This doesn't make sense to me. You declare bankruptcy when you run out of rope. And quite clearly, there is still cash left, and no debt maturing that needs repayment.
I don't have any idea what is going on. They could be looking into re-working the debt like the re-worked that last set. If the debt is heavily discounted, they might be looking at a some crazy plan.
I don't know the debt trading, but I saw a comment here that it is trading at 15-cents-on the dollar of par value. That would make the price tag for the $1.6 billion of total debt something like $230 million. I think the 2016 debt load due is something around $200 million (after the last equity for debt swap, I don't recall the number). So that is trading in the market for $30 million.
There simply isn't any reliable info. It could be that the rumors are right and Molycorp has burned thru all cash, has interest due, and bills to pay, and needs chapter 11 protection. That seems unlikely. I don't know what the debt relief they are trying to cram thru is. It does not seem likely that they are seeking debt relief via a bankruptcy at this time.
But who knows ...
It should not be large at Mt Pass. I've expressed amazement at the actual physical scale before. But let's say they operate at 20,000 mt of RE's per year. The ore is about 7-8%. So they have to use excavation of about 300,000 mt of dirt and ore. A nice ballpark number is that a cubic yard of dirt weighs a ton. So that is 300,000 cubic yards, about 1000 cubic yards per day. Wikipedia tells me that a Caterpiler D-11 has a 57 cubic yards scoop. So they need it to dig 18 scoops per day and put those into a truck to dump at the crusher.
When you start to think about the daily operations, the diesel vehicles are not a big part of things. It is a savings to have lower fuel, but not a large volume cost item. Once the ore is pushed into the crusher, the process should use NG based electricity from the combined heat and power plant. No doubt there are diesel fueled Caterpiller machines in steady use. But maybe not so many, and possibly smaller ones.
There is a lot of movement of mass in mining not directly involved in moving the ore. You constantly are setting non-ore aside. You constantly have to contour the slopes to prevent landslides and make movement possible. You have to have the ability to scoop sand, as well as break rocks. So don't take the simplified cubic yards as the entire mining operation. But the reality is that they don't have to spend a lot of digging effort to completely load up the front end of processing.
And right now, they still are only producing at over 25% of capacity, so the ore mining part is even smaller.
Long story short: it saves money to have cheaper diesel, but they may not use much diesel. Say they use 500 gallons per day for 60 days in a quarter. And now save $2 per gallon. That is $60,000 savings per quarter.
I pulled that 500 gallons per day number straight out of my ... no idea what they use.
The thing you are missing is that the senior debt is not due for a few years. Yes, they are in a secured position and should have full recovery in a bankruptcy scenario. The debt due in 2016 and 2017 is not secured. If that can't be paid, a bankruptcy would likely not help the debt-holders.
Currently the Secured $650 million debt is being WELL paid also That debt gets 10% per year and gets repaid in 2020.
I don't see it like a lion though. Wanting to get a loan repaid is not some uncivilized predation. It seems like a reasonable expectation. The notes were a $650 million loan, and Molycorp should repay that loan, or sell the parts of the company to repay the debt. That is just the expectation.
The debt due in 2016 could be viewed as risky, with the company unlikely to earn enough before then. But the risk has to be considered with the Oaktree financing,which added a lot of cash, and has a $150 million secondary payment that would cover the 2016 debt. If the company was to improve to breakeven, the cash on hand and $150 million would cover the 2016 and 2017 debt.
And if they can actually ever HIT the business targets, they could easily have re-fi loans available to them at reasonable rates. It is the continued failure at the business side that is the problem. And will continue to be a problem.
Unless they actually run a successful business, the debt will eventually push them into a bankruptcy proceeding. That should not be in 2016, but could be in 2017, if they suck badly enough. The liquidation would easily cover the Secured debt, and probably the Oaktree debt. You really want to either own secured, or 2016 debt.
If one series is unable to be repaid, the debt-holders have a claim against assets, and those claims can only be sorted in a bankruptcy court, with a judge to sort thru the claims.
What I was getting at, is that the judge will put priority #1 at the secured debt. That's how the debt is structured. Where you don't want to be standing in a debt workout is the guy owed $100 by a business with $500 of assets and $500 of secured debt. You get nothing. Forcing that bankruptcy is foolish. If your debt is due 1st (as it is here), you want to have a workout. Stockholders are ALWAYS last in line.
And once again, you are jumping ahead to an impairment event. There is not a need to jump ahead to that. Bankruptcy is the process for companies that can't pay the bills. Restructuring the debt is to the advantage of the un-secured debt. Anything is better than a bankruptcy with a poor chance of recovery. And to be clear, that is what the S&P ratings keep saying: if the company runs out of cash and defaults, then the chance of recovery of the loans is very low (CCC+, I believe).
