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.
The previous management under Mark Smith constantly over-promised and under-delivered. They were even investigated by the SEC about potentially misleading promises. The current management has clearly adopted the mantra "make no promises". They really won't say anything. That was what got Mark Smith tossed.
I am merely wrong in an investment. Good for you for never being wrong. I really don't need a scoreboard on the MB. Everyone has their own scoreboard ... look at your account balance.
We can all make arguments here. You can then use those or disregard those. You should only invest on your own conclusions. If my arguments make sense, and you decide they are going to be part of your decision ... go for it. But make up your own mind. I've lost money waiting on a turnaround in MCP. Do your own DD. If part of that is name-calling on Yahoo MB's ... again, go for it. I advocate for more civil posting but I have a thick enough skin to take it.
I would love to know what the Apollo plan is. We know they made an investment with a plan to make money. I simply don't see the logic that they are going to get a big payoff by forcing insolvency. The secured bonds have to much leverage.
I don't see the current info as pertaining to a bad Q2. The leverage moment for the 2016 bonds is in 2016, when Molycorp doesn't have the $230 million to repay. At that moment they have some leverage to try and get the company to offer some exchange that is favorable. Bu the secured debt has a lot of veto power on any such deal. And that is 2016. The Q2 numbers matter for the cash on hand situation, deciding if the company needs money.
The management left the shareholders up the creek when they refused to project a time for when the company would make money. The ambiguous business plan to make money someday doesn't cut it when there is a limited amount of cash on hand. That does make each Q result very critical for shareholders. Either they can make it to making money before selling stock or they can't. And they really aren't saying.
I do have to wonder if Apollo has a plan to sell on a return to solvency event. If Molycorp sells stock, the bonds go up. If the Q2 results make selling stock a necessity, then yes, a leak makes the bond buys a short term play on solvency.
But I don't know the plan, of course.
They would not be buying the 2016 bonds as short protection. Those are the highest conversion price (IIRC). Anyone that checks that conversion price can correct me on that.
The best protection is to buy the ones that convert at $7.20 per share. Buying those at a 35% discount is the same as having shares backstopped at $4.68. And if the share price remains low, and the company pays the bonds, you make out two ways. You are protected from a squeeze, as you have the bond conversion backstop. And if there is no squeeze, you cover for a profit when you want, selling or holding the bonds.
I don't ignore the risk that MCP stock will be wallpaper. But I think the most likely outcome is that they make profits. I've dismissed cerium for a long time and been looking for Nd/Pr as the metals with value.
Lynas and Molycorp have been trying to get to market for a long time, and everyone knows that new supply will perturb the market dynamics. It is unlikely to be the price disaster that so many have predicted. This supply is expected and rare earth demand is growing, and will absorb the supply, with the prices dropping slightly, for only a short time.
It makes no sense to talk about the recapitalization that buries longs. There is not an imminent cash crisis, as portrayed by SA. If they lose too much cash too quickly, and don't arrive at profits, then they need more cash. But that is not as certain as all the predictions are making it out to be.
The bonds in question have no leverage until 2016. The interest on them is trivial.
The real question remains: can Molycorp execute the business plan? Before they burn current cash reserves?
You are right. My exposure to Apollo was via some high yield funds that were apparently atypical. It looks like Leon Black likes to acquire via bonds and flip for a profit.
I don't mind being a little bit ignorant. It might surprise you to learn though, that I am regarded as unusually informed on a wide variety of subjects. But I certainly don't know everything. This is the one use of the MB's I truly value is when I say something I recall, and then it gets corrected. I verified what you said and it is right.
Apollo wants to be paid interest for 2 years and then be paid $51 million. They win if Molycorp operates profitably, as do longs.
The secondary you propose is only necessary if the company needs money. That is NOT a known. Currently we know they had $236 million cash on March 31st. If they underperformed badly in Q2, they still would have a lot of cash at this time.
Molycorp has usually raised cash sooner rather than later. So it is reasonable to wonder if they are considering it at this time. But then again if they did not underperform in Q2, they would have quite a reasonable amount of cash on hand. Enough to consider another cash raise unnecessary.
Apollo makes money if Molycorp turns profitable. So do longs. Apollo is unconcerned about stock offerings, as they add to the cash available for Molycorp. That allows for further time for profitability.
Apollo gets VERY little in bankruptcy. In that case. Molycorp has to have no cash to pay the bills. The only assets are the idle facilities, operating under bankruptcy protection (in the US, Canada, China, and world wide laws). After a while, a bankruptcy plan would be calculated. The maximum Apollo would get would be $51 million. Since bankruptcy judges allow the bondholders to bid on assets, there is some leeway to get more value, but the shareholders have a tertiary claim.