My strategy for 2015 is to invest in oil stocks. E&P, the riggers, tight oil companies, and offshore drillers. I will not invest in MCP. The key difference is that everyone knows oil will come back. Virtually nobody believes the REE market will recover any time soon. Despite the 60 Minutes story, you can do without REE. The world must use oil.
You would be wise to look to oil for gains, not MCP.
The on-paper consequences of delisting are too draconian. No exchange wants to be the catalyst that induces BK or similar legal proceedings. The reality is this: a stock less than $1 will still trade and earn fees for the exchange.
MCP management is focused on the debt restructuring. Everything else is just noise. Longs and shorts should follow this lead.
Q1: Who knows why shares are dumped? It could be a hedge fund that want to hold over night. The dollar value is low. If MCP opens up with very bad news, the "insurance" is worth it.
Q2: Employees are not dumb and can see the troubles MCP is having. The stock options are a way to offer a retention bonus. Look at the strike price. Look at all the exhibits certifying to the options. I don't think any employee will be fooled by the ISOP.
The main driver in the near future for MCP is the Debt Deal. MCP can ill afford $55 mln/qtr interest payments.
You will have better odds of success in a casino. Take your $20k and place it on red or black on a roulette wheel.
A much better play is to invest in the oil patch stocks. All have been hammered but will rise once oil prices rise. This is a sure bet. Much better than Casino Molycorp.
For the first time the majority of MCP longs realize their investment in MCP is in mortal danger. Last Tuesday, we heard it again from MCP management: the goal is to ramp up to 4k mt in Q4 to secure more funding from Oaktree. Most longs don’t believe this and they shouldn’t. MCP burnt $100 mln cash in 2014 Q4. Sales were $116 mln. Absolutely horrible numbers added to a series of losses stretching back 12 quarters.
As guidance, Q1 in 2015 is also going to be bad. MCP is down to $150 mln in cash (estimated). In Q2, the tank runs dry and the soft debt covenants crystallize into hard covenants, which allow the debt holders to act.
Can the US government save MCP? Mark Smith tried this in 2010 and failed. It seems that the US military does not need LREEs. It’s the HREEs that are valued.
MCP management is not focused on tank liners or chlor alkali or anything else to do with operations. They are being swarmed under by debt holders who want to be made whole. At some time, they throw in the towel and seek BK protection. This stops the swarming and puts everything in the hands of a judge.
How much recovery can MCP longs expect to get? I suggest you follow GT Advanced Technology (GTATQ) who entered BK about 4 months ago. Ironically, the share price for both companies is the same. GTATQ longs are hopeful for some recovery but hope is waning. MCP is much more leveraged so its prospects are bleaker.
Not going to happen as you contemplate. If equity is diluted 10:1, it's like owning MCP now at 4 cents per share. What you forget is that in BK, the bondholders get first dibs at the assets. There is nothing left for the old shareholders. It is a rare BK where the old shareholders get something.
A lot is going on at MCP now. Everyone is hiring lawyers. All debt holders want their share of MCP. At some point, MCP may declare BK just to gain some protection from the groups.
Not true voting. Debt covenants enable the bond holder to step in and demand repayment under certain conditions. I think this trip wire has been tripped already but the 2016 debt holders want to negotiate rather than cause an disorderly unwinding of MCP. MCP has not received "the Demand Letter" but if Apollo is not happy they will.
MCP is in the the ER and the nurses are writing up morgue tags. Something is going to happen soon.
This is the life and death struggle going on now. Any default by any junior will precipitate defaults in all bond classes. The "subject to interpretation" angle works now but each day MCP draws closer to "no interpretation needed" type default. The 2016 convertibles are on the hot seat and they are lead by Apollo. It will be interesting.
The fundamental problem with investing in MCP is their proclivity to hide material facts from its investors. The biggest lie that has been around for years is the ramp up to nameplate capacity of Project Phoenix, 20 mt annual production. There are many ingenuous investors who opined on this Board that once MCP ramps up, profits would flow from MCP. This flawed investing strategy failed for many reasons. The biggest is that it’s not how much you produce; it’s how much you sell that determines profitability. Surprisingly, this Econ 101 concept is lost on many. Contributing to this ruse is a comical series of production mishaps. The latest being bad liners in the new Leach 2.0 tanks.
