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EX-10.1 - EXHIBIT 10.1 - Molycorp, Inc. | c18959exv10w1.htm |
EXCEL - IDEA: XBRL DOCUMENT - Molycorp, Inc. | Financial_Report.xls |
EX-32.1 - EXHIBIT 32.1 - Molycorp, Inc. | c18959exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - Molycorp, Inc. | c18959exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - Molycorp, Inc. | c18959exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-34827
Molycorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 27-2301797 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
5619 Denver Tech Center Parkway, Suite 1000 | ||
Greenwood Village, Colorado | 80111 | |
(Address of principal executive offices) | (Zip Code) |
(303) 843-8040
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the
Exchange Act). Yes o No þ
As of
August 10, 2011, the registrant had 83,896,189 shares of common stock, par value $0.001 per share,
outstanding.
MOLYCORP, INC.
INDEX
Table of Contents
MOLYCORP, INC.
(A Company in the Development Stage)
Consolidated Balance Sheets
(Unaudited)
(In thousands, except share and per share amounts)
June 30, 2011 | December 31, 2010 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 680,282 | $ | 316,430 | ||||
Trade accounts receivable |
43,230 | 16,421 | ||||||
Inventory (Note 4e) |
72,281 | 18,822 | ||||||
Deferred charges (Note 4m) |
7,568 | | ||||||
Prepaid expenses and other assets |
6,745 | 1,759 | ||||||
Total current assets |
810,106 | 353,432 | ||||||
Non-current assets: |
||||||||
Deposits |
$ | 15,500 | $ | 26,200 | ||||
Property, plant and equipment, net (Note 4g) |
286,389 | 93,966 | ||||||
Deferred tax assets (Note 4m) |
27,519 | | ||||||
Inventory (Note 4e) |
1,051 | 5,212 | ||||||
Intangible assets, net (Note 4i) |
957 | 639 | ||||||
Other assets |
144 | 111 | ||||||
Total non-current assets |
331,560 | 126,128 | ||||||
Total assets |
$ | 1,141,666 | $ | 479,560 | ||||
LIABILITIES AND EQUITY |
||||||||
Current liabilities: |
||||||||
Trade accounts payable |
$ | 80,335 | $ | 13,009 | ||||
Accrued expenses (Note 4j) |
7,658 | 4,225 | ||||||
Income taxes payable |
14,131 | | ||||||
Debt (Note 4l) |
2,610 | | ||||||
Short-term borrowing related party (Note 9) |
2,384 | 3,085 | ||||||
Current portion of asset retirement obligation (Note 4k) |
394 | 393 | ||||||
Total current liabilities |
107,512 | 20,712 | ||||||
Non-current liabilities: |
||||||||
Asset retirement obligation (Note 4k) |
$ | 12,840 | $ | 12,078 | ||||
Debt (Note 4l) |
195,073 | | ||||||
Other non-current liabilities |
148 | 257 | ||||||
Total non-current liabilities |
208,061 | 12,335 | ||||||
Total liabilities |
$ | 315,573 | $ | 33,047 | ||||
Commitments and contingencies (Note 6) |
||||||||
Equity: |
||||||||
Common stock, $0.001 par value; 350,000,000 shares authorized
at June 30, 2011 (Note 4n) |
84 | 82 | ||||||
Preferred stock, $0.001 par value; 5,000,000 shares authorized
at June 30, 2011 (Note 4n) |
2 | | ||||||
Additional paid-in capital |
865,811 | 539,866 | ||||||
Accumulated other comprehensive income |
1,193 | | ||||||
Deficit accumulated during the development stage |
(51,166 | ) | (93,435 | ) | ||||
Total Molycorp stockholders equity |
815,924 | 446,513 | ||||||
Noncontrolling interest (Note 5) |
10,169 | | ||||||
Total equity |
826,093 | 446,513 | ||||||
Total liabilities and equity |
$ | 1,141,666 | $ | 479,560 | ||||
See accompanying notes to the consolidated financial statements.
3
Table of Contents
MOLYCORP, INC.
(A Company in the Development Stage)
Consolidated Statements of Operations
(Unaudited)
(In thousands, except share and per share amounts)
Total from | ||||||||||||||||||||
Three Months Ended | Six Months Ended | June 12, 2008 | ||||||||||||||||||
June 30, | June 30, | (Inception) Through | ||||||||||||||||||
2011 | 2010 | 2011 | 2010 | June 30, 2011 | ||||||||||||||||
Sales |
$ | 99,615 | $ | 1,904 | $ | 125,876 | $ | 4,922 | $ | 170,263 | ||||||||||
Operating costs and expenses: |
||||||||||||||||||||
Cost of goods sold |
(42,923 | ) | (5,576 | ) | (59,600 | ) | (11,526 | ) | (132,003 | ) | ||||||||||
Selling, general and administrative |
(13,817 | ) | (4,254 | ) | (22,156 | ) | (8,734 | ) | (56,203 | ) | ||||||||||
Stock-based compensation |
(412 | ) | (15,133 | ) | (3,311 | ) | (15,133 | ) | (32,441 | ) | ||||||||||
Depreciation and amortization |
(283 | ) | (61 | ) | (366 | ) | (156 | ) | (895 | ) | ||||||||||
Accretion expense |
(240 | ) | (216 | ) | (474 | ) | (479 | ) | (2,642 | ) | ||||||||||
Operating income (loss) |
41,940 | (23,336 | ) | 39,969 | (31,106 | ) | (53,921 | ) | ||||||||||||
Other income (expense): |
||||||||||||||||||||
Other income (expense) |
133 | 45 | (35 | ) | 66 | 355 | ||||||||||||||
Interest income, net |
70 | | 210 | | 275 | |||||||||||||||
203 | 45 | 175 | 66 | 630 | ||||||||||||||||
Income (loss) before income taxes |
42,143 | (23,291 | ) | 40,144 | (31,040 | ) | (53,291 | ) | ||||||||||||
Income tax benefit |
6,612 | | 6,413 | | 6,413 | |||||||||||||||
Net income (loss) |
48,755 | (23,291 | ) | 46,557 | (31,040 | ) | (46,878 | ) | ||||||||||||
Net (income) loss attributable to noncontrolling interest |
(968 | ) | | (968 | ) | | (968 | ) | ||||||||||||
Net income (loss) attributable to Molycorp stockholders |
$ | 47,787 | $ | (23,291 | ) | $ | 45,589 | $ | (31,040 | ) | $ | (47,846 | ) | |||||||
Net income (loss) |
$ | 48,755 | $ | (23,291 | ) | $ | 46,557 | $ | (31,040 | ) | $ | (46,878 | ) | |||||||
Other comprehensive income: |
||||||||||||||||||||
Foreign currency translation adjustments |
1,324 | | 1,324 | | 1,324 | |||||||||||||||
Comprehensive income (loss) |
$ | 50,079 | $ | (23,291 | ) | $ | 47,881 | $ | (31,040 | ) | $ | (45,554 | ) | |||||||
Comprehensive income (loss) attributable to: |
||||||||||||||||||||
Molycorp stockholders |
$ | 48,980 | $ | (23,291 | ) | $ | 46,782 | $ | (31,040 | ) | $ | (46,653 | ) | |||||||
Noncontrolling interest |
1,099 | | 1,099 | | 1,099 | |||||||||||||||
$ | 50,079 | $ | (23,291 | ) | $ | 47,881 | $ | (31,040 | ) | $ | (45,554 | ) | ||||||||
Weighted average shares outstanding
(Common shares) (1) |
||||||||||||||||||||
Basic |
83,847,119 | 49,666,732 | 83,054,811 | 48,165,914 | 53,957,611 | |||||||||||||||
Diluted |
84,413,499 | 49,666,732 | 83,339,566 | 48,165,914 | 53,957,611 | |||||||||||||||
Income (loss) per share of common stock (Note 4o): |
||||||||||||||||||||
Basic |
$ | 0.52 | $ | (0.47 | ) | $ | 0.50 | $ | (0.64 | ) | $ | (0.97 | ) | |||||||
Diluted |
$ | 0.52 | $ | (0.47 | ) | $ | 0.50 | $ | (0.64 | ) | $ | (0.97 | ) | |||||||
(1) | Weighted average shares outstanding include the retroactive treatment of exchange ratios for conversion of Class A common stock and Class B common stock to common stock in conjunction with the initial public offering. |
See accompanying notes to the consolidated financial statements.
4
Table of Contents
MOLYCORP, INC
(A Company in the Development Stage)
Consolidated Statement of Stockholders Equity
(Unaudited)
(In thousands, except share and per share amounts)
Series A Mandatory | ||||||||||||||||||||||||||||||||||||||||
Convertible Preferred | Deficit | |||||||||||||||||||||||||||||||||||||||
Common Stock | Stock | Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||
Additional | Other | During the | Total | |||||||||||||||||||||||||||||||||||||
Paid-In | Comprehensive | Development | Molycorp | Noncontrolling | Total | |||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Income | Stage | Stockholders | interest | Equity | |||||||||||||||||||||||||||||||
Balance at December 31, 2010 |
82,291,200 | $ | 82 | | $ | | $ | 539,866 | $ | | $ | (93,435 | ) | $ | 446,513 | $ | | $ | 446,513 | |||||||||||||||||||||
Sale of Series A mandatory convertible preferred
stock at $100.00 per share, net of underwriting
fees and other offering costs |
| | 2,070,000 | 2 | 199,640 | | | 199,642 | | 199,642 | ||||||||||||||||||||||||||||||
Stock-based compensation |
10,735 | | | | 3,386 | | | 3,386 | | 3,386 | ||||||||||||||||||||||||||||||
Issuance of shares for interest in Molycorp Silmet |
1,593,419 | 2 | | | 72,653 | | | 72,655 | 9,070 | 81,725 | ||||||||||||||||||||||||||||||
Component of convertible debt |
| | | | 36,227 | | | 36,227 | | 36,227 | ||||||||||||||||||||||||||||||
Deferred taxes on component of convertible debt |
| | | | 14,039 | | | 14,039 | | 14,039 | ||||||||||||||||||||||||||||||
Net income |
| | | | | | 45,589 | 45,589 | 968 | 46,557 | ||||||||||||||||||||||||||||||
Preferred dividends |
| | | | | | (3,320 | ) | (3,320 | ) | | (3,320 | ) | |||||||||||||||||||||||||||
Other comprehensive income |
| | | | | 1,193 | | 1,193 | 131 | 1,324 | ||||||||||||||||||||||||||||||
Balance at June 30, 2011 |
83,895,354 | $ | 84 | 2,070,000 | $ | 2 | $ | 865,811 | $ | 1,193 | $ | (51,166 | ) | $ | 815,924 | $ | 10,169 | $ | 826,093 | |||||||||||||||||||||
See accompanying notes to the consolidated financial statements.
5
Table of Contents
MOLYCORP, INC
(A Company in the Development Stage)
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Total from | ||||||||||||
Six Months Ended | June 12, 2008 | |||||||||||
June 30, | (Inception) Through | |||||||||||
2011 | 2010 | June 30, 2011 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net income (loss) |
$ | 46,557 | $ | (31,040 | ) | $ | (46,878 | ) | ||||
Adjustments to reconcile net loss to net cash used
in operating activities: |
||||||||||||
Depreciation and amortization |
5,421 | 2,408 | 16,268 | |||||||||
Accretion of asset retirement obligation |
474 | 479 | 2,642 | |||||||||
Deferred income tax benefit |
(13,481 | ) | | (13,481 | ) | |||||||
Non-cash inventory write-downs |
1,585 | 915 | 23,602 | |||||||||
Non-cash share-based compensation expense |
3,386 | 15,133 | 32,516 | |||||||||
Impairment of fixed assets |
| | 3,114 | |||||||||
Other operating adjustments |
(113 | ) | 13 | (170 | ) | |||||||
Increase (decrease) in cash, excluding the effects of acquisitions and dispositions, resulting from changes in: |
||||||||||||
Accounts receivable |
(20,711 | ) | 444 | (37,683 | ) | |||||||
Inventory |
(12,593 | ) | (366 | ) | (36,462 | ) | ||||||
Prepaid expenses and other |
(417 | ) | (994 | ) | (1,440 | ) | ||||||
Accounts payable |
14,194 | 1,489 | 18,379 | |||||||||
Asset retirement obligation |
(339 | ) | (304 | ) | (1,358 | ) | ||||||
Accrued expenses |
7,395 | (2,931 | ) | 13,881 | ||||||||
Net cash provided by/(used in) operating
activities |
31,358 | (14,754 | ) | (27,070 | ) | |||||||
Cash flows from investing activities: |
||||||||||||
Acquisition of the Mountain Pass facility |
| | (82,150 | ) | ||||||||
Cash paid in connection with acquisitions, net of cash acquired |
(20,021 | ) | | (20,021 | ) | |||||||
Proceeds from sale of investment in joint venture |
| | 9,700 | |||||||||
Deposits |
10,700 | | (15,500 | ) | ||||||||
Capital expenditures |
(79,291 | ) | (7,260 | ) | (120,026 | ) | ||||||
Other assets |
(33 | ) | | (144 | ) | |||||||
Proceeds from sale of assets |
| 9 | 14 | |||||||||
Net cash used in investing activities |
(88,645 | ) | (7,251 | ) | (228,127 | ) | ||||||
Cash flows provided by financing activities: |
||||||||||||
Capital contributions from original stockholders |
| 15,000 | 125,004 | |||||||||
Repayments of short-term borrowings related party |
(1,688 | ) | | (2,795 | ) | |||||||
Repayments of debt |
(2,958 | ) | | (2,958 | ) | |||||||
Net proceeds from sale of common stock in conjunction with
the initial public offering |
| | 378,633 | |||||||||
Net proceeds from sale of preferred stock |
199,642 | | 199,642 | |||||||||
Net proceeds from sale of convertible notes |
223,100 | | 223,100 | |||||||||
Payment of financing costs |
(22 | ) | | (207 | ) | |||||||
Payment of preferred dividends |
(3,320 | ) | | (3,320 | ) | |||||||
Proceeds from exercise of stock options |
| 300 | 350 | |||||||||
Proceeds from short-term borrowings related party |
| 5,008 | 11,645 | |||||||||
Proceeds from debt |
6,288 | | 6,288 | |||||||||
Net cash provided by financing activities |
421,042 | 20,308 | 935,382 | |||||||||
Effect of exchange rate changes on cash |
97 | | 97 | |||||||||
Net change in cash and cash equivalents |
363,852 | (1,697 | ) | 680,282 | ||||||||
Cash and cash equivalents at beginning of the period |
316,430 | 6,929 | | |||||||||
Cash and cash equivalents at end of period |
$ | 680,282 | $ | 5,232 | $ | 680,282 | ||||||
Supplemental disclosure of non-cash activities: |
||||||||||||
Change in accrued capital expenditures |
$ | 34,540 | $ | 1,126 | ||||||||
Net cash paid for taxes |
$ | 505 | $ | | ||||||||
See accompanying notes to the consolidated financial statements.
6
Table of Contents
MOLYCORP, INC.
(A Company in the Development Stage)
(A Company in the Development Stage)
Notes to Condensed Consolidated Financial Statements
June 30, 2011
(Unaudited)
June 30, 2011
(Unaudited)
(1) Company Background
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 its wholly-owned
subsidiary, Molycorp Minerals, LLC (Molycorp Minerals) became subsidiaries of Molycorp, Inc. (the
Corporate Reorganization). On June 15, 2010, Molycorp LLC was merged with and into Molycorp
Minerals. Molycorp, Inc., together with its consolidated subsidiaries, is referred to herein as the
Company or Molycorp.
The Company 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:
| clean-energy technologies such as hybrid and electric vehicles, wind turbines and compact florescent lighting; | ||
| high-technology applications including cell phones, personal digital assistant devices, digital music players, hard disk drives used in computers, computing devices, ear bud speakers and microphones, as well as fiber optics, lasers and optical temperature sensors; | ||
| critical defense applications such as guidance and control systems, communications, global positioning systems, radar and sonar; and | ||
| advanced water treatment applications including those for industrial, military, homeland security, domestic and foreign aid use. |
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.
