There is nothing that longs say about the company "bailing out" the stock. That makes no sense.
There is a long investment proposition. There is a short investment proposition. Longs need a change in business operations. Shorts need the company to keep on failing quarter after quarter. You agree with that short proposition and I can't say that it is an unreasonable scenario. But I have no idea what you think longs are thinking. The long scenario that works is for the company to operate successfully, and produce positive business results.
There is no such thing as a stock bailout from the company. And it is possible for the company to go on and the stock to be a viable investment with a positive return. That requires the company make profits though.
I get that a company that makes money is a viable business and one that loses money is not. And I get that the bondholders want repayment.
I've said many times that nothing matters if they can't turn a profit. Losing money inevitably leads to failure.
I don't have much in money of the stock (anymore). The entire market cap is $170 million. I don't think the long shot odds are so bad that I should sell, vs let it ride. But it certainly is a long shot. When you say it is worthless, you are jumping ahead to your conclusion that there is an inevitable bankruptcy where the stock is wiped out, along with most of the unsecured debt. It is the most likely event, but not a foregone conclusion.
I went and looked to find the answer about if interest counts. Here is the MCP PR:
$250 million of the Financings has now been funded, with the remaining $150 million available until April 30, 2016 if Molycorp achieves consolidated adjusted EBITDA of not less than $20.0 million per quarter for two consecutive fiscal quarters, and production volume at its Mountain Pass facility of at least 4,000 metric tons per quarter for two consecutive fiscal quarters.
So there you have it. If MCP hits 4000 mt and EBITDA of $20 million in Q4-2015 and Q1-2016, they receive a loan of $150 million.
It depends on the owners of the bonds sentiment. If you think demanding cash interest payments is better, you do that. If you think demanding equity payments is better, you do that.
I think it is likely that the bondholders approve an equity payment of interest. Possibly with a higher interest. The bonds are currently as poorly thought of as the equity. Demanding cash payments guarantees a bankruptcy. The chances of Molycorp making the cash they have on hand last to pay is almost zero. So taking equity gives the slight chance that there is an Oaktree refi. That is GREATLY in the interest of the 2016 debt. If they can get repaid, they are dancing in the streets naked.
There is a legal problem with Molycorp having $25 million cash on hand, then taking a $150 million loan, and then paying the $160 million of debt in 2016. Everyone else is going to see that as just letting the first in line get everything, while they get nothing. At least I would. The 2016 debt may have to also move their due date out a year.
NO. They don't have to get rid of the 2016 due debt to qualify for financing. They need to qualify for financing, to pay that debt. The Oaktree 2nd tranche is little more than a debt rollover. It will be used to pay the 2016 debt.
They only qualify for that 2nd tranche if they hit 2 consecutive quarters with Mt Pass production at 4000 mt, and cash flow positive. Otherwise, if they don't get that, and likely declare bankruptcy.
If they manage to get interest paid with equity, positive cash flow is simpler. If they ramp up LREC, they can more easily hit the production metric. It matters a lot whether they can make the Magnets and Alloys segment carry the cash flow results.
That is all I see anyway. They have to ramp up production to 4000 mt for Q4-2015 and Q1-2016, while holding costs down, and selling enough Magnaquench to carry the books to positive. Eliminating the cost of current interest as CASH might not be counting the results correctly ... I don't know if the terms are CASH flow positive, or earnings positive. If they make a single dollar from all the operations, and pay $40 million of stock as interest, in accounting terms, that is a loss of $40 million. But it is CASH flow positive.
Ultimately though, they are betting everything on hitting the Oaktree targets in Q4 and Q1. And as a practical matter, Q2 and Q3 have to not be so cash damaging that the company runs out before then. IIRC, they had $134 million on March 31st. They need the interest swap to equity payments ASAP.
If they did all that ... it kicks the can down the road. The next debt due is another year down the road. Presumably, they can combine positive cash flow and refinancing to get thru that.
At some point they have to start making even larger amounts than a cash flow positive result.
#1 is likely ... I think getting bondholders to accept shares for interest is a necessary step.
