Molycorp, a company that once prided itself as being one of the few non-Chinese producers of rare earth elements (REEs) in the world filed for bankruptcy protection last Thursday.
A hot mining trend just a few years ago, REEs are comprised of 17 chemical elements found in ore deposits. REEs have a variety of applications as components of electronic manufacturing, in everything from a Prius to an iPhone to lasers and magnets. In mid-2011, REE prices peaked, driven by demand for electronics and green technologies as well as tight supply due to few large economic deposits. China instituted export quotas, further pinching supply and escalating prices.
With China accounting for over 90% of global REE production, Molycorp was regarded as a reliable supplier for the U.S. green technology market. In April 2012, when the company increased its reserves by 36% at its Mountain Pass mine in California, research analysts enthusiastically hailed the mine as now having potential to last “a little beyond forever.” Molycorp’s stock peaked at $79.16 in May 2011.
REEs were long regarded as a sure bet amongst analysts and investors until prices started to tumble – and fast – in the last few months of 2011. Several factors caused the decline. First, the main consumers of REEs, like Toyota and GE, had initiated their own engineering departments to come up with alternatives to expensive REEs, by either eliminating them from product design or turning to recycled REEs. Then, China did the unexpected and eased export regulations, quickly flooding a starved market.
Despite its unique position and demand of its product, Molycorp ran an operating loss of over $350 million over the last 3 years, on revenues above $475 million each year. The losses were in part due to annual write downs on the $1.3 billion acquisition of Neo Material Technologies, an REE processing and distribution company with various patents, in an attempt to vertically integrate. The purchase made Molycorp the only major miner and processor of REEs in North America. The other issue was the company’s inability to rein in production costs as quickly as REE prices tumbled. Molycorp stock closed at $0.36 as the company filed for Chapter 11 on Wednesday. The company missed the June interest payment of $32.5 million on senior secured notes. It has $1.7 billion in debt.
However, on Friday, at its first bankruptcy hearing, an affiliate of Oaktree Capital Management, a holder of $250 million of the company’s debt guaranteed by the Neo business, argued that Molycorp could not justify its need for money and the presiding U.S. Bankruptcy Court judge agreed. Oaktree claimed that Molycorp functioned as two separate businesses: Neo Material, a profitable processor and distributor of REEs, and poorly operating Mountain Pass mine, supplying less than 30% of Neo Material’s throughput. Essentially, Molycorp was looking to unjustly and unnecessarily burden the profitable arm of their business in an effort to develop a failing operation. Molycorp’s CFO Michael Doolan admitted in court that the Neo business would survive the demise of the mining operation, which the board has considered shutting down.
Molycorp was seeking approval for an additional $44 million in debt to continue operations and signal to suppliers, employees and clients a sense of stability as the company restructures. The approval was ultimately denied but Molycorp returns for a second hearing on Thursday.
Posted by Olga Ivleva, Senior Associate, Range Advisors
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