Interest payments and operating cash burn are large. But that is still sustainable with the current cash on hand.
I disagree with your assessment that a ramp up is impossible and expensive. Really that is all you have to say. If you believe they can't hit the business plan then it is clear that the company will fail. Trying to characterize the debt-holders by analogy with predators doesn't really matter. They could be a bunch of swell guys and they still have to be paid. Or they can be lions, and it just doesn't matter. It is a "show me the money" situation. Either you show it or you don't.
There is a plant design and an output and cost planned. The way to quadruple My Pass production is to hit the target of that plan. It is not like asking how I am going to drive my car 300 mph. My car is not ever going to do that. But if you ask how it is going to drive 80 mph, I can tell you that is by pushing the gas pedal down, and waiting for the speed to ramp up.
The reason I think it is possible is that it is the plan, and while they have missed about every important deadline, and cost target, they have continuously stated that the plant will be brought to the target ... eventually.
We just don't know what the debt re-structuring underway is. Or even if there is debt re-structuring. I think the only thing we have some evidence for is that they are consulting with Jones Day. Jones Day has been the companies legal go-to for a long time. They were part of the legal counsel for the Neo acquisition. Maybe there is an acquisition being planned. Maybe they have another debt for equity swap proposal by debt-holders that they want advice on.
I see the rumors. This MB assured me that bankruptcy was imminent to be announced on last Monday. You are pulling assumptions out of nowhere about what is being done.
The critical thing is if they can also hit the design cost target. If they can then they can sell because they will be the lowest cost producer. Economically, the lowest cost producer can ALWAYS sell. They simply lower the price to cover costs. Anyone else has to sell at a loss to take that market share away.
The market is certainly large enough for the non-cerium RE's to absorb the production.
Of course the stock price raises questions. But I not only don't know EXACTLY what is going on, I don't know at all.
Ah, I see you are unfamiliar with the word "if".
And fortunately, cerium is co-produced with Neodymium and Praseodymium.
OMG, that's like what, a $2500 investment. $3000 maybe. I try not to get scared when big money gets tossed around like that.
It seems that MCP is now practicing a sort of pre-release of quarterly numbers. Once again they out out a bit of news that lets you see parts of the numbers.
"Mountain Pass completed Q4 of 2014 with 1,328 metric tons (mt) of rare earth oxide (REO) equivalent production."
It is good that production is up. But still it is a long way from the 5,000 mt per Q target. It is a rise from a really bad Q. Maybe back on track for the ramp, who knows.
"Per-unit cash production costs at Mountain Pass also declined sequentially in Q4 of 2014."
This is good. The main problem is that Q3 costs were wildly higher, primarily from high HCl acid costs and from low production. I'm not expecting a good number here ... maybe in the mid-$20's per kg.
"The Company said that its onsite Chlor-Alkali plant at Mountain Pass is performing well in producing hydrochloric acid ("HCl"), a key chemical reagent used in rare earth production at Mountain Pass. Moreover, commercial availability also has improved, such that HCl currently is no longer a significant constraint to production. Molycorp's Chlor-Alkali plant helps to lower cash production costs by generating chemical reagents onsite, reducing waste water disposal costs, and further shrinking the environmental footprint of rare earth production."
Good. This was late in coming and I wonder if it only was a cost contributor in December. We know it was not online by the Q3 report at early November.
More in Part 2 ...
"Company officials said that the higher production volumes they expect at Mountain Pass in 2015 should coincide with relatively strong demand the Company is seeing for products such as the magnetic rare earth material Neodymium/Praseodymium, Lanthanum, and Light Rare Earth Concentrate ("LREC")."
"Company officials reported that repairs of construction-related issues with the facility's newly expanded Leach system are ongoing. Once fully operational, that system is expected to increase rare earth production and lower operating costs."
We basically still are waiting for the Mt Pass plant to be functional at the targets. The Leach is critical to getting the ore into a processable solution, from the rock minerals. The finely ground ore (they expanded the crushing and milling), is soaked with hydrochloric acid converting the insoluble minerals to chloride salts. The acid component sounds to be on track to generating cheaper acid, and leaching is such old school tech that it is just a matter of time and scale. Build a big enough big reservoirs and wait long enough and you generate a steady state stream of soluble RE's.
This is the usual Molycorp announcement. Progress, but at a snail's pace. I'm torn between clapping and screaming at them.
Generally, it is good news though. I think that it imples the quarter may not be as bad as I was expecting, which was a quarter of miserable failure in money results. Q3 was awful. I thought they would match or exced that awfulness in Q4. The Q3 report didn't say anything but that Mt Pass was stuck. At that time high costs and low production were the only expectation. December may actually show a decent improvement in the Mt Pass facility. And leach ... that often is just a matter of time ... if you have to soak more ore for longer.