#2 gets discussed a lot, but they have so many bond series and so much debt that I have trouble seeing how to get it done. That doesn't mean it won't happen, just that it is exceedingly complicated.
#3 seems impossible to predict. They can't really avoid an SPO if they are out of money, and they can't really sell shares if they are out of money. The market is already uninterested in owning the current shares of MCP. 100% of the company is about $175 million. So even if you infinitely diluted (huge reverse split ... 1000:1 and sold the same amount of stock again ... you can't really raise that much. 100% ownership of MCP shares is worth exactly $175 million in the market.
#4 is possible, although it is nothing to bank on.
I would add that a combo of #1 and another option might work. That would be:
#5. MCP gets orders for magnets from Seimens soon enough to matter to the bottom line results. And puts out enough from Mt Pass (even at an increase in loss) to qualify in sum for the Oaktree 2nd tranche (cash flow via Seimens orders, production quota via LREC ... cheating but literal production). With 2nd tranche in hand, then evaluate Mt Pass to figure out how to get rid of that operational loss.
At that point, you have a business with defined debt principle times and amounts. No cash interest (optional). A magnet order book that makes money. Some cash on hand, that increases with quarterly results.
That is pretty much subsistence level business operations, but better than bankruptcy. I can't put any dollar value on it because I don't have a prediction for magnet orders. And of course at any time, an increase in REE prices adds business value.
Well, so would we all. The only long term plan that allows survival is turning around the performance from continuous losses to gains.
They've indicated that they are doing something with the debt. I'm just guessing on what.
But I don't think that anything works unless they have profits. Taking interest payments down is just a way to stretch out the ending, not a survival strategy. They need to have a business plan that makes money, and really, that makes money soon.
The reverse split has to be approved.That is nothing I like ... I would much rather have the stock price organically grow higher. But it has to be approved as a fall back option if nothing else.
That level of dilution seems unlikely. Sure, they could release 240 million shares into a market with 5 million shares at $26.5, but that seems unlikely. That is an attempt to sell several $billion of stock.
The more likely situation, after a 50:1 reverse split is that they offer 80 to 90-cents on the dollar in equity for the senior secured debt, and 40 to 50-cents on the dollar for the unsecured debt. That would require about $1 billion of stock, which at $25, would be 40 million shares (1 billion of the pre-split share price stock).
The obvious need is to turn to profitability. If they can't stop losing money, nothing else matters.
Beyond that, they would benefit from a plan that allowed interest to be paid in stock. That might be $100 million of new stock per year, a large dilution (current market cap $150 million). If they then hit some small level of profit, and qualify for the 2nd tranche Oaktree, that would keep them afloat thru 2015 and 2016, with the debt due late in 2017 as a hurdle to consider later.
Again though, that plan requires a large stock pool. $100 million of stock is about 200 million shares at the current prices. So in 2 years, they would run out of available shares.
If I had to wager on a debt plan, I would guess that they get an interest paid as stock option approved, that lets MCP either pay as stock, or cash, depending on the situation. I would guess that the 2016 debt ($160 million, IIRC) gets an offer of 50-cents on the dollar stock for debt. The later investors actually make a quick buck off of that. Then the Oaktree 2nd tranche acts as a cash hoard that can be used to start to think about the 2017 debt.
I would not really try to deal with the principle on the other debts. If they want to take the 50-cents on the dollar offer, that would probably be OK ... it saves the stock as interest, and it reduces the debt due date hurdles.
The terms of debt claw down are what make the unissued equity pile semi-acceptable.
They are trying to arrange a debt-for-equity swap deal. At the moment they have $1.6 billion (about) of debt. If they negotiated a $1 equity for $2 debt swap, they would need $800 million of stock, which would be about 1.6 billion shares at current prices. So by creating equity in a reverse split (which is what they ARE doing, and what you object to), they can do that equity for debt swap.
I'm a bit peeved that they put off the CC based on the plan that they would have a CC after they negotiated a debt deal. That made it seem imminent.
Maybe they will have some kind of debt swap framework to present at the annual meeting.
I can't see any point in voting against a reverse split. I don't want the company de-listed. That pretty much shuts down the company, as the debt holders can demand immediate repayment, and that forces bankruptcy, wiping out stock.
