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 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.
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.
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.
"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 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 ...
OMG, that's like what, a $2500 investment. $3000 maybe. I try not to get scared when big money gets tossed around like that.
And fortunately, cerium is co-produced with Neodymium and Praseodymium.
Ah, I see you are unfamiliar with the word "if".
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.
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.
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.
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.
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.
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 ...
No. Rare earths are incredibly small in actual amount. Say Molycorp wants to ship 1000 mt to China. Call the density about 2 (table salt is about that) g/cm3. That is 2 metric tonnes per per cubic meter. That's 500 cubic meters of volume. A standard 20-ft cargo shipping container will hold about 33 cubic meters and 14 metric tonnes. There are higher load containers, but even using those, it is only about 70 cargo containers.
They probably are not shipping that much to China per month. There already is a problem in that more containers come in than go out (empty shipping back to China). So all you have to do is rail ship to an open port and it gets loaded and shipped really fast. Vancouver has been REALLY busy with other west coast ports off-line. Vancouver is about 2200 miles from San Diego. So shipping by rail would add $10,000-ish or about $10 per tonne to get to the furthest away west coast port.
The logistics of moving stuff requires planning around obstacles like strikes, but the actual physical amount of RE's is small ... they just are high priced.
And I think the densities of MCP material exports are higher than the table salt I used, and they can use heavier load cargo containers. I believe Mt Pass has a rail spur. At full operations they should be shipping about 2000 mt per month from Mt Pass. So they will probably be loading empty rail flat cars and shipping out a couple times per month. They could hit a bunch of the west coast ports pretty easily ... San Diego, LA, SF, Portland, Seattle, Vancouver.
I think they have to deliver on the business plan. So far they have failed every quarter to make the expected progress. For a long time they keep reporting losses and projecting a future time when the operations are breakeven, moving to profitable. All of those suggested points in time have been missed.
I'm going to keep holding this as a high risk stock. If they can deliver on the business plan, that fundamental change will drive the value of the company much higher. If they keep reporting losses, and don't deliver then they will go out of business.
Q4-2014 is complete and probably is another big loss. The Q3 report was about 1.2 months into the Q4 quarter and they said that HCl costs were high in Q3 and that was continuing so far thru Q4. The plan calls for HCl generation on site, using brine and energy. With energy costs so low, that is an attractive plan. But in the transcript all they say is that they are still experiencing start up issues from construction related problems.
Geoff Bedford: ...The program for chlor-alkali, the repair and refurbishment program, there is a capital cost to that or a maintenance cost of that; but it is really not material. We are thinking in the $3 million to $5 million range.
With respect to the fourth quarter and the out-quarters, we really did make significant progress with chlor-alkali over the quarter. We have been able to get that production back online and we are seeing a much greater volume of HCl coming out of that plant.
Michael Doolan: ... That not being the case ... not a significant impact on the overall cost structure. The big rise from the $16-and-change in Q2 to the $33 was unfortunately just the lack of volume through.
So they need to reduce the chemical costs, and to increase the production rate, and hit the business plan targets, but so far, they are currently limited by the acid supply, which follows the other limits, which follow other problems.
Progress would move the stock price.
You are right. I had to go look it up. I was cognizant of the rules when I had a stock at delisting prices in the recession ... but they changed the rules during that time.
The 30 trading day period ending on a calendar month end is an odd one. A simple 30-day trading period would make more sense as a rule. What if MCP traded at $1.01 for Jan 3rd to Feb 26th, but then closed at $0.99 on Feb 27th (end of calendar month)?
As an exercise, there are 19 market days left in January ... the 5th to the 30th, minus the MLK holiday. So I think the 30 days prior is back to December 17th/18th. The average for the last 10-ish days is about $0.80. So 20 days at $1.10 average and a close over $1 would re-set the clock on January 3th.
The Feb 27th close has a 30 market day window from Jan 16th (MLK holiday Monday 1-19).
The rules look like they change to a simple 30-market day average if the company provides a plan. I believe it is a plan to just expect better results and better stock prices.
I'm a bit surprised by the continued sub-$1 stock price. IMO, the company performance should be resolved in the next 6 months ... we should know if they will survive or fail in that window. If they are on a survival path then the stock price will be higher.
I tend to look at the stock price as reflecting the odds. Odds on the long term, as well as the near term reporting expectations. The stock price indicates investors expect bad Q4-2014 numbers and don't expect much chance of the long term survival.
I wonder if MCP will have a PR that basically pre-announces the Q4 range, as they have several times lately. Perhaps an update on Chlor-alkali operation with numbers on how low the production was with the expensive acid burden on costs.
I think there is a good chance of a daily close over $1 prior to the Q4 report. And a single day with a close over $1 will reset the clock. JMO, but I am surprised at how low the stock price went, and how it has stayed low.