I said "today's numbers" but I notice it is July 23rd. The July 24th numbers will be tomorrow. Try the short interest locations then.
They have tossed out the number of 1000 mt per month production as being the point where they are cash flow positive on a per kg basis. That production level has to be hit soon, even if they are behind schedule on the ramp.
They need to stem the losses before they burn $236 million, or they need to raise more capital. They surely have much more than $50 million cash on hand. And they may be able to look at the production levels and predict with some confidence when they can hit a cash flow neutral production level at Mt Pass. And those losses are the cash burn problem.
I can't say they won't need cash. It certainly is not the case that they have a large cushion. But they had $236 million. The current cushion is smaller, and the window for success smaller. But nowhere near as small as you say.
You've been predicting a stock offering for quite a while now. It is a legitimate concern and a legitimate prediction. But the prediction for an announcement of an offering NEXT MONDAY, is a bit out on a limb. More than a bit, actually.
That is ridiculous: "operating cash of some $50 million"
They had $236 million CASH on March 31, 2014.
They had an awful Q1, but the plan they are following is to be operating at capacity by the end of the year (although they clearly are behind schedule). Every quarter should see increased production, increased revenues, and decreasing costs per kg.
There just is not any way that they have spent $186 million since March 31st, to leave them with your "some $50 million". Most likely they will have slightly better numbers than Q1 due to the Q1 seasonality depression of sales.
The big losses are at Mt Pass. Outside of Mt Pass, the company makes money.
$15.6 M revenues
($49.5 M) loss
($13.1 M) depreciation, etc.
($36.4 M) actual cash loss
Chem and Oxides Segment:
$46.6 M revenues
($0.6 M) loss
($3.9 M) depreciation, etc.
$3.3 M actual cash gain
Mag and Alloy Segment:
$55.9 M revenues
$9.5 M profit
($4.2 M) depreciation, etc.
$13.7 M actual cash gain
Rare Metals Segment:
$20.4 M revenues
($2.2 M) loss
($2.1 M) depreciation, etc.
($0.1 M) actual cash loss
What the business plan calls for is to improve the business at Mt Pass. The production volume is to increase, with cost per kg decreasing, and the revenues to increase, as they sell the output. In the short term, the ramp up will increase costs, as they produce less efficiently. They have $60 M CapEx budgeted for the Mt Pass de-bottlenecking.
I'm not seeing any way that they have spent $186 M. My guess is that they have spent less cash than last quarter, in Q2. Mostly because I don't understand the interest payment schedule, and the interest expense in Q1 ($36 M) was in line with payments where the higher amounts are due iin Q1 and Q3.
The resource segment will see higher revenues, but higher costs. The effects of lower cash cost are still down the road. Some small effect may show up, but not enough to see positive cash flow per kg, in Q2.
I have found the reporting is always less timely than expected. Today's numbers will be sometime after market close. I also have found that the short share report usually shows up faster in different places, with theWSJ before the NASDAQ.
Google: short interest wsj
then navigate the Wall Street Journal Short Interest Stock by Stock Listing to the M's, etc.
Google: short interest nasdaq
The data is clearly presented but they won't have the latest numbers as fast as the WSJ site does.
I don't think he was short. He really seemed convinced that posts to this Yahoo MB move the market ... same as our serial, resident, short over-poster. There was a time when a Yahoo MB was a vehicle for pump-and-dump or short-and-distort schemes. I am convinced that they play a very small role in market sentiment, and that is more a reflection than a proximal cause.
CB has some rose colored glasses for MCP. I enjoy that, but I would never use a MB as the final word in determining value.
Trust but verify. I'm wrong, you're wrong, we all make mistakes. Anyone might say something insightful, but check it independently. Reason it for yourself. Verify the facts. Use the board for bouncing your own ideas out there, but don't use it as the information for investing.
"If MCP were to achieve $7/kg but only sell 30% of what they make, can they be profitable? "
The key is to sell the 16% that is Nd-Pr. If they sell that at $75 per kg, then they make money. Do the math.
16% x $75 / 100% = $12.
Molycorp needs to sell 16% of the produced goods to be profitable. And with the strong demand for Nd-Pr, those are the elements that are easiest to sell. They also should be able to sell the lanthanum, but that is a smaller amount of revenue, simply because lanthanum is abundant and cheap.