It's true the numbers are relative to Q3. But I was expecting a worse version of Q3 repeated for Q4. To me it looked like they were likely to have a VERY bad report of a VERY bad Q result. Now I'm more expecting a bad report of a bad result. It still won't be good ... if you thought I was saying good, I'm not.
I don't guess an equity sale. I am alert to an equity-for-debt swap, that is basically an equity sale, although with the benefit of discounting debt repayment. That is not based on anything other than that rumor about debt restructuring possibly being considered.
They need to "show me the money" in results. Raising more money for more cash burn is a proposition I don't favor as a stockholder. They have enough money. The answer is to deliver results before that money is exhausted, not to raise more money for further delays.
Higher production in 2015 is something they have to deliver. And better quarterly results. They don't need to have adequate funding to last longer with losing results, they need to have winning results before the funding they have is gone.
They seem to be generating a PR prior to quarterly results now. And putting some numbers in it that allow a little targeting of expectations. Anything is possible, but somehow this doesn't seem a preamble to an equity offering.
The hydrochloric acid situation was reported as a bad news. And that was in November. It seemed to me that the HCl would be leading to even higher costs. Instead the statement is that HCl cost is dropping ... I'm still not a really expecting much bottom line effect. Costs were REALLY high in Q3.
If you ramp production with high costs, you just lose more money. If they can ramp and lower costs, then at least they can tread water. I expected slightly higher output, but at the same or worse costs ... that just leads to higher losses. They still may have a worse Q4 result than Q3. The PR states they produced 1328 mt, up from 691 in Q3. IIRC the costs were mid $30's ... call it $35 per kg, $35,000 per mt. They sold at an ASP of under $13 per kg. So net, they lost $22,000 per mt, for 691 mt.
Say they sold at $11,000 per mt in Q4, and it cost $25,000 per mt. Then they lost $14,000 per mt. Since production doubled, they will have a comparable loss, in net magnitude (assuming sales volume greater than production again).
It seems obvious to me that without improvement on the cost side, the Q4 numbers would have been much worse, as they ramped up the new parts of the facility.
Here is what they said at Q3:
"we placed into operation in September our expanded leach system at Mountain Pass. Once this system is fully operational and sufficient supplies of HCl are available, this unit is expected to help us increase rare earth production and lower our operating costs."
To me that said they were going to be leaching more, and processing more, and they still were dependent on higher cost HCl. And that was November 6th.
We don't know the bottom line numbers on cost or ASP. We do know that the cash costs are a little lower, and that the acid cost may not be as large a bite as I would otherwise have expected.
It will still be a bad quarter. But not as bad as if you just scaled up the Q3 loss per mt by 50% ... as if they hit 1000 mt but with the same costs.
I think they have two cost effects. There is the normal division of fixed costs across the production level, and also, they are trying to reduce proportional costs, which will be from optimization, and from full plant contributions.
As an exercise, here is a BS cost calculation based on made up numbers:
mt . . . . . fixed . . . . proportional . . . . net per mt
500 . . . . $20 M . . . $3500/mt . . . . . . $43,500
1000 . . . . $20 M . . . $3500/mt . . . . . . $23,500
1500 . . . . $20 M . . . $3500/mt . . . . . . $16,800
2000 . . . . $20 M . . . $3500/mt . . . . . . $13,500
2500 . . . . $20 M . . . $3500/mt . . . . . . $11,500
3000 . . . . $20 M . . . $3500/mt . . . . . . $10,200
3500 . . . . $20 M . . . $3500/mt . . . . . . $9,200
4000 . . . . $20 M . . . $3500/mt . . . . . . $8,500
4500 . . . . $20 M . . . $3500/mt . . . . . . $7,900
5000 . . . . $20 M . . . $3500/mt . . . . . . $7,500
But they are also fighting the (HCl) cost side. So the proportional costs are higher. Anything they have to do that is outside the standard operating procedure, adds to the proportional cost basis.
I'm not trying to sugarcoat the Q4 expectations based on this PR. I think it is good news, because I was expecting the worst case: higher volume, but still higher proportional costs. It isn't good news because they are going to nail the Q4. It just means they won't suck as much as I really expected. Still bad.
Yep. I really wish they would report even more details about the output. I think the LREC is important, but the real money is in neodymium, praseodymium, and magnets.
LREC should be post HCl leaching though, which currently is a major cost problem. I don't want to go double check, but IIRC it usually goes:
1: mining the ore.
