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Molycorp (MCP) scheduled for July 29, Thursday |
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$1.3bb market cap at price range mid-point of $16 |
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SUMMARY |
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. Plans to spend $511 million through 2012 to restart mining operations for the largest rare earth element mine outside China. |
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. In the periodic table, rare earth elements are lower atomic numbered ("light") elements. Uranium is a "heavy" element |
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. Wants to be seen as an integrated high-tech company rather than an open pit mining company, with long term profits coming from magnet (and other) production, not from open pit mining |
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. Technology applications include high-tech, renewable-energy, and defense-related sectors |
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. Estimated 30 year mine life |
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VALUATION |
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. Valuation seems high & somewhat greedy on the part of the private equity investors, especially because $511mm needs to be spent first to make the mine a viable economic entity |
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. Private equity investors bought the mine from Chevron June 12, 2008, about two years ago |
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. Pre-IPO valuation is 10.7 times pre-IPO net worth of $82mm |
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. 10.7 = $879/$82 |
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. $879mm is the pre-money valuation |
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. Pre-money valuation = post money valuation less new investment = |
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= $1.3bb (post IPO market cap at price range mid-point of $16), less $421mm (IPO proceeds) = $879mm |
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BUSINESS |
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. Expects to be one of the world's most integrated producers of rare earth products, including oxides, metals, alloys and magnets |
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. MCP’s objective is to be a mine-to-magnet supply chain Mountain Pass Open Pit Mine |
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. Molycorp plans to invest $500 million to reopen and expand the mine Mountain Pass mine on the border of southern California & Nevada. |
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. The only rare earth oxide (REO) -- also known as rare earth elements (REE) -- producer in the Western hemisphere and owns one of the world’s largest, most fully developed rare earth projects outside of China
. The Mountain Pass Open Pit Mine -- in California 15 miles from the Nevada border is at an altitude of 4,728 feet. |
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. Upon reaching full planned production rates for REOs in 2012, MCP expect to be in a position to supply a substantial portion of the U.S. demand and also sell to export markets. |
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RESTART MINING OPERATIONS |
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. Expects to produce at the rate of 19,050 mt of REO per year by the end of 2012 |
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. Expects to have the capability to increase production to approximately 40,000 mt of REO per year, if warranted by market conditions.
. Prior to the expected completion of modernization and expansion efforts by the end of 2012, expects to produce approximately 3,000 mt in the aggregate of cerium products, lanthanum concentrate, didymium oxide and heavy rare earth concentrates in each of 2010 and 2011 from stockpiled feedstock. |
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. In November 2009, entered into a non-binding letter of intent to acquire a third-party producer of rare earth metals and alloys in the United States, although has not yet been able to enter into a definitive agreement |
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PRICE HISTORY |
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. As a result of the global economic crisis, rare earth product prices declined by approximately 50% during 2008 and through the third quarter of 2009.
. According to Metal Pages, from October 2009 to mid-June 2010, prices for rare earths have risen by approximately 70% on average.
. Furthermore, over the same period, prices for some of the most common rare earths (cerium oxide, lanthanum oxide, neodymium oxide, didymium oxide and rare earth carbonate) have risen by more than 80% on average. |
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FORECASTED GLOBAL SUPPLY DEFICIT |
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Unless Mountain Pass |
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. Given China’s estimated consumption levels and the limitations its government has put on exports, Roskill projects a global deficit beginning in 2011 without the advent of production from new projects, such as Mountain Pass.
. Limits on rare earth exports from China and the lack of available substitutes make the development of new sources of REEs (rare earth elements) essential to meet the growing demand for existing and emerging technologies, such as hybrid and electric vehicles, wind power turbines, compact fluorescent light bulbs, hard disk drives and dual use electronics. |
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STOCKPILE PROGRAMS |
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. China has also announced a national stockpile program, as has South Korea.
. Additionally, Japan has increased its national stockpile program.