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 Chevrons ownership of the Mountain Pass facility. The neodymium from lanthanum (NFL)
pilot processing project was undertaken to improve the facilitys REE processing techniques. From
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.
On April 1, 2011, Molycorp completed the acquisition of a 90.023% controlling stake in AS Silmet
(now known as Molycorp Silmet AS), one of only two rare earth processing facilities in Europe.
Additionally, on April 15, 2011, Molycorp completed the acquisition of Santoku America, Inc. (now
known as Molycorp Metals and Alloys, Inc.), the only producer of rare earth alloys in the United
States (see Note 5).
(2) Basis of Presentation
The Companys 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 Companys 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 Companys acquisitions of Molycorp Metals and Alloys, Inc. (Molycorp Metals and Alloys or
MMA) and of a controlling interest in Molycorp Silmet AS (Molycorp Silmet) in April 2011 have
been accounted for as business combinations.
7
Table of Contents
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America (GAAP)
for interim financial information and Regulation S-X promulgated under the Securities Exchange Act
of 1934. While the December 31, 2010 balance sheet information was derived from the Companys
audited financial statements, for interim periods, GAAP and Regulation S-X do not require all
information and notes that are required in the annual financial statements, and all disclosures
required by GAAP for annual financial statements have not been included. Therefore, the
accompanying unaudited condensed consolidated financial statements should be read in conjunction
with Molycorps Form 8-K filed on August
5, 2011 with respect to the revised Companys condensed consolidated financial statements as of and
for the three months ended March 31, 2011, and cumulatively for the period from June 12, 2008
(Inception) through March 31, 2011, and the revised Companys consolidated financial
statements as of and for the year ended December 31, 2010, and cumulatively for the period from
June 12, 2008 (Inception) through December 31, 2010, for an overstatement of Work in Process (WIP)
inventory.
The accompanying unaudited condensed consolidated financial statements reflect all adjustments,
which are normal and recurring in nature, and which, in the opinion of management, are necessary
for the fair presentation of Molycorps financial position, results of operations and cash flows at
June 30, 2011, and for all periods presented. The accompanying unaudited condensed consolidated
financial statements include the accounts of the Company and its consolidated subsidiaries. All
intercompany balances and transactions have been eliminated in consolidation.
(3) Capital Requirements
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 initial modernization and expansion plan (Project Phoenix Phase 1), 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 $31.4 million in 2010 and $106.4 million during the six months ended June
30, 2011. In January 2011, the Companys Board of Directors approved a second-phase capacity
expansion plan (Project Phoenix Phase 2). Upon the completion of this capacity expansion plan, by the end of 2013, Molycorp
expects to have the ability to produce up to approximately 40,000 mt of REO per year at its
Mountain Pass facility, or approximately double the amount the Company will be able to produce upon
completion of its initial expansion and modernization plan. Management has estimated that Molycorp
will incur approximately $250 million, excluding capitalized
interest, of capital costs in connection with the second-phase capacity
expansion plan in addition to the $531 million, excluding capitalized
interest, estimated for the initial modernization and
expansion effort.
The Company expects to finance its remaining capital expenditures under the initial modernization
and expansion and the second-phase capacity expansion plans as well as its working capital
requirements, with its available cash balances as of June 30, 2011, and anticipated revenue from
operations. Additionally, the Company may elect to satisfy certain capital expenditure requirements
through vendor financing, leasing or other financing arrangements.
On December 10, 2010, Molycorp entered into a memorandum of understanding with Sumitomo Corporation
(Sumitomo), pursuant to which Sumitomo agreed to, among other things, purchase $100 million of
the Companys 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.
Prior to securing proceeds for its capital plans through its IPO, the issuance of its 5.5%
Series A Mandatory Convertible Preferred Stock (the Convertible Preferred Stock) (Note 4n) and its
3.25% Convertible Senior Notes due 2016 (the Notes) (Note 4l), the Company submitted a Part I
application for a loan guarantee with the U.S. Department of Energy,
(DOE), in June 2010 for up
to $280 million. On July 21, 2010, the DOE deemed the Companys application eligible for submission
of a Part II application, which was submitted on December 31, 2010. Due to program and resource
constraints, the application under Section 1705 of the DOE loan guarantee program LGP was put on
hold on May 10, 2011. At that time, the DOE advised Molycorp that its project may be eligible for
funding under Section 1703 of the LGP. The Company has elected to withdraw its application under
the DOE loan guarantee program due to its success in raising capital through the Convertible Preferred
Stock and the Notes offerings.
(4) Summary of Significant Accounting Policies
(a) Use of Estimates
The preparation of the financial statements, in accordance with GAAP, 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. Management bases its
estimates on the Companys 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.
8
Table of Contents
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
Companys asset retirement obligations.
(b) Revenue and Cost 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 the Companys production facilities. 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.
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.
(c) Cash and Cash Equivalents
Cash and cash equivalents consist of cash and liquid investments with an original maturity of three
months or less. At June 30, 2011, cash and cash equivalents included $664 million of funds held in
money market accounts.
(d) Trade Accounts Receivable
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 June 30, 2011 and December
31, 2010, an allowance for doubtful accounts was not required.
(e) Inventories
Inventories
consist of raw materials, 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 sheets.
Molycorp evaluates its production levels and costs to determine if any should be deemed abnormal,
and therefore excluded from inventory costs. For the three months ended June 30, 2011 and 2010,
Molycorp determined that $0.9 million and $3.6 million, respectively, of
production costs would have been allocated to additional metric tons produced, assuming Molycorp
had been operating at normal production rates. For the six months ended June 30, 2011 and 2010, and
cumulatively for the period from June 12, 2008 (Inception) through June 30, 2011, Molycorp
determined that $3.5 million, $6.0 million and $17.0 million, respectively, of production costs
would have been allocated to additional metric 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.
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 three months ended June 30, 2011 and 2010, the Company
recognized write-downs of zero and $0.3 million, respectively, as a result of production costs in
excess of certain REO market prices. For the six months ended June 30, 2011 and 2010, and
cumulatively for the period from June 12, 2008 (Inception) through June 30, 2011, the Company
recognized write-downs of $0.6 million, $0.9 million, and $21.6 million, respectively, as a result
of production costs in excess of certain REO market prices. In addition, the Company recognized a
$1.0 million write-down of work in process inventory based on estimated REO quantities for the
three months ended June 2011.
The Company evaluates the carrying value of materials and supplies inventories each quarter giving
consideration to slow-moving items, obsolescence, excessive levels, and other factors and
recognizes related write-downs as necessary.
At June 30, 2011 and December 31, 2010, inventory consisted of the following (in thousands):
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Current: |
||||||||
Concentrate stockpiles |
$ | 6,272 | $ | 4,206 | ||||
Raw materials |
29,689 | | ||||||
Work in process |
11,317 | 3,582 | ||||||
Finished goods |
22,645 | 9,307 | ||||||
Materials and supplies |
2,358 | 1,727 | ||||||
Total current |
$ | 72,281 | $ | 18,822 | ||||
Long-term: |
||||||||
Concentrate stockpiles |
$ | 995 | $ | 5,108 | ||||
Finished goods |
56 | 104 | ||||||
Total long-term |
$ | 1,051 | $ | 5,212 | ||||
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Table of Contents
(f) Deposits
The Company has $15.5 million in deposits reported as Non-current assets on the Consolidated
Balance Sheet as of June 30, 2011. The deposits consist of $14.0 million under an escrow
arrangement for the Companys facilities agreement with Kern River Gas Transmission Company and
$1.5 million related to the Companys construction insurance program. During the second quarter of
2011, the Company collected an $18.2 million deposit which was
no longer required to secure surety bonds obtained
for the California state and regional agencies relating to the Mountain Pass facility closure and
reclamation obligations.
(g) Property, Plant and Equipment, net
Property, plant and equipment associated with the acquisitions of the Mountain Pass facility,
Molycorp Silmet and MMA was recorded at estimated fair value as of the respective 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 capitalized $73.0 million and $5.0 million
in plant modernization costs for the three months ended June 30, 2011 and 2010, respectively, and
$114.2 million and $8.4 million in plant modernization costs for the six months ended June 30, 2011
and 2010, 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, approved by the Board of Directors in January 2011 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 mt per year than would otherwise be possible.
Mineral properties at June 30, 2011 and December 31, 2010, represent the purchase price allocated
to mineral resources associated with the Mountain Pass facility and mineral property development
costs.
At June 30, 2011 and December 31, 2010, property, plant and equipment consisted of the following
(in thousands):
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Land |
$ | 3,860 | $ | 800 | ||||
Land improvements |
15,748 | 15,415 | ||||||
Buildings and improvements |
18,053 | 6,892 | ||||||
Plant and equipment |
90,635 | 19,560 | ||||||
Vehicles |
1,055 | 1,049 | ||||||
Computer software |
2,173 | 1,563 | ||||||
Furniture and fixtures |
279 | 170 | ||||||
Construction in progress |
145,894 | 34,809 | ||||||
Mineral properties |
23,968 | 23,968 | ||||||
Property, plant and equipment at cost |
301,665 | 104,226 | ||||||
Less accumulated depreciation |
(15,276 | ) | (10,260 | ) | ||||
Property, plant and equipment, net |
$ | 286,389 | $ | 93,966 | ||||
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. There were no events or changes in circumstances
indicating that the carrying amount of the Companys long-lived assets as of June 30, 2011 may not
be recoverable.
(h) Mineral Properties and Development Costs
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. Molycorps 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.
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Table of Contents
(i) Intangible Assets
At June 30, 2011 and December 31, 2010, amortizable intangible assets consisted of the following
(in thousands):
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Trade name |
$ | 786 | $ | 786 | ||||
Other |
558 | | ||||||
Gross carrying amount |
1,344 | 786 | ||||||
Less accumulated amortization |
(387 | ) | (147 | ) | ||||
Net carrying amount |
$ | 957 | $ | 639 | ||||
Amortization expense for the three months ended June 30, 2011 and 2010 was $222,250 and
$16,250, respectively. Amortization expense for the six months ended June 30, 2011 and 2010, and
cumulatively for the period from June 12, 2008 (Inception) through June 30, 2011 was $238,620,
$32,500 and $385,950, respectively. Amortization expense for the next five years and thereafter is
expected to be as follows (in thousands):
2012 |
$ | 128 | ||
2013 |
128 | |||
2014 |
128 | |||
2015 |
128 | |||
2016 |
128 | |||
Thereafter |
317 | |||
Total |
$ | 957 | ||
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(j) Accrued Expenses
Accrued expenses at June 30, 2011 and December 31, 2010 consisted of the following (in thousands):
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Defined contribution plan |
$ | 562 | $ | 1,199 | ||||
Accrued payroll and related benefits |
2,373 | 1,185 | ||||||
Accrued tolling fees |
| 404 | ||||||
Sales and use tax |
1,797 | 532 | ||||||
Bonus accrual |
587 | 554 | ||||||
Other accrued expenses |
2,339 | 351 | ||||||
Total accrued expenses |
$ | 7,658 | $ | 4,225 | ||||
(k) Asset Retirement Obligation
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.
Depreciation expense associated with the asset retirement cost was $0.3 million and $0.2 million
for the three months ended June 30, 2011 and 2010, respectively. Depreciation expense associated
with the asset retirement cost was $0.5 million, $0.5 million and $4.4 million for the six months
ended June 30, 2011 and 2010, and cumulatively for the period from June 12, 2008 (Inception)
through June 30, 2011, respectively. The following table presents the activity in our asset
retirement obligation (in thousands):
Year Ended | ||||||||
Six Months Ended | December 31, | |||||||
June 30, 2011 | 2010 | |||||||
Balance at beginning of period |
$ | 12,471 | $ | 14,202 | ||||
Obligations settled |
(339 | ) | (632 | ) | ||||
Accretion expense |
474 | 912 | ||||||
Revisions in estimated cash flows |
628 | (1,939 | ) | |||||
Gain on settlement |
| (72 | ) | |||||
Balance at end of period |
$ | 13,234 | $ | 12,471 | ||||
The Company is required to provide the applicable governmental agencies with financial
assurances relating to its closure and reclamation obligations. As of June 30, 2011, the Company
had financial assurance requirements of $27.4 million which were satisfied with surety bonds placed
with the California state and regional agencies.
(l) Debt
On June 15, 2011, the Company completed the issuance and sale of $230.0 million in aggregate
principal amount (net proceeds of $223.1 million after deducting the initial purchasers discounts
and commissions) of the Notes in an offering exempt from the registration requirements of the
Securities Act of 1933 (the Securities Act). The Notes were offered only to qualified institutional buyers pursuant to
Rule 144A under the Securities Act. The Notes are senior unsecured obligations of the
Company and bear interest at a rate of 3.25% per annum, payable semi-annually in arrears on June 15
and December 15 of each year, commencing on December 15, 2011. The Notes are convertible at any
time into shares of Molycorps common stock, cash, or a combination thereof, at Molycorps
election. The initial conversion rate is 14.0056 shares of Molycorp common stock per $1,000
principal amount of the Notes (equivalent to an initial conversion price of approximately $71.40 per
share of Molycorps common stock), subject to customary adjustments. The Notes mature on June 15,
2016, unless earlier repurchased or converted in accordance with their terms prior to that date.
Molycorp does not have the right to redeem the Notes prior to maturity.
The
Company separately accounts for the
liability and equity components of convertible debt instruments (the Notes) that may be
settled entirely or partially in cash upon conversion in a manner that reflects the issuers
economic interest cost. The equity component of the Notes is included in the additional paid-in capital section of stockholders equity on the
consolidated balance sheet and the value of the equity component is treated as original issue
discount for purposes of accounting for the debt component of the Notes. As of June 30, 2011,
Molycorp recognized a liability component related to the Notes of $187.2 million, which includes
accretion of $0.3 million of the original issue discount, and an
equity component of $36.2 million. Transaction costs related to the issuance
of the Notes have been allocated to the liability and equity components in proportion to the
allocation of proceeds to the components, and accounted for as debt issuance costs (recognized as
interest expense over the life of the Notes using the effective interest method) and equity
issuance costs (charged against equity), respectively.
12
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Additional debt was assumed as part of the Molycorp Silmet acquisition. The following table
provides a summary of the current and noncurrent portion of the debt outstanding as of June 30,
2011 (in thousands).
At June 30, 2011 | ||||||||
Current | Non-Current | |||||||
Notes 3.25%, net of discount due June 2016 |
$ | | $ | 187,158 | ||||
Bank loans
2.69% - 3.88% due February 2012 September 2017 |
1,010 | 7,892 | ||||||
Bank overdraft 3.00% due 2011 |
1,594 | | ||||||
Total debt |
2,604 | 195,050 | ||||||
Capital lease obligations 1.88% due April 2012 |
6 | 23 | ||||||
Total debt and capital lease obligations |
$ | 2,610 | $ | 195,073 | ||||
Scheduled minimum debt repayments in thousands are $2,610 for the remainder of 2011, $1,734 in
2012, $1,602 in 2013, $1,602 in 2014,
$1,526 in 2015, and $235,188 thereafter.
(m) Income Taxes and Valuation Allowance
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 files 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 differences between the financial statement carrying amounts of
assets and 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 assets will not be realized in full. As of June 30, 2011, the Companys net
income of $11.6 million since the Corporate Reorganization
included $31.1 million in certain stock-based
compensation expense, which is a permanent difference between its income for financial reporting
and tax purposes. Other permanent differences include legal and due diligence fees related to the
acquisitions that were completed in April 2011, as well as costs related to the registration of
common stock sold by certain stockholders in secondary offerings completed during the first and
second quarters of 2011. Molycorp has generated net deferred income
tax assets of $27.5 million, net of a $3.9 million valuation
allowance, as
of June 30, 2011.
Prior to the second quarter of 2011, Molycorp had a history of losses and, as a result, it
recognized a full valuation allowance against its net deferred tax
assets. At June 30, 2011 a significant portion of its deferred tax
assets related to tax benefits attributable to mineral basis and
the Notes.