Currently Nd-oxide is $62 per kg FOB in China. Pr-oxide is about $150 per kg FOB in China. Molycorp produces about 12% Nd and about 4% Pr.
((12% x $62) + (4% x $150)) / 16% = $84 per kg currently.
If you use $84 instead of $75, above, you get a $13.4 price per kg produced, even though it is selling only 16% of the production.
Again, it is both:
What you make.
What you sell.
The cost of what you make and the price of what you sell then determine if the business makes money.
I know that. But the only survival path is one where they make money. having money-to-burn is not a business plan UNLESS it ends with money-to-earn.
Survival equals profits. There is no other analysis necessary. It is important that they have the cash to burn during the operational beginning. But if the end point isn't profits, then it doesn't matter. The reason I do the analysis of amounts, costs, and sales prices, is because those tell the story of the path to profits.
The business basis for the company is an important thing to know to invest long or short. The cash burn story is certainly important. But the reason it is important is because there is a point in the operational progress, where there are profits. That is why I make a guess on the current operations and the progress on the ramp up path.
I couldn't disagree more with the statement:
" it makes no sense if they achieve $7/kg unless they have the cash to fight another day"
The mere fact of a $7 per kg cost basis guarantees that they can profit from sales. They can set the market price at $8 ASP if they want. $7 per kg is the lowest cost in the world. It is highly important. Certainly they need the money to stay an ongoing concern, but the bottom line is that $7 per kg costs would also guarantee adequate cash availability.
I ran into the Yahoo limit.
The doubling example has the problem of how to deal with cerium which is always a proportional part of the production. I prefer to deal with it as production cost. But if it is truly a waste product, then the alternate accounting is to say the production went from 50 kg produced to 100 kg produced. Then the costs are based on the La-Nd-Pr production rather than the Ce-La-Nd-Pr production.
The cost side still shows a reduction of the same proportional amount. The NET costs are divided by an increasingly large amount. The Net sales are 100% proportional to that amount. Molycorp says the breakeven point is around 1000 mt per month. So my 850 mt guess is getting close.
There are two important things:
What you make.
What you sell.
What you say is correct, but is only half the story. I'm not ignoring the "what you sell part". But the critical thing right now is "what you make".
The business plan is to get to low costs, and compete in the REO market with that low cost. Cerium sales are hard to make. The REO's are approximately 50% cerium. You can look at it two ways. They present two sales scenarios in the presentation of 6-4-14 on the company website, slide 13.
20,000 mt per year total REO's
2400 mt Nd-Pr
5100 mt La
7300 mt Ce
5000 mt LREC
Say you sell all the cerium. Then the net sales look like this:
2400 mt Nd-Pr x $72 = $172.8 M
5100 mt La x $5.6 = $28.6 M
7300 mt Ce x $5.5 = $40.2 M
5000 mt LREC x cost basis transfer ... ignore this
The net sales are $242 M. The costs are about $7 per kg, or $140 M.
Say the cerium is $0 sales. Then the net sales are $201 M. The costs are about $7 per kg, or $140 M. The costs can also be treated as spread over the 7700 mt of La-Nd-Pr, but I find that accounting more confusing.
Ultimately the NET costs have to be lower than the NET revenues. You prefer an accounting method that excludes the cerium numbers, and I prefer to include them. The NET COSTS are most important, I like the simple division of that NET by the total NET production. As you point out, the alternate method of excluding cerium has validity, but it is a matter of preference IMO.
Molycorp is ramping up. The costs will drop with that increase (fixed costs get spread and proportional costs eventually get optimized). They toss around the basic proportion that the current costs are about 30% proportional and 70% fixed. Working thru an example of doubling production:
100 kg produced: $1000 fixed. $5 per kg proportional ($5 x 100 = $500).
Net costs: $1000+$500/100 = $15 per kg
200 kg produced: $1000 fixed. $5 per kg proportional ($5 x 200 = $1000).
Net costs: $1000+$1000/200 = $10 per kg
Q1 report time, they had the number for the April production level at Mt Pass. April was at 520 mt. The August 6th report date will allow them to answer the question for the July production levels.
