I can see what I posted using the search function:
You collect the $0.60 per share as soon as you sell the contract. You must maintain the $3 per share to buy the assigned shares at all times as you might have the contract exercised at anytime.
The money is not free. They very clearly spell out the risks. You could have Molycorp declare bankruptcy, and be assigned shares at $3 that are worthless. That would represent a $2.40 per share loss. For taking on that risk, you get paid $0.60 per share.
I agree that the contract is worth selling. The risk is small. But the fact is that you are the insurance for someone thru 2015, thru the next 19 months. You do have to keep the $3 per share exercise price in my account so it ties up funds there. (That is how the return is only 20%)
Go for it if you like it. But it has risks and rewards. You can earn a 12% annually on the trade of selling the contracts. Obviously Shock Exchange with his bankruptcy will happen, it is just not imminent, would never take that trade.
People love these trades until the day they get assigned shares with a huge loss.
After all, why not the $4 options. The bid is $1.01. So you get $1 for tieing up $4 for 19 months, a higher return. $5 Puts are bid a $1.52, a whopping 30% net over 19 months.
Do what you want. Those are reasonable positions. Just not for me.
If you google: Commit To Buy Molycorp At $3, Earn 20%
you will find a Forbes article advising to sell the $3 strike Puts, for $0.60 per share. That Put costs $1 per share now, representing a loss of $0.40 per share.
I searched the MCP MB, because I recall some discussion of that article ... it looked REALLLY dumb at the time. Now I see that the thread topic was started by CB-CB and has been deleted. That really gets annoying when things are deleted like that.
I thought the trade was fairly safe, and so far, you can't have had shares assigned for a total loss. But like any investment, there is always a risk.
Every share short was from a lending account. Theoretically, the same share could be sold, then borrowed from the next account and then borrowed again. There might be only one share, re-borrowed and re-sold 70 million times!. And then that same share has to be bought, returned, bought, returned, bought, returned, etc, 70 million times!
If the reverse path is over time, like the forward path was, then it is just ordinary market demand, over a long time. If the reverse path is constrained in time and price, then of course, a short squeeze is possible. And every stock that has a high short interest has people predicting a short squeeze. As you have, ad naseum. If it happens, that's great. Good times for all longs. But no one should predict it is inevitable. It is actually very unlikely.
I've also reasoned before that many of the shares are connected to the convertible bond offerings, with the bond conversion representing the method of covering. If I had a long call for 100 shares at $7, and a short position of 100 shares, I don't care if the stock price goes to $100. I can cover for $7. And one set of the convertible bonds convert at $7-ish. Now it is better to cover at $4 than $7, but if you have that backstop, you are NEVER going to be squeezed.
That is not quite my position. I maintain that when a share is borrowed and sold short, that single share represents two interested owners: the one with the lending account and the one with the buying account. Both of those parties think they are shareholders, and from a practical point of view, both are shareholders. So in that sense, every share sold short is in two places: the account that loaned the share and the account that bought it. If the share was not loaned then the account that bought a share, would have bought a non-borrowed share.
If you consider it that way (and I do), then the number of shares OWNED by the market is the full share count PLUS the shares short. The shares short were SOLD short to shareholders.
A short covers by buying shares in the market. The loaned shares are then returned to the lending account, where that shareholder never knows if the shares were loaned or not. It is true that to buy shares in the market someone must sell. But that is what a market is: it is a place where people buy and sell shares. If there is no one selling, the bid has to go up, or the ask come down.
We just disagree about short covering. Shorts cover when they want to cover, by buying in a market that sells shares. And certainly, if they ALL want to cover at the same time, then there is a problem. But since that so rarely happens, it is rational not to expect it.
You are correct that 165 million trading volume could be 165 different shares transferred, or the same share transferred 165 million times. It really doesn't matter though. The point is that if the price goes up, people sell. You can hypothesize about what if no one sells, but people ALWAYS sell.