No. It doesn't force shorts to cover.
Shorts are forced to cover if the share they have borrowed are recalled, due to an unavailability of shares to borrow. A reverse split does not affect shares available.
Shorts are forced to cover or deposit money if the stock price increases. Say they sold 100 shares short for $1, and now owe 100 shares and have a cash balance of $100. Then the stock goes to $10. They now owe 100 shares and have a cash balance of $100 ... and the broker wants a cash balance of at least 50%, or $500 of the market value.
But if they shorted 100 shares at $1 and the stock 1-for-10 revers splits, they now owe 10 shares and have a cash balance of $100. That does not force any action.
Generally, only a share recall forces shorts to cover. In many brokerage accounts, there is software to ensure that the brokerage is not screwed by you having a large losing short position and being secretly insolvent. They don't want you to have that $10 million losing short in Apple, and declare bankruptcy, and the brokerage ends up getting handed a losing money account. That is between you and your broker though.
If the share price increases, shorts have lost money when they cover. When they cover is still a matter of their choice though. When the share price falls longs lose money. When it rises, shorts lose money. When you exit a trade, you close the books at that market price.
I will send an email. I saw two ways of interpreting it, but thought the language more implied magnaquench, rather than straight neodymium. I just looked att. MCP PR and it could be a neodymium supplier relationship.
There was a quote that said "rare earth magnetic materials" from Molycorp, but that could be vague also. I think the point of the PR was that Siemens was looking for an environmentally responsible supplier, and had a goal of dysprosium reduction.
It could be that I misinterpreted that "magnetic materials" reference.
Either way does improve the bottom line. Neodymium is the main driver of rare earth revenues. It has a solid market price. I have frequently compared the neodymium and praseodymium in Mt Pass to the former mining operations that were only to get the europium for the TV market. At that time there was a single element that drove profits. Now there are likely to be two.
It is not clear, but I assume the raw material for the magnets is the magnaquench powder. Molycorp has profit margins well over 20% on that product line.
The confusion lies in the process of making a final magnet, which is to take the paramagnetic particles (magnaquench), orient them in the shape and magnetic field orientations preferred, then to immobilize the particles, making a permanent magnet. Much as you can orient a piece of iron but stroking with a magnet, magnetic domains need to be organized directionally in making a rare earth magnet. What Molycorp sells is magnaquench powder, in many chemical formulations. Magnaquench is a raw material for making a magnet. But it is also the end point in the Molycorp Mines-to-magnets chain.
No, but I looked at their wind generator order book, and it is VERY large. If they want to use Molycorp as a large supplier, then it is a LOT of magnaquench. Siemens isn't going to buy exclusively from Molycorp ... no one knows how the orders will go. It could be that Molycorp becomes the preferred supplier. It also could be that someone else does.
I think that they are looking at a competitive edge in magnets by having Molycorp and Shin-Etsu develop better and better, low dysprosium magnets. If that collaboration succeeds, then it makes sense that Molycorp/Shin Etsu would be the main supplier to Siemens.
That doesn't make sense to me. How can you receive a 1-for-1 exchange and also debt relief of $200 million?
I can see offering a 1-for-1 exchange, if the unsecured debt takes a 1-for-2 exchange.
I can't see any debt holder taking equity without a business plan in front of them that makes the equity worth holding. There is too much new equity to sell it. It has to be an investment proposition. And that is the real question. What is the business basis that makes accepting stock worthwhile, while simultaneously making debt worth giving up on? And I think it seems like the Senior Secured debt should be agitating for a haircut for the unsecured debt. That would be part of their business proposition. Taking $600 millionths of stock, while there is another $1 billion of debt overhang ... that would not make sense.
How about equity interest payments for all? That puts the debt into stasis. The 2016 debt still has a shot of being paid with the Oaktree $150 million. And getting to cash flow positive is a bit easier with no interest. Add a 10% premium to sweeten the deal. So if Molycorp is to pay $20 million in interest in June, instead they pay $22 million of stock.
Then perhaps if Molycorp can increase revenues with sales to Siemens ...
