The common stock will one day be cancelled. All longs will lose 100%; shorts will win 100%. It is that simple. But human nature clings onto hope beyond the point of reality. The exchange will continue to allow trading in MCPIQ for years even though the stock is cancelled. This inane behavior is due in part to earn commissions. But the trading also allows longs to pretend they are still in the game.
You will see it play out on this YMB. Somebody will organize an Equity Committee. Another person will read something in the filings that offer a glimmer of hope. So on and so forth. BK courts have seen this happen over and over and will placate the losing longs. I notice that most of the loyal longs are no longer on this YMB. They are the smart ones and have moved on.
I have been preaching the MCP short case for a year but few have listened. Despite the large body of evidence that pointed to a BK endpoint, very few heeded my words. Moreover, Oaktree Capital lent money to MCP as late as September 2014. This turned out to be a red herring as their exposure is securitized by ownership in the powerplant and chlor-alkali plant.
Oaktree has challenged the DIP financing deal. They, like me, point to the continual cash burn on the part of Mt. Pass. This facility will be shut down; the senior debt holders (new equity holders) will own this mothballed plant. Neo will continue to operate.
Some think China will step in and buy MCP at book value. Why would they do such a stupid thing? They don’t want to operate a REE plant in a tree-hugging State. Plain and simple: Mt. Pass will be shut down. We’ve come full circle with the mothballing of Mt. Pass.
Many longs have lost lots of money. They could have saved some of it if they listened to my thesis. Many longs have gushed these words: “Once Mt. Pass is producing at volume, they can meet the Oaktree lending requirement, which opens up another $150 mil financing.” I cringed at these words. Producing REE is one thing: selling it is more important. Mt. Pass is overloaded with Ce and La, elements that are oversupplied in the market. Work the math and it’s obvious that Mt. Pass cannot produce at volume, sell all, and achieve a positive EBITA. MCP management knew this but kept on with their story. They were not fully truthful.
Sad but true.
It's interesting to note that a prepackaged BK was not announced. The mountain of debt proved too large reconfigure through negotiations.
Next up: Will MCP get DIP financing? They are burning cash big time and this cash belongs to the senior lien holders. We might see a motion by the lien holders to shut down operations to preserve cash.
Big losers: Molymet with stock and convertible. Apollo Capital with the convertible.
I think Mt. Pass incorporated the best engineering in its time but was saddled with tree-hugging design constraints. Trying to reduce emissions from this plant played havoc with operations. I have never seen a plant that took over 4 years to start up and is still not functioning right. After a good try, engineering minds would have figured out that something fundamental is wrong with Mt. Pass's design. But this was papered over as it gave good cover to another glaring issue: the market for REE evaporated overnight.
I think it is human behavior and the desire to keep the gig going. If management pulled the plug say 2 years ago, they lose their job. By keeping Mt. Pass open, they keep their job and play with investor's (not theirs) money.
The biggest lie made by management was that once Mt. Pass is up to capacity, it will be cash flow positive. Then came an endless series of excuses that would shock even Baghdad Bob. The fact was that Mt. Pass would never get to capacity due to China's desire to run their REE plants.
Even if all the debt was exchanged for equity, MCP will still be cash flow negative. Mt. Pass should be shut down, and all other plants sold. Balance sheet total property is $1.7 Bln, a number bloated due to the Neo purchase and $1.2 Bln. spent for Project Phoenix. Getting it down to market prices, maybe the first lien holders can get 45 cents on the dollar. This is the ongoing discussion: let MCP live and maybe get 100% in the future or bail now and get less. If the first lien holders let MCP live, they must absorb years of losses until the market comes back. Tough decision.
Either way, the longs are hosed.
Last November, Saudia Arabia tanked the oil market by not cutting output. Their goal was to shut down or severely hurt US fracking companies. The price of oil has tanked and so have the stocks of oil exploration companies.
Are we seeing the same action in the REE market. In recent weeks, the rare earth elements that MCP mines and sell have seen their market prices tank. Prices were low already but it looks like a 5-10% additional drop. Could it be that China is trying to put MCP under? They know MCP is locked in negotiations with creditors in a debt for stock deal. How this deal is valued is a function of REE prices. Hmmmmmmm.
MCP defies gravity. Everyone knows the equity is dead but it still trades at a decent price. If the senior debt holders pass on the debt for stock deal, BK is declared and the seniors will be repaid from the sale of assets. Oaktree will lose a little as they are secured by discrete assets. Convertibles are hosed as they will get nothing. Where does this leave the longs?
DIP financing is only after BK is declared and is senior to all instruments. Why would the existing seniors or Oaktree allow somebody to get in front of them? If they had no choice as in BK it would happen.
There was no cc on Q2 so you know something is cooking. Of great surprise to me is that the share price is holding up well.
The cash account hourglass is running out of sand. Something will happen soon. The market is telling us that the longs will survive.
The Siemens deal is a red herring. The prime on that contract is a Japanese company who wants badly to get out of sourcing via China. I wonder why Lynas was cited as the REE supplier.
MCP has booked another quarter and the numbers are horrible again but in line with recent trends. If we extend the trend line into Q2 and Q3, MCP is out of cash and out of business. By now nobody should believe that production ramp up is imminent and will turn MCP around. ASPs are down again which should clarify what China is doing with respect to REE prices and exports: Selling more at lower prices.
What has changed is the activity of the debt holders. Unlike the equity longs on this Board, debt holders know they are hosed and can will lose all if the trend line is extended. If a deal to trade equity for debt is struck, the longs will be comprehensively diluted if they survive. But something more is needed. Mt. Pass needs to be mothballed and MCP revert back to the Neo business. This is what China has wants and if it comes to pass, sanity will return to the REE markets.
I am surprised that the share price has held up so well.