. The U.S. Department of Defense is conducting a study, which is expected to be completed by September 2010, to determine its rare earth requirements and supply chain vulnerabilities and whether to build a strategic stockpile.
. These stockpile programs will likely accelerate the pace of the projected global REE deficit. |
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US Federal Government |
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. U.S. federal government investments and policies may materially increase end-market demand for our rare earth products.
. For example, the U.S. federal government recently approved $45 billion in grant funding and loan guarantees directed toward wind power generation projects and hybrid and electric vehicles. Pending energy legislation may also increase demand for clean technology applications, which use rare earth products. |
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GLOBAL DEMAND |
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. According to IMCOA and Roskill, total demand for rare earths outside of China is expected to increase at a compound annual growth rate, or CAGR, of approximately 4% to 5% between 2008 and 2014.
. In addition, according to Roskill, global demand for the more important magnetic rare earths, neodymium, praseodymium and dysprosium, is expected to grow at CAGRs of approximately 8%, 6% and 6%, respectively, over the same period. Both IMCOA and Roskill estimate that total global demand for rare earths is expected to increase from 124,000 mt in 2008 to 180,000 mt in 2014, which results in a CAGR of approximately 6% for that period.
. Total demand outside of China in 2008 of approximately 50,000 mt, according to Roskill, with rapid growth expected by industry analysts. |
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GLOBAL SUPPLY |
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. Upon completion of the modernization and expansion efforts, MCP will have the ability to produce 19,050 mt of REO per year to supply the non-Chinese demand and expect to have the capability to increase production to approximately 40,000 mt of REO per year, if warranted by market conditions. |
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. According to Roskill, global REO production in 2008 was approximately 119,220 mt, of which only approximately 4,220 mt originated from outside of China, with Molycorp producing approximately 1,700 mt from its stockpiles and Russian producers producing approximately 2,500 mt. |
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China tightens supply
. China has dominated the global supply of REOs for the last ten years and, according to Roskill, accounted for approximately 96% of global REO production in 2008. |
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. Even with MCP’s planned production, global supply is expected by analysts to remain tight due to the combined effects of growing demand and actions taken by the Chinese government to restrict exports. |
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. The Chinese government heightened international supply concerns in August 2009 when China’s Interior Ministry signaled that it would further restrict exports of Chinese rare earth resources. Citing the importance of REE availability to internal industries and the desire to conserve resources, the Chinese government has announced export quotas, increased export tariffs and introduced a "mining quotas policy" that, in addition to imposing export quotas and export tariffs, also imposes production quotas and limits the issuance of new licenses for rare earth exploration.
. According to IMCOA, China’s export quotas have decreased from approximately 65,600 mt of REO in 2004 to approximately 50,100 mt of REO in 2009 |
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30 YEAR ANTICIPATED MINE LIFE -- 600,000 metric tons |
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. Based on estimated reserves and an expected annual production rate of 19,050 mt of REO, MCP’s expected mine life is in excess of 30 years.