2. crushing and milling the ore
3: acid leaching the minerals
4: flotation concentration of metal ions
That generates the Rare Earth Concentrate.
The cost side of LREC is still going to be high, although lower than the purified output. They will still generate the wastewater that has had a high disposal cost. They still use HCl at high amounts.
And then the ASP gets dropped from the LREC internal sale. SO YES, the product mix is hugely important. And not in the PR. And not in enough detail in reports IMO.
I'm still not expecting much in the Q4 numbers. As I said, it gets difficult to know when to applaud and when to scream, with progress, but maddeningly SLOW progress.
I made a conversion of my shares of MCP that I held in a taxable IRA into a taxfree Roth. I submitted the paper work Friday the 23rd after market close (at $0.28 that day). It processed at $0.39 ... I may complain about the delays. Regardless of the exact cost I will pay taxes on, I made the conversion with the idea that the 2015 tax bite I'll pay, will be made up in long term gains.
I'm not going to make any predictions. But if you are predicting large gains, then there is a tax implication for that, especially IRA vs Roth RA. The current price is higher than the price I converted at, and will pay taxes on.
With the price rapidly rising over the last couple days, and any expectation on your part (shared on my side) that the price will go higher, then there is some consideration for the tax side. I made a tax-based adjustment. I have no idea if that sort of move has any benefit for anyone else, but there is a process of "conversion" where you can transfer stock from a tax-deferred IRA, into a tax-free Roth RA, paying the taxes on the basis.
I thought it made sense for me. But I readily admit that taxes and different RA's are a bit of a mystery to me. Do your own DD, etc.
Mathwise, if you put $1000 into an IRA, that is pre-tax dollars. And you pay income taxes on withdrawals. If you put $1000 into a Roth RA, that is post-tax dollars. And withdrawals are not taxed as income. If you convert, you pay the income tax on the converted amount as you reverse the contribution tax profiles of the money. Generally, the IRA is considered advantageous if you are going to be in a much lower tax bracket after retirement. But if the gains are large enough,then the tax advantage is outweighed by that. Say the $1000 has a 33% tax bracket. IRA gets you an immediate $330 tax advantage. Then if the later tax bracket is 11%, but the investment in MCP triples, you pay 11% on $3000, $330 on withdrawal. I just ballpark estimated that in my case it might be better to convert.
For Q1: They almost always give an indication on the production levels for the current part of the quarter. And they usually give enough hints about the cost side expectations. I just went and looked in the Q4 transcript and the cost per kg in Q3 was $33. The cost was $16 per kg in Q2.
Costs had been trending downwards prior to the Q3 disaster. And they say in the PR that costs are lower than Q3 in Q4. Q3 was such a disaster ...
Here is a quote from Q2 transcript:
"In short, compared to Q1, we've produced more at Mountain Pass in the second quarter and we spent less doing it. We continue our efforts toward our goal of bringing Mountain Pass up to its full initial design capacity."
Then quite obviously, the wheels fell off the bus. I don't expect that Q4 will be back to the point they were in Q2. In Q2, it was possible to imagine you saw the light at the end of the tunnel. I'm only seeing tunnel right now.
Q4 results will be awful financially. They may have enough progress to report that it grow optimism slightly. Q1 is again going to have financial results that are bad. After Q3, I feel they are still significantly far away from the point where Mt Pass operations turn around. And that is the giant money loser.
I like that the PR indicates progress. But that progress is only relative to what was a historically bad quarter that completely de-railed the ramp up progress.
I don't really understand terms like over bought, or over sold. The price is what it is. Currently MCP has an aggregate value of around $200 million. I think the market cap would not be excessive over $1 billion. I thought the market was wrong at $100 million. I still think it is wrong at $200 million.
Sure, it went up far further than ordinary rises. But it also was falling much faster than ordinary falls. There MANY days of 10% drops on the way down. I'm not able to make TA predictions. The price went up a lot yesterday. I don't share the idea that the price change one day is a predictor one way or the other for the next day.
The only Panasonic battery investment I am familiar with is with Tesla. Pretty much any new battery plants should be lithium ion rechargeable or lithium ion disposable batteries. That is the current best chemistry set. And that chemistry set has no rare earths in it.
The previous best rechargeable battery, and still a very important battery in a lot of applications is the nickle-metal hydride chemistry, which uses rare earths in the "metal hydride" (primarily lanthanum, sometimes lanthanum-cerium mix).
I'm a huge fan of the compact size and power densities of the lithium ion batteries. I would think that there is not only going to be decreasing demand for rare earths from battery use.
There may be a need for a "couple tons" of RE in the Tesla battery plant. Robots with RE magnets, etc. But not a need for a continuous supply as a chemical in the electrolyte.