My expectation is that they are in the range of 800 to 1000 mt per month production, and have a cost around $20 per kg (still a net loss at the current basket price, especially with cerium being unsold).
850 mt. $21 per kg cost of production.
It is not a secret and it hasn't been ignored. The Magnaquench patent expiration has been talked about quite a lot. We will have to see how it plays out. Obviously rare earth magnets of the Magnaquench Nd-Fe-B formulation have been made in China for a long while. It isn't a case where the patent was preventing others from manufacturing rare earth magnets.
MCP makes Nd-Fe-B magnetic powder and there is a market for that. I think there was very little patent protection in that market. The Nd-Fe-B magnetic formulation was invented in 1983, 31 years ago. There are a bunch of routes to manufacture a magnet, and magnaquench powder is just one.
I think this quarter is not the critical cash burn that makes an SPO necessary. I think they have to look at their internal objectives and their internal predictions, and add up the numbers. If the total cash burn is greater than the cash on hand then they need cash at some point. I have said that the best time is sooner rather than later. But I also said that with the share price higher than it is now. The longer they wait, with uncertainty, the worse an SPO is. The bottom line is that if they had done an SPO right after the Q1 report, it would have sucked, but the assumption would have been that it was the final SPO, with that cash calculated to be enough.
Any SPO would have to be the final one. The bottom line is that the facility is done and they need to put the business operation plan into effect ASAP. I can see how the cash burn should be lower than the cash on hand ... but they would not commit to that at Q1.
I agreed that the best time for an SPO was prior to any Q2 results ... sooner rather than later. I don't know if one is necessary. And they really aren't saying. But the news of Q2 reporting date without a preceding SPO is good, whether the report is good or not.
It really is impossible to say. They had a decent amount of cash after Q1, but they also pushed the moment of turning from cash-burning to cash-earning to an indefinite time. In theory, they came close to almost hinting at a commitment to December as full operational capacity, with reduced costs to follow.
But that is just in theory. The reality is that any company has to be profitable to stay in business. And while Molycorp has a business plan to produce 20,000 mt, and sell that at a profit, they just aren't willing to commit to when they will get there. Without a commitment to reaching profits before the losses burn the existing cash, it is only fair to ask what the future prospects really are ... when is there a cash raise, etc.
A Q2 report, SPO announcement would be something businesses have done before. Personally, I don't see how they can ask the market for cash without a concrete plan for reaching profits. I think it was reasonable to have committed to that with the last capital raise. The end point and the cash on hand allow the exact consideration of every belt-tightening measure, and of every postponement of cash expenditure, and every possible ramp up haste. I can't see a capital raise without an explicit timetable and an explicit schedule of the cash burn and operational expectations.
I'll just wait and see what the Q2 numbers are and what they say about the ramp up. Who knows ...
Yep. There has been huge speculation that they needed cash imminently. Seeking Alpha blogs about the cash crunch incessantly. There was a lot of speculation that there would be another SPO prior to the Q2 report. That timing made sense, if the company has a reasonable expectation of cash needs before the ramp up finishes, and before positive operational results.
The announcement of the report date for August 6th tells us that they are going forward without another SPO at this point. The results will have to be judged to determine the risks of a future SPO. They are burning cash currently as they ramp up. The business plan calls for an end to losses after they reach final operations. There was an open question whether they would look at the Q2 cash burn numbers and decide to access capital early, and they didn't.
Estimates for the quarter have drifted downward. Here are the estimates I posted June 23rd and the current estimates:
-0.21 average. -0.13 high and -0.28 low
-0.22 average. -0.13 high and -0.28 low (1 down in last 4 weeks)
-0.26 average. -0.21 high and -0.29 low
$131 million revenues
-0.28 average. -0.26 high and -0.29 low
$131 million revenues
$124 million revenues
-0.29 average. $119 million revenues
-0.21 average. -0.13 high and -0.28 low
Revenue average estimate is about $125 million. Loss averages around -0.25 per share. Q1 was $119 revenue and -0.29 per share loss. Estimates are for a financial result similar to Q1. That would be OK if they report that cash burn level, if they are making solid progress on the ramp up. That still remains the critical element.