Each quarter, the Company evaluates the need to retain all or a portion of the valuation allowance
on its deferred tax assets. During the three months ended June 30, 2011, Molycorp determined that
it is more likely than not that it will realize its deferred tax assets, including the NOLs. In
making this determination, management analyzed, among other things, the Companys recent history of
earnings and cash flows, forecasts of future earnings, the nature and timing of future deductions
and benefits represented by the deferred tax assets and liabilities. The reversal of the valuation allowance resulted in a current period net income tax benefit of $18.7 million and an
increase in the non-current deferred tax assets on the condensed consolidated balance sheet as of June 30, 2011. The
release of the valuation allowance on our mineral basis deferred tax asset of $17.3 million is being recorded as a
discrete income tax benefit in the quarter because we are relying on future income to support the realization of the
deferred tax asset. Of the remaining $5.3 million of valuation allowance on our other deferred tax assets, $1.4
million has been released and recorded as an income tax benefit in the quarter because we are relying on current year
income to support the realization of this deferred tax asset. The remaining $3.9 million of valuation allowance will be
released during the third and fourth quarter of 2011 is based on current year income.
The net
tax effect of the elimination in consolidation of all intercompany
balances and transactions resulted in a deferred charge and income
tax payable of $7.6 million.
(n) Stockholders Equity
As of June 30, 2011 and December 31, 2010, the Company had 83,895,354 and 82,291,200 shares of
common stock outstanding, respectively.
13
Table of Contents
On February 16, 2011, Molycorp completed a public offering of its 5.50% Series A Mandatory
Convertible Preferred Stock (Convertible Preferred Stock), $0.001 par value per share. In connection with this offering, the
Company issued 1,800,000 shares of Convertible Preferred Stock for $100.00 per
share. In addition, Molycorp granted the underwriters an option to purchase up to 270,000
additional shares of Convertible Preferred Stock to cover over-allotments. The
underwriters exercised their option to purchase the additional shares of Convertible Preferred Stock on March 16, 2011. Each share of the
Convertible Preferred Stock will automatically convert on March 1, 2014 into between 1.6667 and 2.0000 shares
of Molycorps common stock, subject to anti-dilution adjustments. At any time prior to March 1,
2014, holders may elect to convert each share of the Convertible Preferred Stock
into shares of common stock at the minimum conversion rate of 1.6667 shares of common stock per
share of Convertible Preferred Stock, subject to anti-dilution adjustments.
Dividends on the Convertible Preferred Stock are payable on a cumulative basis
when, as and if declared by the Companys Board of Directors
(Board) or an authorized committee of such
Board, at an annual rate of 5.50% on the liquidation preference of $100.00 per share. The Company
may pay declared dividends in cash, common stock or any combination of cash and common stock,
subject to certain limitations, on March 1, June 1, September 1 and December 1 of each year,
starting on June 1, 2011 and to, and including, March 1, 2014. The
Convertible Preferred Stock is not redeemable. Molycorp received net proceeds from the
Convertible Preferred Stock offering totaling $199.6 million after underwriter discounts and
commissions and offering expenses paid by Molycorp, Inc.
On April 1, 2011, Molycorp acquired 80% of the outstanding shares of Molycorp Silmet from AS Silmet
Grupp in exchange for 1,593,419 shares of Molycorp common stock, which had a fair value of
approximately $72.7 million based on the closing price of the Companys common stock on the
acquisition date, net of an estimated discount that a market participant would require given that issuance of
the shares Molycorp transferred in consideration to AS Silmet Grupp
was not registered under the Securities Act and such shares are subject to certain lock up provisions, which
limit AS Silmet Grupps ability to sell these shares.
On May 4, 2011, the Company declared a cash dividend of $1.604 per share on the
Convertible Preferred Stock. The aggregate dividend of $3.3 million was paid on June 1, 2011 to
holders of record at the close of business on May 15, 2011.
(o) Earnings per Share
Basic earnings per share is computed by dividing the Companys net income attributed to common
stockholders by the weighted average number of shares of common stock outstanding during the
period. For the three and six months ended June 30, 2011, the cumulative undeclared and paid
dividends on the Convertible Preferred Stock were subtracted from the net income in the
period for the purpose of computing the basic earnings per share.
Total from | ||||||||||||
June 12, 2008 | ||||||||||||
Three Months | Six Months | (Inception) | ||||||||||
Ended | Ended | Through | ||||||||||
(In thousands, except share and per share amounts) | June 30, 2011 | June 30, 2011 | June 30, 2011 | |||||||||
Net income (loss) attributed to Molycorp stockholders |
$ | 47,787 | $ | 45,589 | $ | (47,846 | ) | |||||
Cumulative undeclared and paid dividends on preferred stock |
(4,269 | ) | (4,269 | ) | (4,269 | ) | ||||||
Income (loss) attributed to common stockholders |
43,518 | 41,320 | (52,115 | ) | ||||||||
Weighted average common shares outstanding basic |
83,847,119 | 83,054,811 | 53,957,611 | |||||||||
Basic earnings (loss) per share |
$ | 0.52 | $ | 0.50 | $ | (0.97 | ) | |||||
Weighted average common shares outstanding dilutive |
84,413,499 | 83,339,566 | 53,957,611 | |||||||||
Dilutive earnings (loss) per share |
$ | 0.52 | $ | 0.50 | $ | (0.97 | ) | |||||
Diluted earnings per share reflect the dilutive impact of potential common stock and unvested
restricted shares of common stock in the weighted average number of common shares outstanding
during the period, if dilutive. For this purpose, the treasury stock method and if converted
method, as applicable, are used.
Under the treasury stock method, assumed proceeds upon the exercise of stock options are assumed to
be used to purchase common stock at the average market price of the shares during the period. Also
under the treasury stock method, fixed awards and nonvested shares, such as restricted stock, are
considered options for purposes of computing diluted earnings per share. As of June 30, 2011 and
December 31, 2010, all potential common stock under the treasury stock method were antidilutive in
nature; consequently, the Company does not have any adjustments between earnings per share and
diluted earnings per share related to stock options and restricted stock awards.
In applying the if-converted method, conversion is not assumed for purposes of computing diluted
earnings per share if the effect would be antidilutive. Convertible preferred stock (such as the
Convertible Preferred Stock) is antidilutive whenever the amount of the dividend
declared in or accumulated for the current period including the deemed dividend in the period from
a beneficial conversion feature per common share obtainable on conversion exceeds basic earnings
per share.
The Convertible Preferred Stock was antidilutive as of June 30, 2011.
Convertible debt (such as the Notes) is antidilutive whenever its interest including any
deemed interest from a beneficial conversion feature and nondiscretionary adjustments, net of tax,
per common share obtainable on conversion exceeds basic earnings per share. As of June 30, 2011,
the Notes were dilutive under the if-converted method; therefore, the shares of common stock
obtainable on conversion of the Notes were included in the computation of diluted earnings per
share.
14
Table of Contents
(p) Comprehensive Income (Loss)
In addition to Net income (loss), Comprehensive income (loss) includes changes in equity for the
three and six months ended June 30, 2011 due to foreign currency translation adjustments.
(q) Foreign Currency
The functional currency for Molycorp Silmet is the Euro. All monetary assets and liabilities
recorded in Euro are translated at the current exchange rates and the resulting adjustments are charged
or credited directly to cumulative translation adjustments which is a
component of other comprehensive income in equity. Revenues and expenses in
Euro are translated at the average exchange rates for the period;
equity is translated at historical rates.
(5) Acquisitions
The following table summarizes the purchase prices and opening balance sheets for the acquisition
of Molycorp Metals and Alloys and the 90.023% controlling interest in Molycorp Silmet:
Molycorp | ||||||||
Molycorp Silmet | Metals and Alloys | |||||||
Effective acquisition date for financial reporting purposes: | April 1, 2011 | April 15, 2011 | ||||||
(in thousands) | ||||||||
Purchase consideration: |
||||||||
Cash consideration |
$ | 9,021 | $ | 17,500 | ||||
Fair value of common stock |
72,653 | | ||||||
Total purchase consideration |
$ | 81,674 | $ | 17,500 | ||||
The fair values of the assets and liabilities acquired: |
||||||||
Cash |
$ | 105 | $ | 6,395 | ||||
Accounts receivable and other current assets |
8,626 | 5,474 | ||||||
Inventory |
26,700 | 11,327 | ||||||
Property and equipment, net |
77,947 | 3,930 | ||||||
Intangible assets subject to amortization |
525 | | ||||||
Liabilities |
(19,975 | ) | (9,626 | ) | ||||
Long-term debt and capital lease obligations |
(3,184 | ) | | |||||
Noncontrolling interest |
(9,070 | ) | | |||||
Total purchase consideration |
$ | 81,674 | $ | 17,500 | ||||
The purchase price allocations above are based on preliminary assumptions and valuations for each
acquisition. These valuations are subject to change as the Company obtains additional information
on the assets acquired and liabilities assumed during each acquisition measurement period (up to
one year from the acquisition date).
The fair value of the assets acquired includes trade receivables of $5.0 million for Molycorp
Silmet and $4.9 million for MMA; these trade receivables are all considered collectible.
The fair value of the noncontrolling interest in Molycorp Silmet was estimated by applying the
noncontrolling interest percentage to the preliminary net assets determination.
15
Table of Contents
The amounts of Molycorp Silmets and MMAs (acquirees) revenue, earnings and earnings per share
included in the Companys condensed consolidated statements of operations since the acquisition
date, and the revenue, earnings and earnings per share of the combined entity had the acquisition
date been January 1, 2011, and January 1, 2010, are as follows:
Net Income | ||||||||||||||||
Attributable To | ||||||||||||||||
(In thousands, except per share amounts) | Revenue | Net Income | Molycorp | EPS Basic | ||||||||||||
Actual April 1, 2011 to June 30, 2011 (acquirees) |
$ | 39,267 | $ | 8,020 | $ | 7,052 | $ | 0.08 | ||||||||
Supplemental proforma January 1, 2011 to June 30, 2011 (combined
entity) |
$ | 159,350 | $ | 55,463 | $ | 54,495 | $ | 0.60 | ||||||||
Supplemental proforma January 1, 2010 to June 30, 2010 (combined
entity) |
$ | 32,598 | $ | (29,598 | ) | $ | (29,618 | ) | $ | (0.61 | ) |
The 2011 revenue of the acquirees and of the combined entity excludes
$19.6 million of intercompany
sales. The 2011 earnings of the acquirees and of the combined entity
were adjusted to exclude $9.2
million of intercompany sales and $1.8 million of non-recurring acquisition-related costs the
Company incurred to acquire Molycorp Silmet and MMA, and to reverse
$1.1 million of purchase
price variance MMA capitalized during the first quarter of
2011. The 2010 earnings of the combined entity were adjusted to reverse $2.0
million of purchase price variance MMA capitalized during the first two quarters of 2010.
Molycorp Silmet
On April 1, 2011, Molycorp acquired 80% of the outstanding shares of AS Silmet (now Molycorp
Silmet) from AS Silmet Grupp in exchange for 1,593,419 shares of Molycorp common stock
contractually valued at $80 million based on the average closing price of the
Companys common stock as reported by The New York Stock Exchange for the 20 consecutive trading
days immediately preceding April 1, 2011, the acquisition date. Under ASC 805, Business
Combinations, the consideration transferred in a business combination is measured at fair value on
the acquisition date. Generally, the acquisition-date fair value of shares of common stock
transferred by the acquirer is the closing price of that stock on the same date adjusted by a
discount that a market participant would require as a result of any restrictions on the sale or
transferability of the stock. The fair value of common stock of $72.7 million disclosed in the table
above is based on the closing price of the Companys common stock on the acquisition date, net of
an estimated discount that a market participant would require given that issuance of the shares of common stock
Molycorp transferred in consideration to AS Silmet Grupp
was not registered under the Securities Act and such shares are subject to certain lock up provisions, which limit AS Silmet Grupps ability to sell these shares.
AS Silmet Grupp retained a 9.977% ownership interest in Molycorp Silmet. Molycorp acquired the
other 10.023% from Treibacher Industrie AG for $9.0 million in cash. The Molycorp Silmet
acquisition provides Molycorp with a European base of operations and significantly increases the
Companys current rare earth production capacity by approximately 3,000 mt REO equivalent. Molycorp
Silmet sources a portion of rare earth feed stocks for production of its products primarily from
Molycorps Mountain Pass facility. The main focus of this newly acquired business is on the
production of rare earth oxides and metals, including didymium metal, a critical component in the
manufacture of neodymium-iron-boron permanent rare earth magnets. Molycorp Silmets manufacturing
operation is located in Sillamäe, Estonia.
In connection with the acquisition of the 90.023% controlling interest in Molycorp Silmet, the
Company incurred $1.2 million of acquisition-related costs, which are included in
selling, general and administrative expenses for the three and six-month periods ended June 30,
2011, respectively.
Molycorp Metals and Alloys
On April 15, 2011, Molycorp completed the acquisition from Santoku Corporation (Santoku) of all
the issued and outstanding shares of capital stock of Santoku America, Inc., which is now known as
Molycorp Metals and Alloys, an Arizona-based corporation, 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 MMAs products. On the same date, Molycorp
and Santoku entered into five-year marketing and distribution agreements for the sale and
distribution of neodymium and samarium magnet alloy products produced by each party. Additionally,
the parties entered into a rare earth products purchase and supply agreement through which MMA will
supply Santoku with certain rare earth alloys for a two-year period at prices equal to the
feedstock cost plus the applicable product premium as such terms are defined in the agreement.
In connection with the acquisition, the Company incurred $0.6 million of acquisition-related costs,
which are included in selling, general and administrative expenses for the three and six-month
periods ended June 30, 2011, respectively
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(6) Commitments and Contingencies
(a) Future Operating Lease Commitments
The Company has certain operating leases for office space and certain equipment. Remaining annual
minimum payments under these leases at June 30, 2011 were $0.2 million in 2011, $0.2 million in
2012, $0.2 million in 2013, $0.2 million in 2014, $0.2 million in 2015 and $0.2 million thereafter,
totaling $1.2 million.
(b) Plant Modernization and Expansion Commitments
In connection with the Mountain Pass facility modernization and expansion and future
operations, the Company entered into contractual commitments for the purchase of materials and
services from various vendors. Future payments for these commitments
are estimated at $187.9 million due in 1
year and $50.0 million due in 2-3 years.
(c) Labor Contract
Certain Mountain Pass facility employees are covered by a collective bargaining agreement with the
United Steelworkers of America that expires on March 15, 2012. At June 30, 2011, 85 employees, or
approximately 49% of the Companys workforce at Mountain Pass, California, were covered by this
collective bargaining agreement.
(d) Reclamation Surety Bonds
At June 30, 2011, Molycorp had placed $27.4 million of surety bonds with California state and
regional agencies to secure its Mountain Pass facility closure and reclamation obligations.
(e) Licenses and Permits
The Company is subject to numerous and detailed federal, state and local environmental laws,
regulations and permits including health and safety, environmental, and air quality. The Company is
subject to strict conditions, requirements and obligations relating to various environmental and
health and safety matters in connection with the current permits, and the Company may be subject to
additional conditions, requirements and obligations associated with its permits and future
operations. Certain conditions could be imposed in order to maintain the required permits including
requirements to conduct additional environmental studies and collect and present data to government
authorities pertaining to the potential impact of current and future operations upon the
environment. Accordingly, the required permits may not be maintained or renewed in a timely fashion
if at all, or may be renewed upon conditions that restrict the Companys ability to conduct its
operations economically. Any failure, significant delay or significant change in conditions that is
required to maintain or renew permits, could have a material adverse effect on the Companys
business, results of operations and financial condition.
(7) Stock-Based Compensation
Molycorp accounts for stock-based compensation based upon the fair value of the awards at the time
of grant. The expense associated with such awards is recognized over the service period associated
with the issuance. There are no performance conditions associated with these awards.