They will buy them in the market at the market price. The price point in the market might be higher or lower. Assuming that there will be share scarcity, even with higher prices is generally not true. Higher prices lead to supply of shares into the market. Since May 14th, 165,592,900 shares have traded under $3. If the price moved to $4, there would be many people eager to sell their positions for a 20-day, 33% gain.
Short squeezes are beyond exceedingly rare. Stocks have prices. When prices soar, people sell. A short squeeze requires that prices soar AND that people don't sell.
Short covering will eventually add to the market demand. The thing that will move the stock price is business success. If that fundamental is there then the price will begin moving. Short covering will be slow as shorts give up slowly, not fast and panicky. The reversal of market sentiment and added demand will favor longs, but obviously, I consider that dependent on the business plan actually succeeding.
I think it will, but I've been wrong before. And right before also. I'm just an anonymous Yahoo MB poster who enjoys MB's. My disagreement with your short squeeze suppositions is JMO.
I side with Keynes that markets are largely irrational.
I like the conventional supply-demand curves as an explanation for how markets work, and I think that markets are efficient methods of moving the price point to avoid surplus or scarcity. But I don't buy the various flavors of rational markets otherwise.
The common assumption is that the market averages out the spectrum. So there are over-optimists and over-pessimists, and risk-takers and risk-avoiders, and the expectation is that the average is rational. I don't really think that is correct. The market averages the irrational impulses of investors but I don't see the net average of irrational people as rational.
Keynes draws an important distinction between risk and uncertainty that most people don't recognize. We tend to assign every unknown (and remember Rumsfeld's famous "unknown unknowns") as a risk, something for which we can assign odds. In fact there are many things which are uncertain and odds don't apply. The efficient market hypothesis argues these average out ... sort of like the betting line for a football game. If the line is set and moved correctly, the amount bet will be equal on both sides. Of course one side is smart and the other stupid ... but the goal of the odds-makers is to be the middleman, holding the money, on many bets between disconnected individuals, and get paid for that middleman role.
Dilution is never priced in. Fear of dilution will drop the price. But since a stock offering is inevitably at a discount to the market price, that discount CAN'T be priced in. At some price point, the benefit of buying outweighs the risk/uncertainty of dilution and price drop of an offering. But if events lead to Molycorp making a dilutive offering, they will make that offering below the market price.
Molycorp added to uncertainty with the last Q1 report and CC. And the market is irrational. But we tell good stories that seem to make sense retrospectively.
It doesn't mean anything. The market isn't supposed to trade in fractions of a penny, but if someone buys 1000 shares for $2553, the trade is registered by the market at $2.553 per share. I tend to think these are somewhat larger trade blocks, where the last bits are trivial per share buy might matter when you are about to hit lunch. So maybe someone is buying 100,000 shares for $255,300. The fractional price prevents the block from filling partially ... that price just forces a full fill. The "market maker" has the normal action above and below that block, and can fill the order and take a small profit.
I'm just guessing but I interpret it that the fractions arrive that way. You and I can't place an order for 1000 shares at $2.553, but a market insider can trade a block, with a price that divides out to fractional. I think it can also be a result of a "dutch auction" order processing. Say a broker has three market orders for 1000 shares arrive simultaneously, and before the 3rd is filled, the price drops a penny. The broker can take the orders as 3000 shares at a fractional third of a cent. At least I have had weird order fills that have multiple blocks at multiple fractions. Some stocks seem to have more of that. I don't know if those trades show in the market as fractions, even though they show in accounts as fractions.
I wonder also about intra-brokerage trades. Say I decide to sell 1000 shares as a market order (bid at $2.55) and another Scottrade account places a simultaneous market buy order ($2.56 ask). Now I pay $7 and the buyer pays $7 fees. But I think Scottrade could also process the order. 1000 shares move, but at what price? I was willing to sell at $2.55 and another was willing to buy at $2.56 ... but it has to be registered as a single 1000 share transaction. It could be that the order processes at $2.555, with both the buyer and I getting a bargain, and the market not caring.