I don't see how Oaktree would be allowed to be a DIP. They are NOT first-lien. They have title to two specific pieces of Mt Pass, but the first-lien credit is the Senior Secured Bonds. Oak tree has $130 million of collateral in the form of the titles to the Chlor-Alkali and Combined-Heat-and-Power facilities, which they lease back to Molycorp.
The rest of the company ... they would only have a secondary position in their debt.
That is just my read of the debt structures.
Sure. But what is the market pricing in and at what odds? It gets easy when it is bond pricing, and you can look at long yields and short yields and determine the exact market odds of a rate hike. In this case we don't know the outcome end states or the odds, and we all make guesses.
Particularly, the next shoe to drop is the debt restructuring. And that has a particular bit of math.
Say the exact value of Molycorp is $1 billion. That includes valuation for the Siemens business, the assets, the losses, everything. Now the market cap is $165 million and the debt is $1.6 billion. So that says that the restructuring should leave $165 million for the longs. And the debt side will get $850 million. At least that would be the market bet.
You can do that math with many starting assumptions, but there is actually the possibility of doing an actual market assessment of the restructuring event. So in the case that the market is pricing correctly now, the stock WON'T drop on a restructuring event.
Of course if the company declared bankruptcy at this moment the Longs would be wiped out. But he bondholders would also take a bath as they no longer have as much ability to acquire the value of the Siemens contract, which would be lost, as Molycorp is broken up. Conceivably, Siemens finds a way to buy magnets from the former supply chain, but it isn't a given.
I place a high value in the Siemens business deal. That deal is not something the bondholders can sell in liquidation. It is also not a good time to liquidate/sell failed rare earth projects, in general.
I'm not saying there isn't a chance that the stock goes down. I am saying that anyone who says they can exactly predict the future price outcomes does not need to talk on MB's. Just go and be rich. I can't predict, so I spend time posting and reading. You might be right. Longs might be ignoring the obvious. But just short the stock the ...
That is what the market is pricing the stock for though.
What you are saying is that there are these inevitable bad outcomes that will drop the stock price. But the stock price is already dropped, almost as though the rest of the market also sees those inevitable bad outcomes.
I'm trying to think thru enough to make some predictions on the debt restructuring. Here are some random bits as I work it thru in my head.
Here is the current "big" debt from the current 10Q:
$195.4 million June 2016, 3.25%
$339.9 million Sept 2017, 6.00%
$144.8 million Feb 2018 5.5%
$101.2 million Sept 2019, 12% (Oaktree)
$130.1 million Sept 2019, 12% (Oaktree collateralized)
$639.3 million June 2020, 10%
$11 million, other stuff.
We have two leaks on groups seeking restructuring. Apollo has the lead for the June 2016 debt. And some group representing the June 2020 Senior secured debt is also talking.
I don't see how a deal can be anything but all-or-nothing. Say everyone but the 2018, $144 million debt holders took an equity swap. The recovery estimate for liquidation of Molycorp would suddenly exceed the debt stacked against it. That group gets full recovery, while everyone else gets the haircut.
The Senior secured debt, and the Oaktree Equipment collateralized debt have to be treated separately. They have primary positions in any liquidation.
Assets are all the facilities, inventory, and about $134 million cash.
It seems possible that the company could survive and pay the June 2016 debt off with the 2nd Oaktree loan. There are two conditions for that $150 million that I am not certain about. They have to hit two successive quarters of 4000 mt production from Mt Pass and a Cash Flow positive over those quarters I believe. They have to hit this metrics Q4-15 and Q1-16 for that to work.
If they were cash flow positive ... the debt would be the same, but interest payments would increase. Unless they had extraordinary profits from June 2016 to Sept 2017, they are not going to have the $340 million they need then.
It seems that they need the Oaktree 2nd tranche, which also seems like they can't re-structure the 1st tranche. So Oaktree restructuring seems off the table.
That doesn't make sense to me. You want to be the last one then. Say everyone swaps ... then you have a recoverable position in liquidation, or a small amount for the company to repay.
Meanwhile the equity holders don't have that security.
It seems that a universal haircut has to be negotiated. All or nothing.