Effective November 1, 2009, Molycorp, LLC issued 5,880,000 incentive shares to certain employees
and independent directors of the Company. At the time of issuance, due to Molycorp, LLCs option to
repurchase vested shares of terminated participants at a price other than fair value, these
incentive shares were classified as liabilities and were valued at zero using the intrinsic value
method. On April 15, 2010, all holders of incentive shares contributed their incentive shares to
Molycorp, Inc. in exchange for an aggregate of 3,012,420 shares of Class B common stock of
Molycorp, Inc., 1,004,140 shares of which vested immediately with an additional 1,004,140 shares
vesting on September 30, 2010 and the remaining 1,004,140 shares vesting on September 30, 2011. The
shares of Class B common stock were non-transferable and the Company had the right to repurchase
vested shares upon the termination of employment for any reason.
The shares of Class B common stock automatically converted into shares of common stock, based on a
conversion factor, immediately prior to completion of the IPO. On August 3, 2010, Molycorp
completed an IPO of common stock at an offering price of $14.00 per share. At that time, the shares
of Class B common stock were converted into an aggregate of 2,232,740 shares of common stock,
744,247 of which remained vested with the remaining 1,488,493 vesting over a period of six months
following the IPO. Stock-based compensation associated with these
shares was zero and $2.6 million for the three months and the
six months ended June 30, 2011, respectively, and $28.7 million for the year ended December 31, 2010
On November 4, 2010, the Compensation Committee of the Board of Directors of the Company approved
the grant of 37,500 shares of restricted stock with a three-year cliff vesting period to certain
executive officers and a director of the Company. The $1.4 million fair value of the awards was
determined using the stock price on the date of grant and is recognized straight-line over the
three-year vesting period. The stock-based compensation associated with these awards was $0.1
million and $0.2 million for the three months and six months ended June 30, 2011, respectively.
On January 13, 2011, the Company granted 9,557 shares of restricted stock and 32,637 restricted
stock units with a three-year cliff vesting period to certain employees and executive officers of
the Company. The total $1.9 million fair value of the restricted stock and restricted stock units
was determined using the Companys stock price on the date of grant and is recognized straight-line
over the three-year vesting period. On the same day, the Company granted 52,819 stock options that
vest in equal installments annually over a three-year period to certain employees and executive
officers of the Company. The $1.4 million fair value of the stock options was determined using the
Black Scholes option valuation model and the Companys stock price on the date of grant and is
recognized straight-line over the three year vesting period. The stock-based compensation
associated with these awards was $0.3 million and $0.5 million for the three months and six months
ended June 30, 2011, respectively.
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During
the second quarter of 2011, Molycorp granted 45,485 restricted stock
units and 1,325 shares of restricted stock with a three-year
cliff vesting period to certain employees, executive officers and non-employee directors of the
Company. The total $2.6 million fair value of these restricted stock units was determined using the
Companys stock price on the date of grants and is recognized straight-line over the three-year
vesting period. The stock-based compensation associated with these awards was $0.1 million for the
three months and six months ended June 30, 2011.
The stock-based compensation associated with all awards issued since inception was $0.5
million and $3.4 million for the three months and six months ended June 30, 2011, respectively.
Approximately $41,800 and $76,800 of the stock-based compensation associated with these equity
awards was capitalized into inventory for the three months and six months ended June 30, 2011,
respectively.
(8) Concentrations
(a) Limited Number of Products
The Companys current operations at the Mountain Pass facility are primarily limited to the
production and sale of REOs from stockpiled concentrates and purchasing and reselling REOs from
other producers. The Company does not have and will not have the capability to significantly alter
its product mix from its Mountain Pass facility prior to completing the modernization and expansion
project and the restart of mining operations. Sales, net of intercompany sales, for the Mountain
Pass facilitys most significant products for the three and six months ended June 30, 2011 and
2010, in thousands, were as follows:
Three | ||||||||
Months | Six Months | |||||||
Ended | Ended | |||||||
2011 | June 30 | June 30 | ||||||
Lanthanum products |
$ | 14,948 | $ | 26,414 | ||||
Ceric Hydrate |
$ | 18,806 | $ | 26,674 | ||||
Didymium products |
$ | 20,828 | $ | 25,521 | ||||
Other cerium products |
$ | 3,985 | $ | 5,170 |
Three | ||||||||
Months | Six Months | |||||||
Ended | Ended | |||||||
2010 | June 30 | June 30 | ||||||
Lanthanum products |
$ | 1,787 | $ | 4,538 | ||||
Ceric Hydrate |
$ | | $ | | ||||
Didymium products |
$ | | $ | 105 | ||||
Other cerium products |
$ | 32 | $ | 46 |
The
tables above reflect revenues from the Mountain Pass facilitys
most significant products and do not include revenues from Molycorp
Silmet or MMA.
As a result of the acquisition of the 90.023% controlling interest in Molycorp Silmet on April 1,
2011, the Company added additional rare earth products and two new metal products, tantalum and
niobium, to its product mix.
From the acquisition of MMA, which also occurred during the second quarter of 2011, the Company
added neodymium iron boron (NdFeB) alloy and samarium cobalt (SmCo) alloy to its
product mix.
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(b) Limited Number of Customers
There is a limited market for the products currently produced and purchased by the Company. Sales to the Companys largest customers, for the three and six months
ended June 30, 2011 and 2010, in thousands, were as follows:
Three | ||||||||
Months | Six Months | |||||||
Ended | Ended | |||||||
2011 | June 30 | June 30 | ||||||
Mitsubishi Unimetals USA |
$ | 18,627 | $ | 26,394 | ||||
Hitachi Metals, Ltd. |
$ | 18,328 | $ | 24,113 | ||||
W.R. Grace & Co. Conn. |
$ | 2,520 | $ | 8,727 | ||||
Santoku Corporation |
$ | 8,320 | $ | 8,320 | ||||
Chuden Rare Earth Co., LTD |
$ | 6,073 | $ | 6,073 |
Three Months | Six Months | |||||||
Ended | Ended | |||||||
2010 | June 30 | June 30 | ||||||
W.R. Grace & Co. Conn. |
$ | 1,498 | $ | 3,806 |
(c) | Geographic Locations |
Currently, the Companys only mining facility is the Mountain Pass, California facility, and the
Companys viability is based on the successful modernization and expansion of its operations. The
deterioration or destruction of any part of the Mountain Pass facility, or legal restrictions
related to current or anticipated operations at the Mountain Pass facility, may significantly
hinder the Companys ability to reach or maintain full planned production rates within the expected
time frame, if at all.
Through the acquisition of the 90.023% controlling interest in Molycorp Silmet, the Company added a
rare earth oxides and metals processing facility in in Sillamäe, Estonia. In addition, the Company
acquired Molycorp Metals and Alloys, based in Arizona, which processes and manufactures neodymium
and samarium alloy products.
(9) Related-Party Transactions
In February 2009, certain of the Companys stockholders incurred certain costs in providing letters
of credit and/or cash collateral to secure the surety bonds issued for the benefit of certain
regulatory agencies related to the Companys Mountain Pass facility closure and reclamation
obligations. The total amount of collateral provided by stockholders was $18.2 million. Under the
terms of the agreement with its stockholders, the Company agreed to pay each such stockholder a 5%
annual return on the amount of collateral provided, and the stockholders were entitled to receive
quarterly payments, delay payments, or receive payments-in-kind. In September 2010, the Company
issued its own collateral in the amount of $18.2 million in replacement of the letters of credit
and cash collateral provided by the stockholders. The Company paid fees due to stockholders in the
amount of $0.8 million in September 2010.
In June 2010, the Company entered into an inventory financing arrangement with Traxys North America
LLC (Traxys), the parent of one of its stockholders, TNA Moly Group, LLC, under which it borrowed
approximately $5.0 million, secured by certain product inventories. Borrowings under this
arrangement required an initial interest rate of 6% based on three-month LIBOR plus a margin, which
is subject to adjustment every three months. No adjustments have been made to the interest rate
since the agreement was signed. At June 30, 2011 and December 31, 2010, interest payable associated
with the arrangement totaled $11,000 and $9,000, respectively. Principal under this arrangement is
payable from revenue generated from sales of the product inventories. During the third quarter of
2010, both parties agreed that 50% of all didymium oxide sales will be subject to this arrangement.
The Company made principal payments of $0.9 million and $1.7 million for the three and six
months ended June 30, 2011, respectively. The outstanding amounts payable to Traxys under this
arrangement were $2.4 million reported on the Condensed Consolidated Balance Sheet as Short-term
borrowing related party and $0.1 million in Trade accounts payable related to the sales made,
but not remitted to Traxys and affiliates as of June 30, 2011.
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The Company and Traxys and affiliates jointly market and sell certain lanthanum oxide, cerium oxide
and erbium oxide products. Per the terms of this arrangement, the Company and Traxys split gross
margin equally once all costs associated with the sale are recovered by both parties. The Company
has recorded a related party receivable from Traxys and affiliates of $45,000 as of June 30, 2011.
The Company recorded an expense of $167,000 during the first quarter of 2011 and $65,000 during the
second quarter of 2011 and had an outstanding related payable to Traxys and affiliates in the
amount of $362,000 as of June 30, 2011. Revenues and expenses related to these settlements are
presented on a net basis in Other Income on the Statement of Operations. In addition, for the three
and six months ended June 30, 2011, the Company made purchases of lanthanum oxide from Traxys and
affiliates in the amount of $1.9 million and $6.2 million, respectively.
(10) Segment Information
The Company is currently organized into three primary divisions or operating segments: Molycorp
Minerals, Molycorp Silmet and Molycorp Metals and Alloys. Molycorp Minerals owns and operates the rare earth mine and
processing facilities in Mountain Pass, California. Molycorp Silmet produces rare earth oxides and
rare metals at the manufacturing facility located in Sillamäe, Estonia. MMA manufactures neodymium
and samarium magnet alloy and other specialty alloy products in Tolleson, Arizona.
The accounting policies of these segments are the same as those described in the summary of
significant accounting policies except that asset retirement obligations are recognized only for
the Molycorp Minerals, certain government grants are recognized only for Molycorp Silmet, and
annual profit earned by Molycorp Silmet is not taxed. In accordance with the Estonian Income Tax
Act, only distribution of annual profit is subject to income tax.
Intersegment sales and transfers are based on similar arms-length transactions with third parties
at the time of the sale.
Molycorps reportable segments are strategic business units that fit into the Companys
mine-to-magnet strategy to be the worlds most integrated producer of rare earth products,
including oxides, metals, alloys and magnets. All three segments were acquired as a unit and
management at the time of the acquisition was retained.
Molycorp | Eliminations | |||||||||||||||||||
Three Months Ended June 30, 2011 | Molycorp | Molycorp | Metals and | and Other | Total | |||||||||||||||
(In thousands) | Minerals | Silmet | Alloys | Adjustments | Molycorp | |||||||||||||||
Sales: |
||||||||||||||||||||
Total |
$ | 76,295 | $ | 32,656 | $ | 10,250 | $ | (19,586 | ) | $ | 99,615 | |||||||||
Intersegment |
(15,947 | ) | (3,639 | ) | | 19,586 | | |||||||||||||
Cost of goods sold |
||||||||||||||||||||
Total |
(21,709 | ) | (20,472 | ) | (11,143 | ) | 10,401 | (42,923 | ) | |||||||||||
Intersegment |
2,770 | 7,631 | | (10,401 | ) | | ||||||||||||||
Selling, general and administrative
expenses |
(12,294 | ) | (1,411 | ) | (112 | ) | | (13,817 | ) | |||||||||||
Depreciation, amortization and accretion
expense |
(332 | ) | | (191 | ) | | (523 | ) | ||||||||||||
Stock-based compensation |
(412 | ) | | | | (412 | ) | |||||||||||||
Operating income (loss) |
28,371 | 14,765 | (1,196 | ) | | 41,940 | ||||||||||||||
Other income (expense) |
304 | (103 | ) | 2 | | 203 | ||||||||||||||
Income before income taxes |
$ | 28,675 | $ | 14,662 | $ | (1,194 | ) | $ | | $ | 42,143 | |||||||||
Total assets at June 30, 2011 |
$ | 1,099,900 | $ | 152,984 | $ | 29,705 | $ | (140,923 | ) | $ | 1,141,666 | |||||||||
Capital expenditures (accrual basis) |
$ | 70,742 | $ | 2,231 | $ | | $ | | $ | 72,973 | ||||||||||
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Molycorp | Eliminations | |||||||||||||||||||
Six Months Ended June 30, 2011 | Molycorp | Molycorp | Metals and | and Other | Total | |||||||||||||||
(In thousands) | Minerals | Silmet | Alloys | Adjustments | Molycorp | |||||||||||||||
Sales: |
||||||||||||||||||||
Total |
$ | 102,556 | $ | 32,656 | $ | 10,250 | $ | (19,586 | ) | $ | 125,876 | |||||||||
Intersegment |
(15,947 | ) | (3,639 | ) | | 19,586 | | |||||||||||||
Cost of goods sold |
||||||||||||||||||||
Total |
(38,386 | ) | (20,472 | ) | (11,143 | ) | 10,401 | (59,600 | ) | |||||||||||
Intersegment |
2,770 | 7,631 | | (10,401 | ) | | ||||||||||||||
Selling, general and administrative
expenses |
(20,633 | ) | (1,411 | ) | (112 | ) | | (22,156 | ) | |||||||||||
Depreciation, amortization and accretion
expense |
(649 | ) | | (191 | ) | | (840 | ) | ||||||||||||
Stock-based compensation |
(3,311 | ) | | | | (3,311 | ) | |||||||||||||
Operating income (loss) |
26,400 | 14,765 | (1,196 | ) | | 39,969 | ||||||||||||||
Other income (expense) |
276 | (103 | ) | 2 | | 175 | ||||||||||||||
Income before income taxes |
$ | 26,676 | $ | 14,662 | $ | (1,194 | ) | $ | | $ | 40,144 | |||||||||
Total assets at June 30, 2011 |
$ | 1,099,900 | $ | 152,984 | $ | 29,705 | $ | (140,923 | ) | $ | 1,141,666 | |||||||||
Capital expenditures (accrual basis) |
$ | 111,966 | $ | 2,231 | $ | | $ | | $ | 114,197 | ||||||||||
The total assets elimination of $141.0 million is comprised of $16.4 million
of intercompany accounts receivable, $10.6 million of intercompany inventory and $114.0 million of intercompany investments.
(11) Subsequent Events
In July 2011, the Company declared a cash dividend of $1.375 per share on the
Convertible Preferred Stock. The aggregate dividend of $2.8 million will be paid on September 1,
2011 to holders of record at the close of business on August 15, 2011.
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
In this Quarterly Report on Form 10-Q, unless the context requires otherwise, references to
Molycorp, we, our or us refer to Molycorp, LLC, and its consolidated subsidiaries prior to
our corporate reorganization (as described under the heading Overview Presentation below) and
Molycorp, Inc. and its consolidated subsidiaries after the corporate reorganization (as described
below). As used herein, a ton is equal to 2,000 pounds, the term mt means a metric tonne (equal
to 2,205 pounds), and the term Rest of World means the entire world except China. For definitions
of certain rare earth-related and mining terms, see Glossary of Selected Mining Terms.
This Quarterly Report on Form 10-Q contains forward-looking statements that represent our beliefs,
projections and predictions about future events or our future performance. You can identify
forward-looking statements by terminology such as may, will, would, could, should,
expect, intend, plan, anticipate, believe, estimate, predict, potential, continue
or the negative of these terms or other similar expressions or phrases. These forward-looking
statements are necessarily subjective and involve known and unknown risks, uncertainties and other
important factors that could cause our actual results, performance or achievements or industry
results to differ materially from any future results, performance or achievement described in or
implied by such statements.