All of these are guesses.
I've gone thru his before ... right after the Q1 report and again now. The question was necessary and obvious.
Q: When will you make money?
A: We don't know, but progress is way slow.
Q: Will you need more money? And will you sell stock?
A: We don't know, but we have options. And we expect to make money.
then repeat again.
Part of the problem is that they have been behind schedule and over-promising so long, and they probably got a big legal smackdown after the SEC investigation ... lawyers will tell you not to promise. But they need to deliver positive progress, not more news of more delays. When you deliver bad news quarter after quarter, the question of money comes up.
I don't know. They do have to consider the credit options also. And those should be better if they have a firmer business case, with actual operational progress.
In the CC they said this:
Again, I think that really depends on the ramp. We're watching it every month and looking at where we think we are and where our liquidity position is. If and when we think we need to access the market then we will do that. But it really is going to be driven by our progress with our ramping production.
So they are watching the monthly numbers and they are watching the quarterly numbers. And they should be able to make some informed guesses about cash burn.
I'm not trying to make the case for a share offering. I think they are going to do what that last CC statement says: pay attention to the progress and the cash burn, and if they are making enough progress, they won't sell stock, and if they aren't, then they will.
I was agreeing with the timing of a stock offering as being before the end of July, if they need it. The quarterly report timing influences that.
What they said in the presentation was:
... with 1100 (inaudible) metric tons at production in the first quarter, we did not achieve the production volumes we were targeting.
I expect we will see significantly increased production in the second half of this year.
And a direct question about the rate I am guessing at in this thread:
... since you mentioned you did about 520 metric tons in April, you expect to get to that cash flow break even point if you do over 1,000. I mean, what type of improvement in your operation rates on a monthly base should we be expecting? Will you be significantly higher in the second half? Should we be expecting a 30% jump per month, 50% jump per month? Can you give more specific guidance in that range?
The answer was essentially "no".
... do you think that having 2,000 production metric tons a month in the second half would not be out of the question when things are progressing at this point?
It's more of a challenge to get there in the fourth quarter than was it six months ago when we set the target because we thought we might have higher production today. That's the best that I can answer that.
Sure. Just going back to your liquidity. You talked about you have many options, including issuing equity ...
I can't blame the analysts for the question. The CC was an exercise in saying we are behind our plan, and we won't commit to meeting the production goals at any time. Or to hitting any production amount at all. We were way under what we wanted for Q1.
If you say that, the very obvious question is when does the money run out and what is your plan? I can't blame the analysts for negative questions. They are hard questions but it isn't their money they are losing, it is ours. I wanted better answers to the plan ...
I still think they completely set up and asked for that question. You raise money because you need it. If you have a CapEx project, as Molycorp did, you raise money for it. If you are temporarily short, you raise money.
Molycorp is losing money. And they would not say when they expect to stop losing money. If you are losing money and can't/won't say when it stops (and therefore you won't need money) ... you are begging for the question: when will you run out of money, when will you need to raise money?
Molycorp doesn't need money right now. They had $236 million 3 months ago. The question is strictly WILL they need money. And the answer is not obvious. If they could say that Q4 will be profitable, then I think everyone would agree that they have more cash than they will burn thru between now and profitability.
If they had firmly said they expected with near certainty to have full operations in December, with Mt Pass costs near single digits and falling ... people might have complained about delays, but they would see enough cash. They said they were still expecting December, but it would be tough to get full production by then, and they didn't really talk about the intervening months.
That first question is negative, but so is the answer:
Q: ...What is the contingency if things don't improve? Quite frankly, you guys have thought that production was going to be ramping up quicker for several quarters now. What if it doesn't and your cash burn continues, are you forced to raise equity again?
