neodymium from lanthanum stockpiles produced prior to Chevron’s ownership of the Mountain Pass facility. The neodymium from lanthanum (“NFL”) pilot processing project was undertaken to improve the facility’s REE processing techniques. Since June 12, 2008 (Inception) through March 31, 2010, revenue was generated primarily from the sale of products associated with the NFL pilot processing project, which concluded in February 2010. In April 2010, the Company commenced the second pilot processing campaign to recover cerium, lanthanum, neodymium, praseodymium and samarium/europium/gadolinium concentrate from bastnasite concentrate stockpiles.

 

 

The Company’s acquisition of the Mountain Pass facility has been accounted for as an acquisition of net assets and not a business combination. As described below, the Company’s current business plan includes investing substantial capital to restart mining operations, construct and refurbish processing facilities and other infrastructure, and to expand into metal and alloy production. Molycorp will continue as a development stage company until these activities have been completed which is currently expected to be by the end of 2012.

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All intercompany balances and transactions have been eliminated in consolidation.

 

We have revised our consolidated financial statements for an overstatement of Work in Process (WIP) inventory. See Note (13) Revision of Financial Statements for December 31, 2010.

 

 

Most of the facilities and equipment acquired with the Mountain Pass facility are at least 20 years old and must be modernized or replaced. Under its current business plan, the Company intends to spend approximately $531 million through 2012 to restart mining operations, construct and refurbish processing facilities and other infrastructure at the Mountain Pass facility and expand into metal and alloy production. Capital expenditures, on an accrual basis, under this plan totaled approximately $31.4 million in 2010. The Company expects to finance these expenditures, the second phase expansion plan (see Note 12) as well as its working capital requirements, with the $360.4 million of net proceeds from its IPO (after giving effect to the use of $18.2 million of net proceeds for surety bonds), approximately $173.1 million of net proceeds from its offering of mandatory convertible preferred stock (see Note 12), anticipated revenue from operations and traditional debt financing, project financing, and/or government programs, including the U.S. Department of Energy (“DOE”) loan guarantee program. The Company submitted a Part I application on June 2010. On July 21, 2010, the U.S. DOE deemed the Company’s application eligible for submission of a part II application. Our Part II application was submitted on December 31, 2010. On December 31, 2010, we entered into a memorandum of understanding with Sumitomo Corporation (“Sumitomo”), pursuant to which Sumitomo agreed to, among other things, purchase $100 million of the Company’s common stock and arrange for $30 million of debt financing. The consummation of these transactions with Sumitomo is subject to numerous conditions and finalization of a definitive agreement.

 

 

 

The preparation of the financial statements, in accordance with generally accepted accounting principles in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

MOLYCORP, INC
(A Company in the Development Stage)

Notes to Consolidated Financial Statements — (Continued)

 

Management bases its estimates on the Company’s historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ significantly from these estimates under different assumptions and conditions.

 

Significant estimates made by management in the accompanying financial statements include the collectability of accounts receivable, the recoverability of inventory, the useful lives and recoverability of long-lived assets such as property, plant and equipment, and the adequacy of the Company’s asset retirement obligations.

 

 

Revenue is recognized when persuasive evidence of an arrangement exists, the risks and rewards of ownership have been transferred to the customer, which is generally when title passes, the selling price is fixed or determinable, and collection is reasonably assured. Title generally passes upon shipment of product from the Mountain Pass facility. Prices are generally set at the time of, or prior to, shipment. Transportation and distribution costs are incurred only on sales for which the Company is responsible for delivering the product. We recognized revenue of $3.2 million for inventory which had not been shipped as of December 31, 2010 under a bill and hold agreement.

 

Cost of goods sold includes the cost of production as well as write-downs to the extent of inventory costs in excess of market values. Primary production costs include labor, supplies, maintenance costs, depreciation, and plant overhead.

 

 

Cash and cash equivalents consist of cash and liquid investments with an original maturity of three months or less. At December 31, 2010, cash and cash equivalents consisted of $316.4 million (2009: $6.9 million) of funds held in money market accounts.

 

 

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company reviews its allowance for doubtful accounts on a quarterly basis. As of December 31, 2010 and 2009, an allowance for doubtful accounts was not required.

 

 

Inventories consist of work-in-process, finished goods, stockpiles of bastnasite and lanthanum concentrate, and materials and supplies. Inventory cost is determined using the lower of weighted average cost or estimated net realizable value. Inventory expected to be sold in the next 12 months is classified as a current asset in the consolidated balance sheet.