Factors that may cause actual results to differ materially from expected results described in
forward-looking statements include, but are not limited to: our ability to secure sufficient
capital to implement our business plans; our ability to complete our Phase 1 modernization and
expansion efforts and Phase 2 capacity expansion efforts and reach full planned production rates
for REOs and other planned downstream products; the final costs of the Phase 1 modernization and
expansion plan and Phase 2 capacity expansion, which may differ from estimated costs; uncertainties
associated with our reserve estimates and non-reserve deposit information; uncertainties regarding
global supply and demand for rare earths materials; our ability to successfully integrate recently
acquired businesses; our ability to reach definitive agreements for a joint venture to manufacture
neodymium-iron-boron permanent rare earth magnets and our supply and financing arrangement with
Sumitomo; our ability to maintain appropriate relations with unions and employees; our ability to
successfully implement our mine-to-magnets strategy; environmental laws, regulations and permits
affecting our business, directly and indirectly, including, among others, those relating to mine
reclamation and restoration, climate change, emissions to the air and water and human exposure to
hazardous substances used, released or disposed of by us; and uncertainties associated with
unanticipated geological conditions related to mining; and those risks discussed and referenced in
the section entitled Risk Factors described in our Annual Report on Form 10-K for the year ended
December 31, 2010 and our Quarterly Report on Form 10-Q for the quarterly period ended March 31,
2011.
Any forward-looking statement you read in this Quarterly Report on Form 10-Q reflects our current
views with respect to future events and is subject to these and other risks, uncertainties and
assumptions relating to our operations, operating results, growth strategy and liquidity. You
should not place undue reliance on these forward-looking statements because such statements speak
only as to the date when made. We assume no obligation to publicly update or revise these
forward-looking statements for any reason, or to update the reasons actual results could differ
materially from those anticipated in these forward-looking statements, even if new information
becomes available in the future, except as otherwise required by applicable law.
The following discussion and analysis should be read in conjunction with our unaudited condensed
consolidated financial statements and related notes included herein. The historical financial data
discussed below prior to the completion of the initial public offering, or IPO, of Molycorp, Inc.
reflects the historical results of operations and financial position of Molycorp, LLC and, for any
time period prior to the formation of Molycorp, LLC on September 9, 2009, those of Molycorp
Minerals, LLC, or Molycorp Minerals. The historical financial data does not, unless otherwise
noted, give effect to the completion of the IPO and corporate reorganization.
This Quarterly Report on Form 10-Q also contains statistical data and estimates we obtained from
industry publications and reports generated by third parties. Although we believe that the
publications and reports are reliable, we have not independently verified their data.
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Overview
Presentation
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 its wholly-owned
subsidiary, Molycorp Minerals, LLC (Molycorp Minerals) became subsidiaries of Molycorp, Inc. (the
Corporate Reorganization). On June 15, 2010, Molycorp LLC was merged with and into Molycorp
Minerals.
In the quarter of 2011, we completed a public offering of 5.50% Series A Mandatory
Convertible Preferred Stock, or Convertible Preferred Stock, $0.001 par value per share. In connection with this offering, we
issued 2,070,000 shares of 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 Convertible Preferred Stock will automatically convert on March 1, 2014 into between 1.6667 and 2.0000 shares
of Molycorps common stock, subject to anti-dilution adjustments. At any time prior to March 1,
2014, holders may elect to convert each share of the Convertible Preferred Stock
into shares of common stock at the minimum conversion rate of 1.6667 shares of common stock per
share of Convertible Preferred Stock, subject to anti-dilution adjustments. The
Convertible Preferred Stock is not redeemable.
On April 1, 2011, we completed the acquisition of a 90.023% controlling stake in AS Silmet, one of
only two rare earth processing facilities in Europe. We acquired 80% of the outstanding shares of
AS Silmet (now Molycorp Silmet) from AS Silmet Grupp in exchange for 1,593,419 shares of Molycorp
common stock, contractually valued at $80 million based on the average closing price of the
Companys common stock as reported by The New York Stock Exchange for the 20 consecutive trading
days immediately preceding April 1, 2011, the acquisition date. AG Silmet Grupp retained a 9.977%
ownership interest in Molycorp Silmet. Molycorp acquired the other 10.023% from Treibacher
Industrie AG for $9.0 million in cash. The total purchase price
for the acquisition of the 90.023% controlling stake was $81.7
million for accounting purposes. The Molycorp Silmet acquisition provides us with a European
base of operations and significantly increases our current rare earth annual production capacity by
approximately 3,000 mt REO equivalent. Molycorp Silmet sources rare earth feed stocks for
production of its products primarily from our Mountain Pass, California rare earth mine and
processing facility. The main focus of this newly acquired business is on the production of rare
earth oxides and metals, including didymium metal, a critical component in the manufacture of
neodymium-iron-boron permanent rare earth magnets. Molycorp Silmets manufacturing operation is
located in Sillamäe, Estonia Molycorp Silmet currently sells products to customers in Europe, North
and South America, Asia, Russia, and other former Soviet Union countries.
On April 15, 2011, we completed the acquisition from Santoku Corporation, or Santoku, of all the
issued and outstanding shares of capital stock of Santoku America, Inc., which is now known as
Molycorp Metals and Alloys, or MMA, an Arizona-based corporation, in an all-cash transaction for
$17.5 million. The acquisition provides us 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 us for the
purpose of maintaining and enhancing the quality of our products. On the same date, we entered into
five-year marketing and distribution agreements with Santoku for the sale and distribution of
neodymium and samarium magnet alloy products produced by each party. Additionally, we entered into
a rare earth products purchase and supply agreement through which MMA will supply Santoku with
certain rare earth alloys for a two-year period at prices equal to the feedstock cost plus the
applicable product premium as such terms are defined in the agreement.
Our Business
We are the only rare earth oxide or REO producer in the Western hemisphere and own one of the
worlds largest, most fully developed rare earth projects outside of China at our Mountain Pass,
California facility. We also own a controlling interest in one of the largest rare earth and rare
metal producers in Europe and the only producer of rare earth alloys in the United States. Upon
the full execution of our mine-to-magnets strategy and completion of our modernization and
expansion efforts at our Mountain Pass facility, we expect to be one of the worlds most integrated
producers of rare earth products, including oxides, metals, alloys and magnets. 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 rare earth elements, or
REEs, is projected to steadily increase both due to continuing growth in existing applications and
increased innovation and development of new end uses.
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Our goals are to:
| develop innovative rare earth technologies and products vital to green energy, high-tech, defense and industrial applications; | ||
| be commercially sustainable, globally competitive, profitable and environmentally superior; | ||
| act as a responsible steward of our rare earth resources; and | ||
| use our technology to improve the daily lives of people throughout the world. |
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,
California facility, and our recent acquisitions of MMA and the controlling interest in Molycorp
Silmet provide us with additional capacity for the production of rare earth oxides 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 Mine Safety and Health Administration, or MSHA, for three of the last six years.
Additionally, the MMA facility has not had a lost-time accident for the past 14 years and the
Molycorp Silmet facility has had one lost-time accident during the second quarter of 2011 and no
lost-time accidents for over 12 months prior to the acquisition by Molycorp.
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 at Mountain Pass, 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 at
Mountain Pass, we expect to produce approximately 3,000 mt to 5,000 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. As a result of our acquisitions of MMA and of a controlling interest in Molycorp
Silmet, 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 Molycorp Silmet
and MMA to produce rare earth metals and alloys.
The following table provides ranges for expected production of rare earth products at our three
production facilities for the remainder of 2011.
Molycorp Metals and | ||||||||||||||||||||||||||||||||
Molycorp Minerals | Molycorp Silmet | Alloys | ||||||||||||||||||||||||||||||
(Mountain Pass, CA) | (Estonia) | (Tolleson, AZ) | Total | |||||||||||||||||||||||||||||
(range of mt of REO) | (range of mt of REO) | (range of mt of REO) | (range of mt of REO) | |||||||||||||||||||||||||||||
Low | High | Low | High | Low | High | Low | High | |||||||||||||||||||||||||
Range | Range | Range | Range | Range | Range | Range | Range | |||||||||||||||||||||||||
1Q2011 (actuals) |
499 | 499 | 229 | * | 229 | * | 68 | * | 68 | * | 796 | 796 | ||||||||||||||||||||
2Q2011 (actuals) |
815 | 815 | 381 | 381 | 53 | 53 | 1,249 | 1,249 | ||||||||||||||||||||||||
3Q2011 |
977 | 1,321 | 400 | 500 | 51 | 69 | 1,428 | 1,890 | ||||||||||||||||||||||||
4Q2011 |
1,017 | 1,377 | 400 | 500 | 51 | 69 | 1,468 | 1,946 | ||||||||||||||||||||||||
3,308 | 4,012 | 1,410 | 1,610 | 223 | 259 | 4,941 | 5,881 | |||||||||||||||||||||||||
(540 tons of total alloy) |
(630 tons of total alloy) |
* | Prior to our acquisitions in April 2011 |
Molycorp
Silmet also produced 80 mt of rare earth metal for the three months
ended June 30, 2011, and expects to produce approximately 84 mt of it per quarter for the remainder of 2011.
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In August 2011, we entered into a preliminary agreement with Hitachi Metals, Ltd., or Hitachi,
for the supply of magnetic rare earth products and lanthanum. Under the three-year agreement, we
will initially provide the rare earth products to Hitachi from our current commercial scale
operations at Mountain Pass. Following completion of Project Phoenix
Phase 1, we can supply the
rare earth products from our new facility at Mountain Pass or our other facilities (including
Tolleson and Estonia) for the remaining term of the agreement. Prices under this agreement are
based on international market price indexes published by third parties and typically used by the
rare earth industry. Molycorp and Hitachi have suspended negotiations concerning the formation of
a joint venture for the production of rare earth alloys and magnets in the United States, and for
Molycorp to acquire a license from Hitachi for certain technology related to the production of rare
earth magnets. The negotiations were suspended due to the inability to reach agreement on certain
key matters affecting the value of the joint venture to each party. We are currently in advanced discussions with other companies
regarding magnet joint venture opportunities and are optimistic about potential developments in the
near term, although there is no assurance that these joint ventures will be established.
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, excluding capitalized interest, through 2012. Additionally, we estimate, that we
will incur approximately $250 million, excluding capitalized
interest, 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, and
capitalized interest.
We expect to finance the remaining capital expenditures under our initial modernization and
expansion and the second-phase capacity expansion plans as well as working capital requirements,
with Molycorp Minerals available cash balances of $670 million as of June 30, 2011, and anticipated revenue from
operations. Additionally, we may elect to satisfy certain capital expenditure requirements through
vendor financing, leasing or other financing arrangements.
On December 10, 2010, we entered into a memorandum of understanding with Sumitomo Corporation, or
Sumitomo, pursuant to which Sumitomo agreed to, among other things, purchase $100 million of the
Companys 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.
Prior to securing proceeds for our capital plans through the IPO, the
issuance of our Convertible Preferred Stock and our 3.25% Convertible
Senior Notes due 2016 or Notes, we submitted a
Part I application for a loan guarantee with the U.S. Department of Energy, or DOE, on June 2010
for up to $280 million. On July 21, 2010, the DOE deemed the Companys 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 have elected to withdraw our application under the DOE
loan guarantee program due to our success in raising capital through
the Convertible Preferred Stock
and the Notes offerings.
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. Effective with the April 1, 2011 acquisition, Molycorp Silmet produces the
additional rare earth products and two new metal products, tantalum and niobium, within the
Molycorp organization. With our acquisition of MMA, which also occurred during the second quarter
of 2011, we added NdFeB alloy and SmCo alloy to Molycorps product mix. With these products, we
have begun expanding and diversifying our product mix and our customer base and we are realizing
revenues from increasing sales volumes and higher REO pricing.
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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 December 31 2010
through June 30, 2011, and from March 31, 2011 to June 30, 2011, prices for rare earths have risen
on average by approximately 271% and 78%, respectively. Furthermore, over the same periods, prices
for some of the most common rare earths (cerium oxide, lanthanum oxide, neodymium oxide, and
praseodymium oxide) have risen on average by more than 186% and 32%, respectively.
Prices (USD/Kg)* | Change | |||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||
December 31, | March 31, | June 30, | 2011 | 2011 | ||||||||||||||||
Rare Earth Oxides | 2010 | 2011 | 2011 | YTD | QTD | |||||||||||||||
Lanthanum |
59 | 121 | 149 | 153 | % | 23 | % | |||||||||||||
Cerium |
61 | 121 | 150 | 146 | % | 24 | % | |||||||||||||
Praseodymium |
86 | 196 | 240 | 179 | % | 22 | % | |||||||||||||
Neodymium |
87 | 201 | 320 | 268 | % | 59 | % | |||||||||||||
Samarium |
35 | 106.5 | 130 | 271 | % | 22 | % | |||||||||||||
Europium |
630 | 940 | 3,200 | 408 | % | 240 | % | |||||||||||||
Gadolinium |
45 | 147 | 205 | 356 | % | 39 | % | |||||||||||||
Terbium |
605 | 990 | 2,920 | 383 | % | 195 | % | |||||||||||||
Dysprosium |
295 | 640 | 1,520 | 415 | % | 138 | % | |||||||||||||
Yttrium |
73 | 143 | 172 | 136 | % | 20 | % |
* | Source: Metal-Pages.com |
Supply of Rare Earth Products
China has dominated the global supply of REOs for the last ten years and, according to Industrial
Minerals Company of Australia Pty Ltd, a rare-earth market consultant, it is estimated that China
accounted for approximately 95% of global REO production in 2010. 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 Chinas 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, Chinas 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, Chinas 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. In July
2011, the Chinese government announced export quotas for the second half of 2011. When combined
with the export quotas for the first half of 2011, Chinas 2011 rare earth exports represent a
decline from 2010 levels, given that ferro alloys are now included in the export quotas, which was
not the case in 2010. That means that less rare earth oxide equivalent material will be exported
than what the overall quota suggests. Chinas 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 worlds supply, and the manufacture of NdFeB magnets, producing approximately 80% of the
worlds supply. Neither capability currently exists in the United States.
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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 full execution of our mine-to-magnets strategy
through which we will produce rare earth metals, alloys, and magnets in 2012. For example, we
expect to increase our capacity and ability to produce and sell a significantly expanded slate of
products, including specialty cerium products for water treatment, neodymium and praseodymium
metal, NdFeB and SmCo 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, we expect to significantly broaden our operations
through the addition of a number of downstream activities and products. For example, our
acquisitions of MMA and the controlling interest in Molycorp Silmet provided us with the facilities
and equipment to produce rare earth metals and NdFeB and SmCo 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. As a result of the Molycorp Silmet
acquisition, we added the production of those rare earth products and two new metal products,
tantalum and niobium, within the Molycorp organization. From our acquisition of MMA, we added
neodymium iron boron, or NdFeB alloy and SmCo alloy to our product mix. 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 from our Mountain Pass facility, net of intercompany sales, by
significant product line for the three and six months ended June 30, 2011 and 2010.
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
Molycorp Minerals (Mountain Pass) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Lanthanum products |
25 | % | 94 | % | 30 | % | 92 | % | ||||||||
Ceric Hydrate |
31 | % | 0 | % | 31 | % | 0 | % | ||||||||
Didymium products |
34 | % | 0 | % | 29 | % | 2 | % | ||||||||
Other cerium products |
7 | % | 2 | % | 6 | % | 1 | % |
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Revenue from sales of rare earth products and rare metals from Molycorp Silmet and from sales
of rare earth and specialty alloy products from MMA accounted for 29% and 10%, respectively, of
our consolidated sales for the three months ended June 30, 2011, and 23% and 8%, respectively, of
our consolidated sales for the six months ended June 30, 2011.
Our prices and product mix are determined by a combination of global and regional supply and demand
factors. Our revenue increased significantly for the three and six months ended June 30, 2011 as
compared to the three and six months ended June 30, 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, and the increase in our product mix. Sales from our
Mountain Pass facility, net of intercompany sales, for the three and six months ended June 30, 2011
included 829 and 1,525 mt of REOs, including purchased REOs, respectively, at an average
price of $72.80 per kilogram and $56.79 per kilogram, respectively, compared to sales of 266 and
688 mt of REO at an average price of $7.16 per kilogram and $7.15 per kilogram for the
three and six months ended June 30, 2010. The REO 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.