A: ... from our perspective the volume that we were anticipating didn't come to
fruition. ... You know, we still are very committed to seeing significantly higher volumes in the second half. That's what we're working towards.
The fact is that the question was warranted.
I know the ramp won't be linear, but the linear increase is the easiest to use in making the case for and against cash raising. They have to stem the losses at Mt Pass. And the ramp up is the path to fixing that. Ultimately, we don't know if it is a set of stair steps with some big and some small, or a set of rate limits that need to be removed, or ...
My main point is still that the company will have the fiscal picture in a few weeks, and generally they report the fully audited results about 6 weeks after the quarter ends. The window when they could best raise cash is the window between having the preliminary fiscal picture and the fully audited results. And the need for an offering will depend on that quarterly result, and the current operations and current expectations.
I'm just saying that the second half of July is the window, with the expectation that Q2 results are reported in early August. It takes time to put an offering together. At least a week to publicize it prior to the placement. If we get to July 31st and have not seen any announcement, then it gets very unlikely they will try to raise cash this quarter. And more likely that they are on one of the more positive tracks I've guessed at.
And if they decide to not raise cash early, it really raises the chances of no further stock sales. I can see the reasoning for a prediction of pre-July 31st offering that amfads made, but the picture of the cash situation is so muddied that I don't think it is possible to assign odds to another offering. They either do it or they don't, but now, the uncertainty is too high to make a CALCULATED odds.
I pointed out how the China export data supported the theory that seasonality was a factor in MCP's poor Q1 results (in a thread titled: Seasonality). Selling 988 mt in Q1 could be viewed as 330-ish mt production per month, in the months produced (figuring in lag times). But if February was depressed sales due to seasonality, then the production was more likely 380-400 mt per month in March.
If so, then the jump from 380 mt in March to 520 mt in April is not awful. Still wildly slow and behind schedule, but actually within the expected range of monthly increases. Say they are only ramping at 120 mt per month. Then we should see:
Apr: 520 mt
May: 640 mt
Jun: 720 mt
Jul: 840 mt
Aug: 960 mt
Sep: 1080 mt
That level of ramp puts the end of Q3 as the beginning of the point where they can expect Mt Pass losses to be very small.
There is a substantial difference between these two ramps I have laid out. Ad the fiscal bottom line is what management has to be calculating, relative to the cash on hand. Anyone can make an argument for a cash need and anyone can make an argument against. It simply is a matter of the progress at Mt Pass.
They mentioned that they were still expecting full scale production at Mt Pass by December. They were at 520 mt for the month of April. So a smooth production would increase the production by 1/8th of the remaining amount each month. So say the ultimate production is 2000 mt per month, then (2000 - 520) / 8 = 185 mt increase per month.
May: 705 mt
Jun: 890 mt
Jul: 1075 mt
Aug: 1260 mt
Sep: 1445 mt
Oct: 1630 mt
Nov: 1815 mt
Dec: 2000 mt
They have mentioned that about at 1000 mt per month, the costs drop to breakeven. Presumably that is a cost of $15 and an ASP of $15 including cerium, or a cost of $19 and an ASP of $19 excluding cerium. If so, they should be able to foresee the Q3 production relative to the breakeven production level.
There is the lag of sales that factors in. If they sell in July what they produced in Jun, they would see a production of (1075 + 1260 + 1445 = 3780) but sales of only (890 + 1075 + 1260 = 3225). SO even at a breakeven cost on a per kg basis, the quarter would see the costs higher by the 555 produced. And since costs drop with quantity, they are selling the higher cost material, and still holding the later, cheaper finished goods. That lag keeps negatively effecting things until they hit a steady state.
Unfortunately, the 520 mt for April is such a long way from the break even point and the full scale levels that it is difficult to guess at a linear increase. But they've seen the April and May production numbers and sales numbers. And they are days away from the Q2 end ... likely enough trying to get last sales booked. They will shortly have an answer to the question of whether they need cash or not ... whether they need cash via stock sales, or whether they can live with the short term credit available.