 

Molycorp evaluates its production levels and costs to determine if any should be deemed abnormal, and therefore excluded from inventory costs. For the years ended December 31, 2010, 2009, the period from June 12, 2008 (Inception) through December 31, 2008 and the period from June 12, 2008 (Inception) through December 31, 2010, Molycorp determined that approximately $11.0 million, $2.5 million, $0.0 million and $13.5 million, respectively, of production costs would have been allocated to additional tons produced, assuming Molycorp had been operating at normal production rates. As a result, these costs were excluded from inventory and instead expensed during the applicable periods. The assessment of normal production levels is judgmental and is unique to each quarter. Molycorp models normal production levels and evaluates historical ranges of production in assessing what is deemed to be normal.

MOLYCORP, INC
(A Company in the Development Stage)

Notes to Consolidated Financial Statements — (Continued)

 

Write-downs to estimated net realizable value are charged to cost of goods sold. Many factors influence the market prices for REOs and, in the absence of established prices contained in customer contracts, management uses an independent pricing source to evaluate market prices for REOs at the end of each quarter. For the years ended December 31, 2010 and 2009, the period from June 12, 2008 (Inception) through December 31, 2008 and cumulatively for the period from June 12, 2008 (Inception) through December 31, 2010, the Company recognized write-downs of $2.5 million $9.0 million, $9.5 million and $21.0 million, respectively, as a result of production costs in excess of certain REO market prices. In addition, Molycorp recognized a $1.0 million write-down of bastnasite stockpile inventory based on estimated stockpile REO quantities at December 31, 2010.

 

The Company evaluates the carrying value of materials and supply inventories each quarter giving consideration to slow-moving items, obsolescence, excessive levels, and other factors and recognizes related write-downs as necessary.

 

At December 31, 2010 and 2009, inventory consisted of the following (in thousands):

 

 

 

Property, plant and equipment associated with the acquisition of the Mountain Pass facility was recorded at estimated fair value as of the acquisition date. Expenditures for new property, plant and equipment and improvements that extend the useful life or functionality of the asset are capitalized. The Company incurred $31.4 million and $0.1 million in plant modernization costs for the years ended December 31, 2010 and 2009, respectively. In addition the Company incurred $7.2 million and $7.0 million in other capital expenditures for the years ended December 31, 2010 and 2009, respectively. Our anticipated project cost through 2012 to restart the mining operations, construct and refurbish processing facilities and to expand into the production of metals and alloys is $531 million, which includes a $20 million increase over our previous estimate. The increase is due to the increased scope of the project including the acceleration of the construction of the new crushing and milling facility and other design changes to allow a faster conversion to 40,000 tons per year than would otherwise be possible. Depreciation on plant and equipment is calculated using the straight-line method over the estimated useful lives of the assets. Depreciation expense for the years ended December 31, 2010 and 2009, the period from June 12, 2008 (Inception) through December 2008, and cumulatively for the period from June 12, 2008 (Inception) through December 31, 2010 was $6.0 million, $3.9 million, $0.9 million and $10.8 million, respectively. Maintenance costs are expensed as incurred.

MOLYCORP, INC
(A Company in the Development Stage)

Notes to Consolidated Financial Statements — (Continued)

 

Mineral properties at December 31, 2010 and 2009, represent the purchase price allocated to mineral resources associated with the Mountain Pass facility and mineral property development costs (see Note 4(g) below).

 

At December 31, 2010 and 2009, property, plant and equipment consisted of the following (in thousands):

 

 

In accordance with ASC 360, Property Plant and Equipment, long-lived assets such as property, plant, and equipment, mineral properties and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company recognized a $3.1 million net of depreciation, impairment expense associated with the mill and crusher, including the associated asset retirement cost, which is included in cost of goods sold in the consolidated statement of operations as of the year ended December 31, 2010, as a result of managements’ decision to replace rather than refurbish these assets.

 

 

Mineral properties and development costs, which are referred to collectively as mineral properties, include acquisition costs, drilling costs, and the cost of other development work, all of which are capitalized. The Company amortizes mineral properties using the units of production method over estimated proven and probable reserves. Molycorp’s proven and probable reserves are based on extensive drilling, sampling, mine modeling, and mineral recovery from which economic feasibility has been determined. The reserves are estimated based on information available at the time the reserves are calculated. Proven and probable reserves are based on estimates, and no assurance can be given that the indicated levels of recovery of REOs will be realized or that production costs and estimated future development costs will not exceed the net realizable value of the products. Reserve estimates may require revisions based on actual production experience. Market price fluctuations of REOs, as well as increased production costs or reduced recovery rates, could render proven and probable reserves containing relatively lower grades of mineralization uneconomic to exploit and might result in a reduction of reserves.