Back in the synthetically created boom year of 2011, MCP sold everything that was not bolted down. Market prices were astronomical. But in the latest cc, we find out that MCP sells only an insignificant amount of Ce. Half of the plant’s output is piled up in heaps for nobody wants it. If GM sold only half the cars they produced, can they make money? Analysts finally are getting wise to the charade: if it were not for a Ce sales question in the cc, we would never have found out about the abysmal sales of the LREE.
Great PEG ratio? It has no earnings. Growth is downwards.
MCP overpaid for Neo and vastly overpaid for project Phoenix. If MCP's assets were to be sold at BK auction, it would fetch maybe a third of the outstanding debt ($1.7 bln). In no case would the sale reflect $4.50 book value.
The market values MCP's equity at $117 mln. Debt holders don't care if MCP operates or not. The more it operates, the more value is lost. How can any equity be preserved if the debt holders are owed over ten times what the equity is worth? The first step in any restructure is to eliminate the interest payments. The debt holders will want to own the whole company.
Molymet is a major shareholder and sits on the Board. I don't see them buying out the company.
Debt covenants serve to protect the interest of the debt holder. In the 2014 10-K MCP said some of the covenants are "subject to interpretation." No doubt the operational loss (12 quarters and counting!) inches them closer to default. When one goes, they all go.
MCP is in frantic negotiations with debt holders even as we write. There is no doubt in my mind that the equity has already been sacrificed given the size of the debt ($1.7 bln). It is the only bargaining chip MCP has.
The magnetic REE prices have gone up. But the LREE, Ce and La have gone down. My last read was $3.50/kg. for these two. This is well below the cash cost to isolate these rare earths. We know that MCP is selling very little Ce. Probably they are cut back on La also due to low prices.
Ce and La comprise 83% of the output from Mt. Pass. There is no way MCP can survive.
One day longs will wake up and read the capital restructure announcement from MCP. I don't know the form it will take but longs will be all but wiped out. MCP cannot keep paying high interest payments.
My take-aways from the cc:
BK can happen any time due to “soft” covenants in the debt.
We have a new excuse for low production: tank liners
Very little Ce is being sold by MCP. Bedford said it was in oversupply for some time.
Magnetic prices going up.
My analysis: They partially fessed up to not being able to sell out the plant. They just pile Ce in unsold heaps. With the new strategy it is impossible for MCP to achieve the Oaktree goals of 4k mt production and positive EBIDA. This is because MCP receives no revenues from half the production, Ce.
I expect to hear in Q2 what the restructuring plan is. Longs should be prepared for bad news.
The market is telling MCP that it does not need its 20k mt/year REE capacity. China can provide for the world and then some. Mt. Pass should be mothballed. The equity should be wiped out and divvied among the debt holders who become the new shareholders.
It is a running joke among MCP investors on what will be the next excuse. I have said many times that it does not take 3 years to start up a plant. The real truth which MCP does not want to own up to is that they cannot sell more than they do now. Why they do not admit this is a mystery to me.
MCP acknowledges that production was low in Q4. They also say in the ER:
"...and this lower than expected production has continued through the first two months of 2015."
Q1 will be as bad as Q4.
It will be a very interesting cc tomorrow.
I didn't see any excuses as to why production was so low. Chlor alkali ran well. Presumably Leach 2.0 worked OK.
I think we will hear the ugly truth tomorrow. That the reason for low production and low sales is that the market has shrunk. Yes, the reason why MCP cannot ramp up to 5 mt/qtr is because they cannot sell all they produce.
Suppose MCP was able to sell out the plant. Using Q4 cash cost and market prices, MCP would barely cover the $80 mln per quarter cash burn. Yes, running the plant flat out still yields no profits. The root cause of all this are the extremely low market prices for LREE. Cerium today has a market price of $4/kg. A normal price is $38/kg. I think old man Smith was selling Ce for over $100/kg during the 2011 boom.
It will be interesting tomorrow.
Cash burn for Q4 was $80 mln, about the same as previous quarters. Cash on hand is $211 mln meaning MCP has 2 quarters to get cash flow positive or rejigger the capital structure. FY 15 Q1 is already in the bag so tomorrow we should hear something about the cash burn issue. This is the KEY ISSUE to the future of MCP.
MCP elected to write of $232 mln in goodwill. This is like kissing your sister. It means nothing. It's all about the cash.