RARE EARTH ELEMENTS (REE) APPLICATIONS
Some outside China are concerned that because rare earths are essential to some high-tech, renewable-energy, and defense-related technologies, the world should not be reliant on a single source |
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. Clean-Energy Technologies: hybrid and electric vehicles, wind power turbines and compact fluorescent lighting
. High-Technology Applications: miniaturization of cell phones, personal digital assistant devices, digital music players, hard disk drives used in computers, computing devices, "ear bud" speakers and microphones, as well as fiber optics, lasers and optical temperature sensors
. Critical Defense Applications: guidance and control systems, communications, global positioning systems, radar and sonar; and
. Advanced Water Treatment: industrial, military, homeland security and domestic and foreign aid applications. |
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MOUNTAIN PASS MINE HISTORY |
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. The Mountain Pass deposit was discovered by a uranium prospector in 1949, who noticed the anomalously high radioactivity. The Molybdenum Corporation of America bought the mining claims, and small-scale production began in 1952. Production expanded greatly in the 1960s, to supply demand for europium used in color television screens. |
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. The deposit was mined in a larger scale between 1965 and 1995. During this time the mine supplied most of the world wide rare earth metals consumption. |
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. The Molybdenum Corporation of America changed its name to Molycorp Inc. in 1974. The corporation was acquired by Union Oil in 1977, which in turn became part of Chevron Corporation in 2005.[citation needed] Another source lists its owner as Unocal from 1976 to 2005. |
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. The mine closed in 2002, in response to both environmental restrictions and lower prices for REEs. The mine has been mostly inactive since 2002, though processing of previously mined ore continues at the site. |
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. In 2008, Chevron sold the mine to privately held Molycorp Minerals LLC, a company formed to revive the Mountain Pass mine. |
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ENVIRONMENTAL IMPACT |
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. In 1998, chemical processing at the mine was stopped after a series of wastewater leaks. Hundreds of thousands of gallons of water carrying radioactive waste spilled into and around Ivanpah Dry Lake.[6] |
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. In the 1980s, the company began piping wastewater as far as 14 miles to evaporation ponds on or near Ivanpah Dry Lake, east of Interstate 15 near Nevada. This pipeline repeatedly ruptured during cleaning operations to remove mineral deposits called scale. The scale is radioactive because of the presence of thorium and radium, which occur naturally in the rare earth ore. A federal investigation later found that some 60 spills—some unreported—occurred between 1984 and 1998, when the pipeline was shut down. In all, about 600,000 gallons of radiological and other hazardous waste flowed onto the desert floor, according to federal authorities.
. By the end of the 1990s, Unocal had been hit with a cleanup order and a San Bernardino County district attorney's lawsuit. The company paid more than $1.4 million in fines and settlements. After preparing a cleanup plan and completing an extensive environmental study, Unocal in 2004 won approval of a county permit that allowed the mine to operate for another 30 years. The mine also passed a key county inspection in 2007
COMPETITION |
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. According to Roskill, global production of rare earth products was approximately 119,220 mt of REO in 2008. China accounted for approximately 96% of this total. The majority of the remaining production in 2008 was from Mountain Pass and Russia.
. Although exploration programs for REEs exist outside of China, Russia, Mountain Pass and Australia, none of the deposits that are the subject of these programs is currently in production.
. In addition, the April 2010 U.S. GAO briefing stated that, for a typical exploration-stage mine, once a company has secured the necessary capital to start a mine, government and industry officials said it can take from seven to 15 years to bring a property fully online, largely due to the time it takes to comply with multiple state and federal regulations. |
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R&D |
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As of March 31, 2010, the product development group consisted of 17 scientists and engineers
INTELLECTUAL PROPERTY |
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. Has a proven technology and product development group and as of June 1, 2010, held 18 issued and pending U.S. patents and patent applications, and 146 issued and pending foreign patents and patent applications.
. Intends to rely on patented products, such as XSORBX®, and related licensing agreements to establish proprietary markets for low demand REEs. |
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USE OF IPO PROCEEDS
$421mm |
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Under the current business plan, MCP intends to spend |
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$511 million through 2012 to restart mining operations, construct and refurbish processing facilities and other infrastructure at the Mountain Pass facility and expand into metals and alloys production, the costs of which referred to as modernization and expansion costs. |
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Also plans to use up to approximately $27.4 million, all of which is expected to be used in 2010, for letters of credit and/or cash collateral to secure surety bonds issued for the benefit of certain regulatory agencies in connection with the Mountain Pass facility closure and reclamation obligation. |
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Anticipates that the remainder of modernization and expansion costs will be funded through traditional debt financing, project financing, additional public or private equity offerings and/or federal government programs including the U.S. Department of Energy loan guarantee program for which MCP submitted an application in June 2010. |