Pursuant to a contract with one of our largest 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, and a floor. This contract was amended effective July 1, 2011 to increase the price
ceiling. 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 customers 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 and to approximate our second quarter production due to increased
processing capacity from the recent acquisitions of MMA and the controlling interest in Molycorp
Silmet and increased production from our Mountain Pass facility. Substantially all of our lanthanum
production in 2011 (which accounts for approximately 50% 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 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,
cerium and didymium products, the subsequent processing costs incurred to produce the product.
Because many of our costs are fixed 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, raw materials for alloy production
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.
Beginning in the second quarter of 2011, our cost of goods sold also includes the cost allocated to
our inventory acquired as part of our acquisitions of MMA and the controlling interest in Molycorp
Silmet as well as the costs of production subsequent to our acquisitions.
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Table of Contents
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 additional personnel
costs 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 other expenses. Additionally, we incurred significant
professional fees and other expenses in connection with the business acquisitions that we completed
in April 2011, and our future selling, general and administrative expenses will be higher as a
result of those acquisitions.
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, LLCs members.
Molycorp, Inc. is subject to U.S. federal and state income taxes. For the three and six months
ended June 30, 2011, we recorded $6.6 million and $6.4 million, respectively in income tax
benefits.
Environmental
Our operations are subject to numerous and detailed federal, state and local environmental laws,
regulations and permits, including those pertaining to employee health and safety, environmental
permitting and licensing, air quality standards, greenhouse gases, or GHG, emissions, water usage
and 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. In addition, during the six months ended June 30, 2011 and 2010, we incurred
operating expenses of approximately $2.0 million and $0.4 million, respectively, associated with
environmental compliance requirements. The costs expected to be incurred as part of our on-going
remediation, which is expected to continue throughout the Mountain Pass facilitys 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
expenditures in connection with our acquisitions of MMA and the controlling interest in Molycorp
Silmet. 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 facility or from wastes disposed of at third-party waste
facilities. The proposed expansion of our operations 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 June
30, 2011, we had placed a total of $27.4 million of surety bonds with California state and regional
agencies. These bonds require annual payment and renewal. In the second quarter of each year, we
are required to provide the State of California with an updated estimate of the costs associated
with the mine reclamation. This estimate is reviewed and approved by the State of California,
after which we are responsible for making any necessary changes to a surety bonds placed with the
State of California.
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As a result of new construction activity at Mountain Pass associated with our modernization and
expansion project, additional lands have been disturbed since the last mine reclamation cost
estimate in 2010, resulting in an increase in the mine reclamation obligation from $3.3 million to
$4.1 million. The additional $0.8 million surety bond associated with this increase was placed with
the State of California subsequent to June 30, 2011. 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,
known as 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.
Results of Operations
Three Months Ended June 30, 2011 and 2010 (In thousands)
Three Months Ended | ||||||||||||
June 30 | ||||||||||||
2011 | 2010 | Change | ||||||||||
Sales |
$ | 99,615 | $ | 1,904 | $ | 97,711 | ||||||
Cost of goods sold |
(42,923 | ) | (5,576 | ) | (37,347 | ) | ||||||
Selling, general and administrative
expenses |
(13,817 | ) | (4,254 | ) | (9,563 | ) | ||||||
Stock-based compensation |
(412 | ) | (15,133 | ) | 14,721 | |||||||
Depreciation and amortization expense |
(283 | ) | (61 | ) | (222 | ) | ||||||
Accretion expense |
(240 | ) | (216 | ) | (24 | ) | ||||||
Operating income (loss) |
41,940 | (23,336 | ) | 65,276 | ||||||||
Other income |
||||||||||||
Other income |
133 | 45 | 88 | |||||||||
Interest income |
70 | | 70 | |||||||||
Income (loss) before income taxes |
42,143 | (23,291 | ) | 65,434 | ||||||||
Provision for income taxes |
6,612 | | 6,612 | |||||||||
Net income (loss) |
$ | 48,755 | $ | (23,291 | ) | 72,046 | ||||||
Revenues
For the three months ended June 30, 2011 and 2010, our consolidated sales were $99.6 million and
$1.9 million, respectively. This significant increase in revenue is due to the combination of a
general increase in the prices of REO products, sales of new metal and alloy products as a result
of our acquisitions of MMA and the controlling interest in Molycorp Silmet, 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.
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Molycorp | Eliminations | |||||||||||||||||||
Three Months Ended June 30, 2011 | Molycorp | Molycorp | Metals and | and Other | Total | |||||||||||||||
(In thousands) | Minerals | Silmet | Alloys | Adjustments | Molycorp | |||||||||||||||
Sales: |
||||||||||||||||||||
Total |
$ | 76,295 | $ | 32,656 | $ | 10,250 | $ | (19,586 | ) | $ | 99,615 | |||||||||
Intersegment |
(15,947 | ) | (3,639 | ) | | 19,586 | | |||||||||||||
Cost of goods sold |
||||||||||||||||||||
Total |
(21,709 | ) | (20,472 | ) | (11,143 | ) | 10,401 | (42,923 | ) | |||||||||||
Intersegment |
2,770 | 7,631 | | (10,401 | ) | | ||||||||||||||
Selling, general and administrative
expenses |
(12,294 | ) | (1,411 | ) | (112 | ) | | (13,817 | ) | |||||||||||
Depreciation, amortization and accretion
expense |
(332 | ) | | (191 | ) | | (523 | ) | ||||||||||||
Stock-based compensation |
(412 | ) | | | | (412 | ) | |||||||||||||
Operating income (loss) |
28,371 | 14,765 | (1,196 | ) | | 41,940 | ||||||||||||||
Other income (expense) |
304 | (103 | ) | 2 | | 203 | ||||||||||||||
Income before income taxes |
$ | 28,675 | $ | 14,662 | $ | (1,194 | ) | $ | | $ | 42,143 | |||||||||
Total assets at June 30, 2011 |
$ | 1,099,900 | $ | 152,984 | $ | 29,705 | $ | (140,923 | ) | $ | 1,141,666 | |||||||||
Capital expenditures (accrual basis) |
$ | 70,742 | $ | 2,231 | $ | | $ | | $ | 72,973 | ||||||||||
Molycorp Minerals (Mountain Pass)
Molycorp Minerals sales were $76.3 million and $1.9 million for the three months ending June 30,
2011 and 2010, respectively. Lanthanum sales for the three months ended June 30, 2011 consisted
primarily of lanthanum oxide, which has a relatively higher sales price per kilogram compared to
sales for the three months ended June 30, 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 37% and 32%, respectively, of our total revenue for the three months ended June 30,
2011 as compared to zero and zero for the three months ended June 30, 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 June 30, 2011, we sold 988 mt of REO products at an average sales price
of $77.22 per kilogram compared to sales of 266 mt of REO products at an average sales
price of $7.16 per kilogram for the three months ended June 30, 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. The following is a summary of the revenue percentages by significant
product for the three months ended June 30, 2011 and 2010.
Three Months Ended | ||||||||
June 30 | ||||||||
Molycorp Minerals (Mountain Pass) | 2011 | 2010 | ||||||
Lanthanum products |
21 | % | 94 | % | ||||
Ceric Hydrate |
37 | % | | |||||
Didymium products |
32 | % | | |||||
Other cerium products |
7 | % | 2 | % |
Molycorp Silmet
Molycorp Silmets revenues for the three months ended June 30, 2011 were $32.7 million. Molycorp
Silmet is one of two rare earth processing facilities in Europe and its main focus is on the
production of rare earth products and rare metals. Rare earth product revenue was approximately 58%
of total Molycorp Silmet revenue and includes cerium carbonate, niobium oxide, praseodymium oxide,
lanthanum oxide and lanthanum carbonate. Rare metal revenue was approximately 42% of total Molycorp
Silmet revenue and primarily includes tantalum and niobium.
Molycorp Metals and Alloys
MMAs revenues from April 15, 2011 through June 30, 2011 were $10.3 million. MMA produces
custom made alloys and high purity rare earth metals. As part of the acquisition of MMA we entered
into a rare earth products purchase and supply agreement with Santoku through which MMA will supply
Santoku with certain rare earth alloys for a two-year period at prices equal to the feedstock cost
plus the applicable product premium as such terms are defined in the agreement. Sales to Santoku
under the terms of this agreement were $7.3 million from April 15, 2011 through June 30, 2011 and
comprised 71% of total MMA revenue.
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Cost of Goods Sold
Molycorp Minerals (Mountain Pass)
Molycorp Mineralss cost of goods sold was $21.7 million and $5.6 million for the three months
ended June 30, 2011 and 2010, respectively. The higher costs for the three months ended June 30,
2011, compared to the three months ended June 30, 2010, were due to higher sales and higher
production costs. Lower of cost or market inventory write-downs were zero and $0.3 million for the
three months ended June 30, 2011 and 2010, respectively. In addition, the Company recognized a $1.0
million write-down of work in process inventory based on estimate REO quantities for the three
months ended June 2011.
Total production costs charged to inventory were $12.3 million and $1.4 million for the three
months ended June 30, 2011 and 2010, respectively. Inventory purchases were $5.9 million and $0.6
million for the three months ended June 30, 2011 and 2010, respectively. The primary products we
purchased during those periods were lanthanum oxide, cerium carbonate, neodymium oxide, didymium
metal and praseodymium oxide.
The following is a summary of the production quantities in metric tons by significant product for
the three months ended June 30, 2011 and the corresponding production quantities for the three
months ended June 30, 2010 (in metric tons).
Three Months Ended | ||||||||
June 30 | ||||||||
Molycorp Minerals (Mountain Pass) | 2011 | 2010 | ||||||
Lanthanum products |
346 | 119 | ||||||
Ceric Hydrate |
325 | | ||||||
Didymium products |
121 | 32 | ||||||
Other cerium products |
23 | |
Production costs charged to inventory were higher during the three months ended June 30, 2011 as
compared to the three months ended June 30, 2010, due to increased production levels. We expect to
attain increased production levels throughout 2011.
Chemical costs allocated to production were $3.1 million and $0.7 million for the three months
ended June 30, 2011 and 2010, respectively. Chemical costs in the second 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 $3.7 million and
$2.1 million the three months ended June 30, 2011 and 2010, respectively. As of June 30, 2011 we
had a total of 239 employees at Mountain Pass and our corporate office compared to 135 employees at
June 30, 2010, which led to higher wage and employee related benefit expenses. During the second
quarter of 2011, we also experienced increase in labor costs as compared to the second 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 June 30, 2011 and 2010, respectively. Utility charges, which primarily
include electricity, were $0.8 million and $0.4 million for the three months ended June 30, 2011
and 2010, respectively.
Other costs allocated to production, including depreciation, were $7.1 million and $1.3 million for
three months ended June 30, 2011 and 2010, respectively. These costs were higher in the second
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 June 30, 2011, approximately 806 mt
were blended. Blended inventory is reclassified from work in process to finished goods.
Molycorp Silmet
Molycorp Silmets cost of goods sold for the three months ended June 30, 2011 was $20.5 million.
Cost of goods sold primarily reflects costs that are incurred to acquire raw materials and
processing costs incurred to obtain finished goods. Processing costs primarily includes labor,
materials and reagents, energy, depreciation and other related costs incurred in the production
process.
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Table of Contents
Molycorp Metals and Alloys
MMAs cost of goods sold from April 15, 2011 through June 30, 2011 was $11.1 million. Cost of goods
sold primarily reflects costs that are incurred to acquire raw materials and processing costs
incurred to obtain finished goods. Processing costs primarily includes labor, materials, energy,
depreciation and other related costs incurred in the production process.
Selling, General and Administrative Expenses
Molycorp Minerals (Mountain Pass)
Molycorp Minerals selling, general and administrative expenses were $12.3 million and $4.3 million
for the quarters ended June 30, 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 $0.4 million and $15.1 million in stock-based compensation in the three
months ended June 30, 2011 and 2010, respectively.
Molycorp Silmet
Molycorp Silmets selling, general and administrative Expenses for the three months ended June 30,
2011 were $1.4 million. Our selling, general and administrative expenses consist primarily of
personnel and related costs, such as legal, accounting and other professional fees, occupancy costs
and information technology costs.
Molycorp Metals and Alloys
MMAs selling, general and administrative Expenses for the three months ended June 30, 2011 were
$0.1 million. Our selling, general and administrative expenses consist primarily of personnel and
related costs, such as legal, accounting and other professional fees, occupancy costs and
information technology costs.
Six Months Ended June 30, 2011 and 2010 (In thousands)
Six Months Ended | ||||||||||||
June 30 | ||||||||||||
2011 | 2010 | Change | ||||||||||
Sales |
$ | 125,876 | $ | 4,922 | $ | 120,954 | ||||||
Cost of goods sold |
(59,600 | ) | (11,526 | ) | (48,074 | ) | ||||||
Selling, general and administrative
expenses |
(22,156 | ) | (8,734 | ) | (13,422 | ) | ||||||
Stock-based compensation |
(3,311 | ) | (15,133 | ) | 11,822 | |||||||
Depreciation and amortization expense |
(366 | ) | (156 | ) | (210 | ) | ||||||
Accretion expense |
(474 | ) | (479 | ) | 5 | |||||||
Operating income (loss) |
39,969 | (31,106 | ) | 71,075 | ||||||||
Other income (expense) |
||||||||||||
Other income (expense) |
(35 | ) | 66 | (101 | ) | |||||||
Interest income |
210 | | 210 | |||||||||
Income (loss) before income taxes |
40,144 | (31,040 | ) | 71,184 | ||||||||
Provision for income taxes |
6,413 | | 6,413 | |||||||||
Net income (loss) |
$ | 46,557 | $ | (31,040 | ) | 77,597 | ||||||
Revenues
For the six months ended June 30, 2011 and 2010, our sales were $125.9 million and $4.9 million,
respectively. This significant increase in revenue is due to the combination of a general increase
in the price of REO products, sales of new metal and alloy products as a result of our acquisitions
of MMA and the controlling interest in Molycorp Silmet 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 six months ended June 30, 2011 and 2010.
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Molycorp | Eliminations | |||||||||||||||||||
Six Months Ended June 30, 2011 | Molycorp | Molycorp | Metals and | and Other | Total | |||||||||||||||
(In thousands) | Minerals | Silmet | Alloys | Adjustments | Molycorp | |||||||||||||||
Sales: |
||||||||||||||||||||
Total |
$ | 102,556 | $ | 32,656 | $ | 10,250 | $ | (19,586 | ) | $ | 125,876 | |||||||||
Intersegment |
(15,947 | ) | (3,639 | ) | | 19,586 | | |||||||||||||
Cost of goods sold |
||||||||||||||||||||
Total |
(38,386 | ) | (20,472 | ) | (11,143 | ) | 10,401 | (59,600 | ) | |||||||||||
Intersegment |
2,770 | 7,631 | | (10,401 | ) | | ||||||||||||||
Selling, general and administrative
expenses |
(20,633 | ) | (1,411 | ) | (112 | ) | | (22,156 | ) | |||||||||||
Depreciation, amortization and accretion
expense |
(649 | ) | | (191 | ) | | (840 | ) | ||||||||||||
Stock-based compensation |
(3,311 | ) | | | | (3,311 | ) | |||||||||||||
Operating income (loss) |
26,400 | 14,765 | (1,196 | ) | | 39,969 | ||||||||||||||
Other income (expense) |
276 | (103 | ) | 2 | | 175 | ||||||||||||||
Income before income taxes |
$ | 26,676 | $ | 14,662 | $ | (1,194 | ) | $ | | $ | 40,144 | |||||||||
Total assets at June 30, 2011 |
$ | 1,099,900 | $ | 152,984 | $ | 29,705 | $ | (140,923 | ) | $ | 1,141,666 | |||||||||
Capital expenditures (accrual basis) |
$ | 111,966 | $ | 2,231 | $ | | $ | | $ | 114,197 | ||||||||||
Molycorp Minerals (Mountain Pass)
Molycorp Minerals our sales were $102.6 million and $4.9 million for the six months ending June
30, 2011 and 2010, respectively. Lanthanum sales for the six months ended June 30, 2011 consisted
primarily of lanthanum oxide, which has a relatively higher sales price per kilogram compared to
sales for the six months ended June 30, 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 35% and 28%, respectively, of our total revenue for the six months ended June 30,
2011 as compared to zero and 2% for the six months ended June 30, 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 six
months ended June 30, 2011, we sold 1,684 mt of REO products at an average sales price of
$60.90 per kilogram compared to sales of 688 mt of REO products at an average sales price
of $7.15 per kilogram for the six months ended June 30, 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. The following is a summary of the revenue percentages by significant
product for the six months ended June 30, 2011 and 2010.