But to your timing point, I would think that they would time a share placement prior to the Q2 numbers. Essentially a share placement would be the equivalent o bad Q2 numbers released early, with the slight ambiguity they would be allowed in providing prospectus "ranges" vs fully audited report numbers. The advantage is with the fuzzier numbers, and with the fuzzier timeline that you can say, when you put a safe harbor statement in front of it.
I have my fingers crossed that they are in the range where they won't make an offering.
At this point they are assembling the bottom line numbers for Q2. They won't have a preliminary accounting for another 2 weeks or so, but they are surely tracking the cash balance closely. If the numbers lead them to believe an offering is prudent then they would surely do the offering before the Q2 report. They would put a range of expected results in the offering prospectus, but the prospectus would then precede any Q&A session accompanying the quarterly report. The advantage of that is they can have the cash on hand as a number in the prospectus, but the schedule for ramp up and the expectations for positive profits can be ambiguously future.
If they put together preliminary numbers, here are some ranges I would expect:
Cash on hand under $160 million.
April: 520 mt, May: 600 mt, June: 650 mt ... ie, a slower than expected ramp.
Q2 cash burn of $76 million ... higher losses than expected
Mt Pass cash costs still higher than expected
Offering Not Sold:
Cash on hand $180 million
April 520 mt, May: 680 mt, June: 850 mt ... ie, expected ramp up performance
Q2 cash burn of $56 million ... lower losses than expected
Mt Pass cash costs in line with expectations
I don't include the cash effects of a positive payment from the M&K lawsuit. But say that is $20 million. That would be a number they know, even if the money is to be paid later.
It really is possible for the company to avoid another offering. One path is simply to beat the ramp up timeline and get to a lower cash cost that stops the losses at Mt Pass. Another is to be enough on track, that they can get a reasonable short term line-of-credit. At the end of Q1, they had $236 million cash on hand and $166 million of inventory (including about $49 million of raw materials that could be used to slow cash burn, and $56 million of finished goods that could be dumped for quick cash). If they burned $56 million in Q2, and see progress on the ramp, they can reasonably risk not raising cash now.
I don't think they EVER release anything pertaining to the discussion.They file the election results with the SEC. Looking at Denverdude's past summaries, they have given some high level perspective on the RE market. With the current situations (China WTO response, Magnaquench patent expiration, China smuggling) that perspective would be nice to hear.
They will post an SEC filing with the results of elections. I don't recall any Molycorp annual meeting being anything important. This one seems to have attracted more attention than is warranted. Everyone always gets re-elected. What the company recommends gets approved.
Denverdude has attended in the past, and you can search the MB for his prior reviews. Generally high level chat, nothing that specific. With the company goals getting nearer, everyone wants to hear the latest bits on progress to full capacity. Those would be the comments I would be interested in also.
Slide 14 shows the impact of cerium, and has a clarification of LREC that I find informative:
Light Rare Earth Concentrate (LREC) will be produced to supply downstream plants; separated oxides produced to maximize volume of NdPr and La.
Rare earth economics derive from production costs, and we will have one of the lowest cost producing plants in the world.
Slide 12 says they have the ability to also ship HREE concentrate downstream for processing at other Molycorp facilities.
The big negative is still the reported Q1 cash burn of $78.3 million, dropping cash from $314.3 to $236 million. Obviously 3 exactly similar quarters would lead to cash depletion. They absolutely must deliver progress on the ramp up and on the bottom line number. I wish we had a transcript to hear if they gave any details on the May production level at Mt Pass.
I'm not familiar with this situation, but drilling? Drilling goes forward all the time. Most deposits are uneconomical, but some are economical. People drill for copper. People drill for lead. People drill for lots of different low value metals. I'm not sure why exploratory drilling is a sign of excessively high prices in the RE's.
I'll have to see the story, but I don't buy that mineral exploration indicates too high prices.