I would agree that a stock offering now is about useless to consider. I have no information to indicate they need capital at that level of emergency. The more likely last-ditch capital raises are sale-and-lease-back of facilities. As that is essentially removing collateral that backs the secured bonds, those have to be carefully arranged.
Obviously the market is acting as though the Q2 cash burn was awful and the cash situation is dire. A lot of people figure that means the info has leaked.
I suppose that if Apollo gains a controlling interest they might try to negotiate a favorable conversion to stock, right now. I don't see that working though. It would not really clean the books up enough to allow for capital market access thru new bonds, and with the share price depressed, issuing new shares would make any further stock offerings unpalatable.
Two things are going on. One is the bond position, which is being interpreted as a plan for an insolvency. And there is no news since the Q1 report, which failed to identify a timeline to solvency, and failed to say if that nebulous path would be with or without stock offerings.
Put those together and the spin is that Molycorp had a bad Q2, they are crawling to the banks and still not getting loans, they need cash, they are further behind the (unstated, but December hoped for) timeline to full operations ... and Apollo is looking for the debt to takeover the company in 2016, when they default on the 2016 notes, and that debt has a lot of control. The 2016 has no special status in bankruptcy court, but they might have the control of how and when to force that event. A finger on the trigger so to speak.
I don't see that spin as particularly solid. It certainly fits the record of quarterly performance and secrecy around bank credit that Molycorp has had.
Even if Molycorp is struggling and unable to get credit, I oppose any conversion of the 2016 notes to lower conversion price and later maturity. Say that the notes were bought at 65% of value ... so the notes get the option of exchanging to new notes with total value of $230 million. By paying 35% in ($80 million), the note value (market 65% + new cash 35%) is a stable $230 million of debt on the books. But the new notes would convert at $2 instead of $50 (IIRC). And probably the interest would go up over 35% ... from 3.25% to 5%.
I would not like that deal, even though it brings in $80 million. That example was sloppy, and I'm not fixing it now.
No, the 2020 trade at closer to par than the 2016. That debt has primary status. It has the first claim on cash from a bankruptcy proceeding. As such it has a pretty solid collateral, and is valued much higher.
The conversion price is awful for the 2016 bonds (IIRC). Conversion simply won't be profitable.
The Plan-A that makes the most sense is buy a bunch of the bonds, then either make sure they get paid back, or that solvency makes re-sale a nicely profitable action.
Plan-B would be to actually put additional money into the company, with a return on that investment amplified by the return on the bonds in the now solvent MCP.
Plan-C would be to have a controlling interest in the 2016 bonds when they are due to be paid, and to use the likely inability to pay to hold up the company for some 10% convertible bonds as payment.
Plan-D (the common media theory) is to have a controlling interest in the 2016 bonds when they come due, and to block any deal but a cash payment, while using backdoor pressure to block Molycorp access to capital (who you going to deal with: Molycorp or Apollo?). The with the notes due and no money, they force the breakup of the company, and with a better RE environment and a low asset fire sale/ bankruptcy value, they hope to put up a little money and walk out with the company.
Basically, if they have a controlling interest in the 2016 notes, they can force a favorable outcome in 2016. Either they get paid cash immediately then, or they get something of value. Worst case is if Molycorp goes insolvent and enters bankruptcy protection courts. Then the secured bonds have complete control.
Borderline insolvent: best
My guess is that they see Plan-C as the most positive outcome. Plan-D, the debt-fueled takeover has too many moving parts and has another interested party, the secured debt, that has a LOT of power. The secured debt might even block a Plan-C, although a deal with massive conversion is irrelevant to the secured bondholders.
I think management stated they did not expect to need to raise equity. Which was generally not well greeted since they also refused to state when they would actually make any money. The two statements are contradictory:
"we don't need to raise money"
"we are unwilling to promise making any money"
I have agreed with the theory that the time to raise money is PRIOR to the Q2 report, which should be in the 2nd week of August. If they cash position is bad after the preliminary accounting summary, then raise the money now, rather than in Q4.
So right now is the moment of greatest unease. A stock sale could happen. Q2 is in the past, and the books are being balanced. The cash balance is probably on the dashboard of the CEO at all times. As is the current progress to making money. He has to make the call if or when they need cash.
Silence is not good. But even worse was non-informative talk, as they practiced at the CC.