 

 

The Company has invested significant resources to improve the efficiency of our REO processing operations and the development of new applications for individual REEs. For the period ending December 31,

MOLYCORP, INC
(A Company in the Development Stage)

Notes to Consolidated Financial Statements — (Continued)

 

2010, 2009 and 2008 the Company spent $2.4 million, $1.5 million and $0.4 million respectively. Research and development costs are recognized under the “Selling, general and administrative” line on the income statement.

 

 

The Company acquired its trade name in connection with the Mountain Pass facility acquisition. Amortization is provided using the straight-line method based on an estimated useful life of 12 years. Amortization expense for the years ended December 31, 2010 and 2009, the period from June 12, 2008 (Inception) through December 31, 2008, and cumulatively for the period from June 12, 2008 (Inception) through December 31, 2010 was $65,000, $65,000, $17,000 and $147,000, respectively. Amortization expense is estimated to be $65,000 annually for the following five years.

 

 

In connection with the Mountain Pass facility acquisition, the Company acquired a one third interest in a joint venture with Sumitomo Metals Industries, Ltd. of Japan (“Sumitomo Metals”) called Sumikin Molycorp (“SMO”). The Company sold its interest in the joint venture to Sumitomo Metals on July 9, 2009 for cash consideration of $9.7 million and recognized no gain.

 

 

Accrued expenses as of December 31, 2010 and 2009 consisted of the following: (in thousands):

 

 

 

The Company accounts for reclamation costs, along with other costs related to the closure of the Mountain Pass facility, in accordance with ASC 410-20, Asset Retirement Obligations. This standard requires the Company to recognize asset retirement obligations at estimated fair value in the period in which the obligation is incurred. The Company recognized an asset retirement obligation and corresponding asset retirement cost of $13.3 million in connection with the Mountain Pass facility acquisition. The liability was initially measured at fair value and is subsequently adjusted for accretion expense and changes in the amount or timing of the estimated cash flows. The asset retirement cost was capitalized as part of the carrying amount of the related long-lived assets and is being depreciated over the assets’ remaining useful lives.

 

In connection with an updated asset retirement obligation analysis prepared as of June 30, 2010, the Company determined that its asset retirement obligation was overstated by approximately $2.5 million as a result of not reducing its prior estimate for costs of soil remediation performed prior to the Company’s acquisition of the Mountain Pass Facility. Because the depreciation of the overstated asset retirement costs and accretion of the asset retirement obligation had an immaterial impact on the Company’s net loss for all periods previously presented and cumulatively since inception, the Company reduced its asset retirement cost asset and asset retirement obligation by approximately $2.5 million effective April 1, 2010. On November 4, 2010,

MOLYCORP, INC
(A Company in the Development Stage)

Notes to Consolidated Financial Statements — (Continued)

 

Molycorp’s Board of Directors approved an expanded budget which accelerated the removal of the crusher and milling facility which resulted in a $0.6 million increase in the asset retirement obligation. Depreciation expense associated with the asset retirement cost was $1.1 million, $1.2 million $0.3 million and $2.6 million for the years ended December 31, 2010 and 2009, the period from June 12, 2008 (Inception) through December 31, 2008, and cumulatively for the period from June 12, 2008 (Inception) through December 31, 2010, respectively. The following table presents the activity in our asset retirement obligation (in thousands):

 

 

The Company is required to provide the applicable governmental agencies with financial assurances relating to its closure and reclamation obligations. As of December 31, 2008, the Company had financial assurance requirements of $26.3 million which were satisfied by instruments obtained by Chevron. In March 2009, the Company replaced these instruments with surety bonds secured by letters of credit or cash collateral provided by the individual members. As of December 31, 2010, the Company had financial assurance requirements of $27.4 million which were satisfied with surety bonds placed with the California state and regional agencies.

 

 

Prior to the Corporate Reorganization, the taxable income and losses of Molycorp, LLC were reported on the income tax returns of its members. Molycorp, Inc. is subject to federal and state income taxes and will file consolidated income tax returns. Molycorp recognizes income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to difference between the financial statement carrying amounts of assets and the liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or recognized. Molycorp records a valuation allowance if, based on available information, it is deemed more likely than not that its deferred income tax asset will not be realized in full. As of December 31, 2010, the Company’s net loss of $41.3 million since the Corporate Reorganization included $28.7 million in stock-based compensation expense, which is the Company’s only significant permanent difference between its losses for financial reporting and income tax purposes. Molycorp has generated net deferred income tax assets of $22.7 million as of December 31, 2010. However, as realization of these tax assets is not assured, we have established a full valuation allowance against these assets. A significant portion of the net operating losses of $18.0 million will expire in the year 2030.

MOLYCORP, INC
(A Company in the Development Stage)

Notes to Consolidated Financial Statements — (Continued)

 

A summary of the components of the net deferred income tax assets as of December 31, 2010 is as follows: