Molycorp’s Interim CEO Determined to Strengthen Company’s Finances

on Dec 14, 2012
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US rare earths producer Molycorp (NYSE:MCP) has set the strengthening of the company’s finances as a priority for its new interim chief executive, Constantine Karayannopoulos, as the miner faces up to falling prices for its principal products and rising costs of its capital spending programme at its mine in California, The Financial Times reported on 14 December 2012.

**Molycorp Leadership Change amid SEC Investigation**
On Tuesday, a month after Molycrop, revealed that it was under investigation by the US Securities and Exchange Commission (SEC) over the accuracy of its public disclosures, the company’s CEO Mark Smith was fired by the board. Molycorp’s official statement was that Mr Smith’s departure had “absolutely nothing to do with the investigation”. The company’s chairman Ross Bhappu said that the board decided to replace Mr Smith because Molycorp had reached “a natural inflection point, as it transitions its focus from development to ongoing operations”. Following the board’s decision, the rare earths producer appointed Constantine Karayannopoulos as interim President and CEO of Molycorp and said that it is undertaking a search for a permanent replacement of Mr Smith.

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**New CEO’s Intensified Drive for Cash**
Soon after the company’s leadership changes, Mr Karayannopoulos have set his agenda as Molycorp’s CEO. According to the FT report, citing a company’s statement, the interim replacement’s main objectives, will be securing “a sufficient liquidity cushion” by means of cost cuts, cash generation, fresh credit facilities and “other sources.” This focus on financial stabilisation has become increasingly important for Molycorp amid the recently tough condition of the rare earths market.

Rare earth elements (REEs), such as praseodymium and neodymium, are essential for a range of hi-tech products and industrial processes. China’s production of the 17 key substances accounts for about 95 per cent of the total global output, which has fuelled concerns about its dominance, but it has also caused certain excitement about the prospects for rival suppliers such as Molycorp, which is currently the largest producer of rare earth metals outside China. Yet the subsequent increase in supply and pipeline supply of rare earth metals has brought prices down. According to an information services firm, MetalMiner, the price in China of cerium oxide – one of Molycorp’s main products – used for polishing glass, fell from about $21,300 per tonne a year ago to about $9,150 this month. Over the same period, another principal product of the company, lanthanum oxide, has also halved in price from about $20,500

per tonne to about $9,470 per tonne.
!m[US Rare Earths Producer Struggles with Rising Costs and Falling Prices for Its Products ](/uploads/story/1034/thumbs/pic1_inline.png)While REE prices are tumbling, Molycorps is also struggling amid the growing cost of raising production at its Mountain Pass mine in California. Recently, the company has been investing heavily in its Project Phoenix at Mountain Pass. As a result, by the end of the year, production at the rare earths mine will be running at the target rate for the first phase of the project — annualised 19,050 tonnes of rare earth oxide equivalent per year. Yet, amid this overall positive outlook, the cost of the site development has risen sharply. At the start of the year, the company estimated the cost of the project’s two phases at $781 million, while latest estimates see the price tag of the venture jumping to $1.25 billion. That spending contributed to a $1.31 billion cash outflow in the nine months to September, sharply up from the outflow of $169 million in 2011’s equivalent period.

This double squeeze on Molycorp’s finances has sent its shares 87 per cent down from their peak at more than $79 last year to only $10.70 in midday trading on Thursday.
**From Net Cash to Net Debt**
This recent rare earth market situation has pushed Molycorp from net cash to net debt of $780 million during the last financial year. The company raised $528 million in an issue of convertible bonds and shares in August. Earlier this week, JPMorgan analysts said that they expected the US rare earth producer would have to raise additional capital early next year.
Despite the current financial challenges, Molycorp executives are bullish about long-term prospects for rare earth metals. They reject the conspiracy theory that suggests China is trying to discourage rival producers by allowing prices to collapse. Analysts warn, however, that rare earth prices could fall further as increased output comes on to the market not just from China, but from rivals from elsewhere, including Molycorp and Lynas (ASX:LYC) of Australia.

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