Six Months Ended | ||||||||
June 30 | ||||||||
Molycorp Minerals (Mountain Pass) | 2011 | 2010 | ||||||
Lanthanum products |
27 | % | 92 | % | ||||
Ceric Hydrate |
35 | % | | |||||
Didymium products |
28 | % | 2 | % | ||||
Other cerium products |
7 | % | 1 | % |
Molycorp Silmet
Molycorp Silmets revenues for the six months ended June 30, 2011 were $32.7 million. Rare earth
product revenue was approximately 58% of total Molycorp Silmets revenues and includes cerium
carbonate, niobium oxide, praseodymium oxide, lanthanum oxide and lanthanum carbonate. Rare metal
revenue was approximately 42% of total Molycorp Silmets revenues and primarily includes tantalum
and niobium.
Molycorp Metals and Alloys
MMAs revenues for the six months ended June 30, 2011 were $10.3 million. MMA produces exotic
custom made alloys and high purity rare earth metals. As part of the acquisition of MMA we entered
into a rare earth products purchase and supply agreement with Santoku through which MMA will supply
Santoku with certain rare earth alloys for a two-year period at prices equal to the feedstock cost
plus the applicable product premium as such terms are defined in the agreement. Sales to Santoku
under the terms of this agreement were $7.3 million for the six months ended June 30, 2011 and
comprised 71% of total MMA revenue.
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Table of Contents
Cost of Goods Sold
Our cost of goods sold was $38.4 million and $11.5 million for the six months ended June 30, 2011
and 2010, respectively. The higher costs for the six months ended June 30, 2011, compared to the
six months ended June 30, 2010, were due to higher sales and higher production costs. Lower of cost
or market inventory write-downs were $0.6 million and $0.9 million for the six months ended June
30, 2011 and 2010, respectively. In addition, the Company recognized a $1.0 million write-down of
work in process inventory based on estimate REO quantities for the six months ended June 2011.
Total production costs charged to inventory were $20.2 million and $4.4 million for the six months
ended June 30, 2011 and 2010, respectively. Inventory purchases were $11.6 million and $0.8 million
for the six months ended June 30, 2011 and 2010, respectively. The primary products we purchased
during those periods were lanthanum oxide, cerium oxide, cerium carbonate, neodymium oxide,
didymium metal and praseodymium oxide.
The following is a summary of the production quantities in metric tons by significant product for
the six months ended June 30, 2011 and the corresponding production quantities for the six months
ended June 30, 2010 (in metric tons).
Six Months Ended | ||||||||
June 30 | ||||||||
Molycorp Minerals (Mountain Pass) | 2011 | 2010 | ||||||
Lanthanum products |
607 | 330 | ||||||
Ceric Hydrate |
495 | | ||||||
Didymium products |
189 | 80 | ||||||
Other cerium products |
23 | |
Production costs charged to inventory were higher during the six months ended June 30, 2011 as
compared to the six months ended June 30, 2010, due to increased production levels. We expect to
attain increased production levels throughout 2011.
Chemical costs allocated to production were $5.4 million and $1.1 million for the six months ended
June 30, 2011 and 2010, respectively. Chemical costs in the second 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 $6.5 million and
$4.0 million the six months ended June 30, 2011 and 2010, respectively. As of June 30, 2011 we had
a total of 239 employees at Mountain Pass and our corporate office compared to 135 employees at
June 30, 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 $1.4 million and $0.8 million for
the six months ended June 30, 2011 and 2010, respectively. Utility charges, which primarily include
electricity, were $1.6 million and $0.8 million for the six months ended June 30, 2011 and 2010,
respectively.
Other costs allocated to production, including depreciation, were $11.8 million and $3.7 million
for six months ended June 30, 2011 and 2010, respectively. These costs were higher in the second
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 June 30, 2011, approximately 806 mt
were blended. Blended inventory is reclassified from work in process to finished goods.
Molycorp Silmet
Molycorp Silmets cost of goods sold for the six months ended June 30, 2011 was $20.5 million. Cost
of goods sold primarily reflects costs that are incurred to acquire raw materials and processing
costs incurred to obtain finished goods. Processing costs primarily includes labor, materials and
reagents, energy, depreciation and other related costs incurred in the production process.
Molycorp Metals and Alloys
MMAs cost of goods sold for the six months ended June 30, 2011 was $11.1 million. Cost of goods
sold primarily reflects costs that are incurred to acquire raw materials and processing costs
incurred to obtain finished goods. Processing costs primarily includes labor, materials, energy,
depreciation and other related costs incurred in the production process.
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Table of Contents
Selling, General and Administrative Expenses
Molycorp Minerals (Mountain Pass)
Molycorp Minerals selling, general and administrative expenses were $20.6 million and $8.7 million
for the six months ended June 30, 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 $3.3 million and $15.1million in stock-based compensation in the six
months ended June 30, 2011 and 2010, respectively.
Molycorp Silmet
Molycorp Silmets selling, general and administrative Expenses for the six months ended June 30,
2011 were $1.4 million. Our selling, general and administrative expenses consist primarily of
personnel and related costs, such as legal, accounting and other professional fees, occupancy costs
and information technology costs.
Molycorp Metals and Alloys
MMAs selling, general and administrative Expenses for the six months ended June 30, 2011 were $0.1
million. Our selling, general and administrative expenses consist primarily of personnel and
related costs, such as legal, accounting and other professional fees, occupancy costs and
information technology costs.
Capital Expenditures
Our capital expenditures, on an accrual basis, totaled $114.2 million and $8.4 million for the six
months ended June 30, 2011 and 2010, respectively. Most of the capitalized costs incurred during
the six months ended June 30, 2010 are related to our second pilot processing campaign, which
commenced in April 2010, and most of the capitalized costs for the six months ended June 30, 2011
relate to our modernization and expansion project at the Mountain Pass facility.
Outlook for the Remainder of 2011
For the remainder 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 aftermath of the earthquake/tsunami in Japan may have a
short-term negative impact on market demand in the third quarter, 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 will keep on supplying
Molycorp Silmet 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 six 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 plans 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 $389 million.
Liquidity and Capital Resources
Under our current business plan, we intend to spend approximately
$531 million, excluding capitalized interest, 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, excluding capitalized interest, in capital costs to expand production capacity through the end of 2013.
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, and capitalized
interest.
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We expect to finance our remaining capital expenditures under the initial modernization and
expansion and the second-phase capacity expansion plans as well as our working capital
requirements, with our available cash balances as of June 30, 2011, and anticipated revenue from
operations. Additionally, we may elect to satisfy certain capital expenditure requirements through
vendor financing, leasing or other financing arrangements.
On December 10, 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
our 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.
Prior to securing proceeds for our capital plans through the IPO, the issuance of our Convertible
Preferred Stock and our Notes we submitted a Part I application for a loan
guarantee with the DOE in 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, the application under Section 1705 of the LGP was
put on hold on May 10, 2011. At that time, the DOE advised us that our project may be eligible for
funding under Section 1703 of the LGP. We have elected to withdraw our application under the DOE
loan guarantee program due to our success in raising capital through the Convertible Preferred Stock
and the Notes offerings.
We currently expect that the cash acquired as part of our purchase of the controlling stake in
Molycorp Silmet 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.
Cash Provided from Operating Activities
Net cash provided from operations was $31.5 million in the first half of 2011,
an increase of $46.2 million from the first six months in 2010 primarily driven by a higher net income, partially offset by a net increase
in working capital requirements. Significant sales growth combined with larger production volume during the first half of 2011 led to much
higher account receivable and inventory balances as compared to the
same period in 2010.
Investing Activities
Net cash used in investing activities increased to $89.0 million during the
first half of 2011 as compared to $7.3 million during the same period of 2010, due to higher capital expenditures as part our modernization
and expansion plan at Mountain Pass, and due to the cash paid for the
business acquisitions we completed in April 2011.
Financing Activities
Net cash provided from financing activities increased from $20.3 million during
the six months ended June 30, 2010 to $421.0 million during the six months ended June 30, 2011, primarily due to the net proceeds from the
sale of our Convertible Preferred Stock and from the sale of our Convertible Notes, partially offset by the $3.3 million preferred dividend
that we paid in June 2011, and $4.4 million of debt repayments.
Contractual Obligations
As of June 30, 2011, we had the following contractual obligations in thousands:
Payments Due by Period | ||||||||||||||||||||
Less Than | More Than | |||||||||||||||||||
Contractual Obligations | Total | 1 Year | 2-3 Years | 4-5 Years | 5 Years | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Operating lease obligations (1) |
$ | 1,238 | $ | 142 | $ | 456 | $ | 444 | $ | 196 | ||||||||||
Purchase obligations (2) |
289,841 | 188,079 | 59,239 | 10,306 | 32,217 | |||||||||||||||
Employee obligations (3) |
870 | 668 | 202 | | | |||||||||||||||
Asset retirement obligations (4) |
21,729 | 353 | 6,932 | 584 | 13,860 | |||||||||||||||
Debt and capital lease obligations, excluding interest |
244,262 | 2,610 | 3,336 | 3,128 | 235,188 | |||||||||||||||
Total |
$ | 557,940 | $ | 191,852 | $ | 70,165 | $ | 14,462 | $ | 281,461 | ||||||||||
(1) | Represents all operating lease payments for office space, land and office equipment. | |
(2) | Represents contractual commitments for the purchase of materials and services from vendors. | |
(3) | Represents payments due to employees for awards under our annual incentive plan. | |
(4) | Under applicable environmental laws and regulations, we are subject to reclamation and remediation obligations resulting from our operations. The amounts presented above represent our estimated future undiscounted cash flows required to satisfy the obligations currently known to us. |
Off-Balance Sheet Arrangements
As of June 30, 2011, our only off-balance sheet arrangements are the operating leases reported in
our Annual Report on Form 10-K for the year ended December 31, 2010.
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Recent Accounting Pronouncements
In December 2010, the Financial Standard Accounting Board, or 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.
The Company
adopted this guidance and provided the supplemental pro forma information related to the business combination of MMA and the controlling
interest in Molycorp Silmet in Note 5 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
In June 2011, the FASB issued ASU 2011-05: Presentation of Comprehensive Income. In this update, an
entity has the option to present the total of comprehensive income, the components of net
income, and the components of other comprehensive income either in a single continuous statement of
comprehensive income or in two separate but consecutive statements.
In both options, an entity is
required to present each component of net income along with total net income, each component of
other comprehensive income along with a total for other comprehensive income, and a total amount
for comprehensive income. Regardless of whether an entity chooses to present comprehensive income
in a single continuous statement or in two separate but consecutive statements, the entity is
required to present on the face of the financial statements reclassification adjustments for items
that are reclassified from other comprehensive income to net income in the statement(s) where the
components of net income and the components of other comprehensive income are presented. The
amendments in this update do not change the items that must be reported in other comprehensive
income or when an item of other comprehensive income must be reclassified to net income. The
amendments do not change the option for an entity to present components of other comprehensive
income either net of related tax effects or before related tax effects, with one amount shown for
the aggregate income tax expense or benefit related to the total of other comprehensive income
items. In both cases, the tax effect for each component must be disclosed in the notes to the
financial statements or presented in the statement in which other comprehensive income is
presented. The amendments do not affect how earnings per share is calculated or presented. For
public entities, the amendments, which should be applied retrospectively, are effective for fiscal
years, and interim periods within those years, beginning after December 15, 2011. Early adoption is
permitted.
Molycorp early adopted this update and elected to present comprehensive income in two
separate, but consecutive statements for the three- and six-month periods ended June 30, 2011. No
retroactive application of this update was necessary as the Company did not have any items entering
into the determination of comprehensive income (loss) other than net income (loss) for all periods
prior to the second quarter of 2011.
GLOSSARY OF SELECTED MINING TERMS
The following is a glossary of selected mining terms used in this quarterly report that may be
technical in nature:
Assay
|
The analysis of the proportions of metals in ore, or the testing of an ore or mineral for composition, purity, weight, or other properties of commercial interest. | |
Bastnasite
|
Bastnasite is a mixed Lanthanide fluoro-carbonate mineral (Ln F CO3) that currently provides the bulk of the worlds supply of the light REEs. Bastnasite and monazite are the two most common sources of cerium and other REEs. Bastnasite is found in carbonatites, igneous carbonate rocks that melt at unusually low temperatures. | |
Cerium
|
Cerium (Ce) is a soft, silvery, ductile metal which easily oxidizes in air. Cerium is the most abundant of the REEs, and is found in a number of minerals, including monazite and bastnasite. Cerium has two relatively stable oxidation states, enabling both the storage of oxygen and its widespread use in catalytic converters. Cerium is also widely used in glass polish. | |
Concentrate
|
A mineral processing product that generally describes the material that is produced after crushing and grinding ore effecting significant separation of gangue (waste) minerals from the desired metal and/or metal minerals, and discarding the waste minerals. The resulting concentrate of minerals typically has an order of magnitude higher content of minerals than the beginning ore material. |
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Cut-off grade
|
The lowest grade of mineralized material that qualifies as ore in a given deposit. The grade above which minerals are considered economically mineable considering the following parameters: | |
estimates over the relevant period of mining costs, ore treatment costs, general and administrative costs, refining costs, royalty expenses, by-product credits, process and refining recovery rates and price. | ||
Didymium
|
Didymium is a combination of neodymium and praseodymium, approximately 75% neodymium and approximately 25% praseodymium. | |
Dysprosium
|
Dysprosium (Dy) is used in high power neodymium iron boron magnets to enhance thermal stability. | |
Europium
|
Europium (Eu) is desirable due to its photon emission. Excitation of the europium atom, by absorption of electrons or by UV radiation, results in changes in energy levels that create a visible emission. Almost all practical uses of europium utilize this luminescent behavior. | |
Gadolinium
|
Gadolinium (Gd) absorbs neutrons and therefore is used for shielding in neutron radiography and in nuclear reactors. Because of its paramagnetic properties, solutions of organic gadolinium complexes and gadolinium compounds are the most popular intravenous medical magnetic resonance imaging contrast agents in MRI. | |
Grade
|
The average REE content, as determined by assay of a metric ton of ore. | |
Lanthanum
|
Lanthanum (La) is the first member of the Lanthanide series. Lanthanum is a strategically important rare earth element due to its use in fluid bed cracking catalysts, FCCs, which are used in the production of transportation and aircraft fuel. Lanthanum is also used in fuel cells and batteries. | |
Mill
|
A processing plant that produces a concentrate of the valuable minerals contained in an ore. | |
Mineralization
|
The extent and form of metal atom deposition as found in rocks or ore or the process by which the metals came to be deposited there. | |
Monazite
|
Monazite is a reddish-brown phosphate mineral. Monazite minerals are typically accompanied by concentrations of uranium and thorium. This has historically limited the processing of Monazite, however this mineral is becoming more attractive because it typically has elevated concentrations of heavy rare earths. | |
Niobium
|
Niobium is a rare, soft, grey, ductile transition metal found in the minerals pyrochlore, the main commercial source for niobium, and columbite. Niobium is used mostly in alloys, the largest part in special steel such as that used in gas pipelines. Although alloys contain only a maximum of 0.1%, that small percentage of niobium improves the strength of the steel. The temperature stability of niobium-containing superalloys is important for its use in jet and rocket engines. Niobium is used in various superconducting materials. | |
Neodymium
|
Neodymium (Nd) is used in the production of NdFeB permanent magnets. These permanent magnets, which maximize the power/weight ratio, are used in a large variety of motors and mechanical systems. Cellular phones, vehicle systems and certain lasers contain both neodymium magnets and capacitors, which produce powerful electronic generation and boost the power of these devices. | |
Ore
|
That part of a mineral deposit which could be economically and legally extracted or produced at the time of reserve determination. | |
Overburden
|
In surface mining, overburden is the material that overlays an ore deposit. Overburden is removed prior to mining. | |
Praseodymium
|
Praseodymium (Pr) comprising about 4% of the lanthanide content of bastnasite, is a common coloring pigment. Along with neodymium, praseodymium is used to filter certain wavelengths of light. Praseodymium is used in photographic filters, airport signal lenses, and welders glasses. As part of an alloy, praseodymium is used in permanent magnet systems designed to make smaller and lighter motors. Praseodymium is also used in automobile and other internal combustion engine pollution control catalysts. | |
Probable reserves
|
Reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation. |
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Proven reserves
|
Reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling; and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well established. | |
Recovery
|
The percentage of contained metal actually extracted from ore in the course of processing such ore. | |
Reserves
|
That part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. Same definition as ore | |
Samarium
|
Samarium (Sm) is predominantly used to produce high temperature, high power samarium cobalt magnets. Although these magnets are less powerful than NdFeB magnets, they can be used over a wider range of conditions. | |
Strike
|
The direction of the line of intersection of a mineral deposit with the horizontal plane of the ground. The strike of a deposit is the direction of a straight line that connects two points of equal elevation on the deposit. | |
Tailings
|
That portion of the mined material that remains after the valuable minerals have been extracted. | |
Tantalum
|
Tantalum is a rare, hard, blue-gray, lustrous transition metal that is highly corrosion resistant. It is part of the refractory metals group, which are widely used as minor component in alloys. The chemical inertness of tantalum makes it a valuable substance for laboratory equipment and a substitute for platinum, but its main use today is in tantalum capacitors in electronic equipment such as mobile phones, DVD players, video game systems and computers. | |
Terbium
|
Terbium (Tb) is a lanthanide series element used in x-ray and color television tubes as well as high grade rare earth magnets. | |
Yttrium
|
Yttrium (Y), although not a lanthanide series element, is often considered to be a rare earth element and its behavior is similar to heavy rare earth elements. It is predominantly utilized in lighting applications and ceramics. Other uses include resonators, lasers, microwave communication devices and other electronic devices. |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Our operations may be impacted by commodity prices, geographic concentration, changes in interest
rates and foreign currency exchange rates.
