This was in the CC:
Michael Gambardella – JPMorgan: I think you had said earlier that you expected this business to generate about $150 million in EBITDA more and running at an annual rate of 60?
... skipped bits ...
Constantine Karayannopoulos – President and CEO: No we need to get cheaper raw materials reflecting today’s raw material prices and that business should be a lot closer to that figure. But as Michael said we’re using feed materials that were purchased last year at much higher prices than what we would be buying them at today.
When Neo was being acquired I thought that they would easily add $120 million to the earnings. Clearly JPM and Gambardella expected $150 million added to the bottom line. But the current Magnaquench margins are squeezed by the cost of the input material RE's which were purchased in large amount during the price spike.
I can certainly understand why Neo wanted to guarantee a supply in the RE crisis after the China quotas and market manipulations. As a RE-buyer-magnet-seller during the price spike and supply uncertainty and quotas ... they needed to buy a huge pile. Now they are selling magnets today made with the RE's they bought a year ago.
With MCP as a backstop, they are guaranteed Neodymium, and can stop maintaining excess inventory ... go to much more of a just-in-time approach to Neodymium. The margins at Magnaquench will go up as they move back to a strictly value-added production of Nd-B-Fe magnets from component raw materials.
Every other company out there is probably also kicking themselves about panicking in the supply crunch. As time goes on the market will clear thru that inventory. A non-monopoly supply will actually make the consumers much more willing to be predictable in buying. The prices will eventually stabilize and then demand will quite likely cause some gradual increases.
Mt Pass will begin making money late this year. Magnaquench division will begin to jump in profits when they run thru the existing costly input inventory. Tolleson has a nice value-added operation that can be and will be expanded. Silmet has an operation that can handle processing of a huge variety of input ores, with output in many rare metals.
That was an awesome CC: swift decisions and swift implementation on cost cutting measures; transparent Phase 1 and Chlor Alkali updates and details; fantastic steps in Sorbx program; evidence of agile thinking (MCP considers slowing production in months after Phase 1 completion but before Chlor Alkali completion). And yet, there is still time to purchase shares at a discount. The best of both worlds.