Commodity Price Risk
Our principal products, including cerium, lanthanum, praseodymium, neodymium, europium, samarium,
gadolinium, dysprosium, and terbium, are commodities but are not traded on any commodity exchange.
As such, direct hedging of the prices for future production cannot be undertaken. We generally do
not currently have any long-term sales contracts with customers, so prices typically will vary with
the transaction and individual bids received. Our products are primarily marketed to manufacturers
as component materials. Prices will vary based on the demand for the end products being produced
with the mineral resources we mine and process.
Our sales and profitability are determined principally by the price of the rare earth products that
we produce and, to a lesser extent by the price of natural gas and other supplies used in the
production process. The prices of our rare earth products are influenced by the price and demand of
the end products that our products support, including clean energy technologies. A significant
decrease in the global demand for these products may have a material adverse effect on our
business. We currently have no hedging contracts for revenues and
costs in place and intend to consider hedging strategies
in the future.
Our costs and capital investments are subject to market movements in other commodities such as
natural gas and chemicals. We may enter into derivative contracts for a portion of the expected
usage of these products, but we do not currently have any derivative contracts and we do not
currently anticipate entering into derivative agreements.
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Interest Rate Risk
Our total debt obligations, including our inventory financing arrangement with Traxys North
America, LLC, were $243 million as of June 30, 2011. Our exposure to interest rate risk as a result
of the variable interest debt included in these obligations would result in a roughly $0.1 million
increase/decrease in interest rate expense for every 1% increase/decrease in the underlying
interest rate. We are not significantly impacted by variations in interest rates at this time. Our
exposure to interest rate risk would increase if, for example, we obtain and utilize additional
debt facilities in the future.
ITEM 4. | CONTROLS AND PROCEDURES. |
In accordance with Rule 13a-15(b) of the Exchange Act, the Companys management, with the
participation of the Chief Executive Officer and the Chief Financial Officer, carried out an
evaluation of the effectiveness of the Companys disclosure controls and procedures, as defined
in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of the end of the period covered by this
report. We acquired a controlling interest in Molycorp Silmet on April 1, 2011, and it represented
14% of our total assets as of June 30, 2011. We also acquired Molycorp Metals and Alloys on April
15, 2011, and it represented 3% of our total assets as of June 30, 2011. As both acquisitions
occurred during the last 12 months, the scope of our assessment of the effectiveness of disclosure
controls and procedures does not include Molycorp Silmet and Molycorp Metals and Alloys. This
exclusion is in accordance with the SECs general guidance that an assessment of a recently
acquired business may be omitted from our scope in the year of acquisition. Based on that
evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures were effective as of June 30, 2011.
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our management,
including the Chief Executive Officer and Chief Financial Officer does not expect that our internal
controls will prevent all error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact that there are
resource constraints and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, within the Company have
been detected.
PART II. OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS. |
From time to time, we may become subject to various legal proceedings that are incidental to the
ordinary conduct of our business. We are not currently party to any material legal proceedings.
ITEM 1A. | RISK FACTORS. |
Refer to the Companys Annual Report on Form 10-K for the year ended December 31, 2010 and the
Companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
(a) Use of Proceeds
Our IPO of common stock, par value $0.001 per share, was effected through a Registration Statement
on Form S-1 (Registration No. 333-166129) that was declared effective by the SEC on July 29, 2010.
There has been no material change in the planned use of proceeds from our IPO from that described
in the final prospectus related to the IPO dated July 29, 2010 filed by us with the SEC pursuant to
Rule 424(b). Assuming use of IPO proceeds before proceeds on our
preferred stock and convertible debt offerings, through June 30, 2011, we have used
approximately $106.2 million, $15.5 million,
$26.5 million and $9.0 million of the net proceeds from the IPO for capital expenditures including construction and
refurbishment of the Mountain Pass facilities, cash collateral
deposit requirements net of refunds of $18.2 million, business
acquisitions and working
capital, respectively. Pending application of the remaining net proceeds to fund a portion of our
modernization and expansion of the Mountain Pass facility, through June 30, 2011, we have invested
$664.2 million of net proceeds from the offering in in a variety of capital preservation
investments, including short-term interest-bearing obligations, investment-grade instruments,
certificates of deposit and direct guaranteed obligations of the United States.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None.
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ITEM 4. | [REMOVED AND RESERVED]. |
ITEM 5. | OTHER INFORMATION. |
Mine Safety Practices
Our operations at the Mountain Pass facility are subject to the Federal Mine Safety and Health Act
of 1977, as amended by the Mine Improvement and New Emergency Response Act of 2006, which we refer
to as the Mine Act, and the regulations adopted by the California Occupational Safety and Health
Administration, which impose stringent health and safety standards on numerous aspects of mineral
extraction and processing operations, including the training of personnel, operating procedures,
operating equipment and other matters.
The Mountain Pass facility maintains a rigorous safety program. Our employees and contractors are
required to complete 24 hours of initial safety training, as well as an 8 hour annual refresher
sessions, which cover all of the potential hazards that may be present at the facility. During the
training, our commitment to a safe work environment is reinforced through our Stop Work Authority
program, which allows any employee or contractor at the facility to stop work that they deem to be
unsafe or out of compliance. As a direct result of this commitment to safety, the Mountain Pass
facility has an exceptional safety record, which as of June 30, 2011, stood at 2,178 days worked
without a lost-time or restricted work accident. The lost-time incidence rate is an industry
standard used to describe occupational injuries that result in loss of one or more days from an
employees scheduled work. Our lost-time incidence rate for all Molycorp employees through June 30,
2011 was zero as compared to the national average of 1.88 reported by MSHA for the 2010 calendar
year.
The exceptional safety performance record of the Mountain Pass facility is further reflected in the
following table, which compares rates for all lost time, restricted work and medical treatment
incidents per 200,000 hours worked with average rates for mining operations, as determined by MSHA:
Year Ended December 31, | ||||||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||
Molycorp Operations |
0 | 0 | 1.01 | 0.86 | 1.33 | |||||||||||||||
MSHA Rates for
Operators |
2.79 | 3.73 | 3.48 | 2.95 | 2.83 |
Within the last several years, the Mountain Pass facility has received numerous awards for
safety, including: the MSHA Sentinels of Safety Award (2008, 2006 and 2004); the National Safety
Council Awards Perfect Record (2008, 2007, 2006, 2004); and the National Safety Council Awards
Occupational Excellence achievement award (2009, 2007 and 2004). We believe that our commitment
to a safe working environment at the Mountain Pass facility provides us with a competitive
advantage in attracting and retaining employees. The MMA facility has not had a lost-time accident
for the past 14 years. Molycorp Silmet is certified in ISO 9001, ISO 14001, and is working on
becoming certified in ISO 18001. The Molycorp Silmet facility has had one lost-time accident during
the second quarter of 2011 and no lost-time accidents for over 12 months prior to the acquisition
by Molycorp.
Section 1503 of Dodd-Frank Wall Street Reform and Consumer Protection Act: Reporting Requirements
regarding Coal or Other Mine Safety.
Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted
on July 21, 2010, requires that mine operators provide certain safety information in their periodic
reports filed with the SEC.
Below is information regarding the safety of our sole rare earth mine located at Mountain Pass,
California for the three and six months ended June 30, 2011:
(A) Total number of alleged violations of mandatory health or safety standards that
could significantly and substantially contribute to the cause and effect of a mine
safety or health hazard under Section 104 of the Mine Act for which we received a
citation from the MSHA |
0 | |||
(B) Total number of orders issued under Section 104(b) of the Mine Act |
0 | |||
(C) Total number of citations and orders for alleged unwarrantable failure by us to
comply with mandatory health or safety standards under Section 104(d) of the Mine Act |
0 | |||
(D) Total number of alleged flagrant violations under Section 110(b)(2) of the Mine Act |
0 | |||
(E) Total number of imminent danger orders issued under Section 107(a) of the Mine Act |
0 | |||
(F) Total dollar value of proposed assessments from the MSHA under the Mine Act |
100.00 | |||
(G) Total number of mining-related fatalities |
0 |
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During the three and six months ended June 30, 2011, we did not receive written notice from the
MSHA of (i) a pattern of violations of mandatory health or safety standards that are of such nature
as could have significantly and substantially contributed to the cause and effect of mine health or
safety hazards under Section 104(e) of the Mine Act, or (ii) the potential to have such a pattern
with respect to our sole rare earth mine located at Mountain Pass, California.
As of June 30, 2011, we had two pending legal action before the Federal Mine Safety and Health
Review Commission involving our sole rare earth mine at Mountain Pass, California. On June 24,
2010, we filed a Notice to Contest Citation with the Federal Mine Safety and Health Review
Commission pursuant to Section 105(d) of the Mine Act to contest a modification to a citation that
was issued after we had paid the penalty assessment due on such citation. MSHA filed an answer on
August 24, 2010, claiming that the citation was properly issued. The matter is still pending before
the Federal Mine Safety and Health Review Commission. On February 2, 2011, we filed a Notice to
Contest Citation in response to two penalty assessments issued by MSHA, each in the amount of
$3,996, for minor workplace inspection and chemical storage violations. On April 12, 2011, MSHA
responded, and reaffirmed the original penalty amounts. On May 4, 2011, Molycorp completed a
filing with the Federal Mine Safety and Health Review Commission which outlined the reasons why the
penalty assessments were excessive, and requested that the citations be vacated and dismissed. A
hearing date is for this matter is pending.
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Table of Contents
ITEM 6. | EXHIBITS |
Exhibit | ||
Number | Description | |
2.1
|
Stock Purchase Agreement, dated as of April 1, 2011, by and among Molycorp, Inc., Molycorp Minerals, LLC and Aktsiaselts Silmet Grupp (filed as Exhibit 2.1 to Molycorp, Inc.s Current Report on Form 8-K filed on April 7, 2011 (File No. 00134827) and incorporated herein by reference) | |
2.2
|
Stock Purchase Agreement, dated as of April 1, 2011, by and between Molycorp Minerals, LLC and Treibacher Industrie AG (filed as Exhibit 2.2 to Molycorp, Inc.s Current Report on Form 8-K filed on April 7, 2011 (File No. 00134827) and incorporated herein by reference) | |
3.1
|
Amended and Restated Certificate of Incorporation of Molycorp, Inc., dated as of August 3, 2010 (filed as Exhibit 3.1 to Molycorp, Inc.s Current Report on Form 8-K filed on August 6, 2010 (File No. 00134827) and incorporated herein by reference) | |
3.2
|
Bylaws of Molycorp, Inc., amended as of August 3, 2010 (filed as Exhibit 3.2 to Molycorp, Inc.s Current Report on Form 8-K filed on August 6, 2010 (File No. 00134827) and incorporated herein by reference) | |
4.1
|
Indenture, dated as of June 15, 2011, between Molycorp, Inc., and Wells Fargo Bank, National Association, as trustee (including the form of Notes) (filed as Exhibit 4.1 to Molycorp, Inc.s Current Report on Form 8-K filed on June 16, 2011 (File No. 00134827) and incorporated herein by reference) | |
10.1
|
Form of Restricted Stock Units Agreement for Non-employee Directors | |
31.1
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
*32.1
|
Certification pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
*101.INS
|
XBRL Instance Document | |
*101.SCH
|
XBRL Taxonomy Extension Schema Document | |
*101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document | |
*101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document | |
*101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document | |
*101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document |
* | Furnished with this Quarterly Report on Form 10-Q. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned hereunto duly authorized.
MOLYCORP, INC. | |||||||
August 11, 2011
|
By: | /s/ Mark A. Smith
|
|||||
President and Chief Executive Officer | |||||||
(Authorized Officer) | |||||||
August 11, 2011
|
By: | /s/ James S. Allen
|
|||||
Chief Financial Officer and Treasurer | |||||||
(Principal Financial Officer) |
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EXHIBIT INDEX
Exhibit | ||
Number | Description | |
2.1
|
Stock Purchase Agreement, dated as of April 1, 2011, by and among Molycorp, Inc., Molycorp Minerals, LLC and Aktsiaselts Silmet Grupp (filed as Exhibit 2.1 to Molycorp, Inc.s Current Report on Form 8-K filed on April 7, 2011 (File No. 00134827) and incorporated herein by reference) | |
2.2
|
Stock Purchase Agreement, dated as of April 1, 2011, by and between Molycorp Minerals, LLC and Treibacher Industrie AG (filed as Exhibit 2.2 to Molycorp, Inc.s Current Report on Form 8-K filed on April 7, 2011 (File No. 00134827) and incorporated herein by reference) | |
3.1
|
Amended and Restated Certificate of Incorporation of Molycorp, Inc., dated as of August 3, 2010 (filed as Exhibit 3.1 to Molycorp, Inc.s Current Report on Form 8-K filed on August 6, 2010 (File No. 00134827) and incorporated herein by reference) | |
3.2
|
Bylaws of Molycorp, Inc., amended as of August 3, 2010 (filed as Exhibit 3.2 to Molycorp, Inc.s Current Report on Form 8-K filed on August 6, 2010 (File No. 00134827) and incorporated herein by reference) | |
4.1
|
Indenture, dated as of June 15, 2011, between Molycorp, Inc., and Wells Fargo Bank, National Association, as trustee (including the form of Notes) (filed as Exhibit 4.1 to Molycorp, Inc.s Current Report on Form 8-K filed on June 16, 2011 (File No. 00134827) and incorporated herein by reference) | |
10.1
|
Form of Restricted Stock Units Agreement for Non-employee Directors | |
31.1
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
*32.1
|
Certification pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
*101.INS
|
XBRL Instance Document | |
*101.SCH
|
XBRL Taxonomy Extension Schema Document | |
*101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document | |
*101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document | |
*101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document | |
*101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document |
* | Furnished with this Quarterly Report on Form 10-Q. |
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