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MOLYCORP, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(Edgar Glimpses Via Acquire Media NewsEdge)
In this Quarterly Report on Form 10-Q, unless the context requires otherwise,
references to "Molycorp," "we," "our" or "us" refer to Molycorp, Inc. and its
consolidated subsidiaries. As used herein, a ton is equal to 2,000 pounds, the
term "mt" means a metric tonne (equal to 2,205 pounds), and the term "Rest of
World" means the entire world except China. For definitions of certain rare
earth-related and mining terms, see "Glossary of Selected Mining Terms."
This Quarterly Report on Form 10-Q contains forward-looking statements that
represent our beliefs, projections and predictions about future events or our
future performance. You can identify forward-looking statements by terminology
such as "may," "will," "would," "could," "should," "expect," "intend," "plan,"
"anticipate," "believe," "estimate," "predict," "potential," "continue" or the
negative of these terms or other similar expressions or phrases. These
forward-looking statements are necessarily subjective and involve known and
unknown risks, uncertainties and other important factors that could cause our
actual results, performance or achievements or industry results to differ
materially from any future results, performance or achievement described in or
implied by such statements.
Risk factors and uncertainties that may cause actual results to differ
materially from expected results include, among others: the need to secure
additional capital to implement our business plans, and our ability to
successfully secure any such capital; our ability to complete our planned
capital projects, such as our modernization and expansion efforts, including
achieving an annual production capacity of 19,050 mt at our Mountain Pass,
California rare earth mine and processing facility, or the Molycorp Mountain
Pass facility, which we refer to as Project Phoenix Phase 1, and our second
phase capacity expansion plan, which we refer to as Project Phoenix Phase 2, and
reach full planned production rates for rare earth oxides, or REO, and other
planned downstream products, in each case within the projected time frame; the
success of our cost mitigation efforts in connection with Project Phoenix, which
if unsuccessful, might cause our costs to exceed budget; the final costs of our
planned capital projects, such as Project Phoenix Phase 1, including the
accelerated start-up of the Molycorp Mountain Pass facility, and Project Phoenix
Phase 2, which may differ from estimated costs; our ability to successfully
integrate Neo Material Technologies, Inc. (now Molycorp Minerals Canada ULC, or
Molycorp Canada), with our operations; our ability to achieve fully the
strategic and financial objectives related to the acquisition of Molycorp
Canada, including the acquisition's impact on our financial condition and
results of operations; and unexpected costs or liabilities that may arise from
the acquisition, ownership or operation of Molycorp Canada. Also as a result of
the Molycorp Canada acquisition, our business performance may be materially
affected by a number of other factors and uncertainties including, but not
limited to: the rate of exchange of the U.S. dollar to the Canadian dollar, the
Japanese yen, and the Chinese Renminbi; new products pricing; the competitive
environment for these new products; unexpected actions of domestic and foreign
governments; and various events which could disrupt operations, including
natural events and other risks. Other risk factors and uncertainties that may
cause actual results to differ materially from expected results include:
uncertainties associated with our reserve estimates and non-reserve deposit
information, including estimated mine life and annual production; uncertainties
related to feasibility studies that provide estimates of expected or anticipated
costs, expenditures and economic returns, REO prices, production costs and other
expenses for operations, which are subject to fluctuation; uncertainties
regarding global supply and demand for rare earths materials; uncertainties
regarding the results of our exploratory drilling programs; our ability to enter
into additional definitive agreements with our customers and our ability to
maintain customer relationships; our sintered neodymium-iron-boron, or NdFeB,
rare earth magnet joint venture's ability to successfully manufacture magnets
within its expected timeframe; our ability to successfully integrate other
acquired businesses; our ability to maintain appropriate relations with unions
and employees; our ability to successfully implement our "mine-to-magnets"
strategy; environmental laws, regulations and permits affecting our business,
directly and indirectly, including, among others, those relating to mine
reclamation and restoration, climate change, emissions to the air and water and
human exposure to hazardous substances used, released or disposed of by us;
uncertainties associated with unanticipated geological conditions related to
mining; and those risks discussed and referenced in the section entitled "Risk
Factors" described in our Annual Report on Form 10-K for the year ended
December 31, 2011.
Any forward-looking statement you read in this Quarterly Report on Form 10-Q
reflects our current views with respect to future events and is subject to these
and other risks, uncertainties and assumptions relating to our operations,
operating results, growth strategy and liquidity. You should not place undue
reliance on these forward-looking statements because such statements speak only
as to the date when made. We assume no obligation to publicly update or revise
these forward-looking statements for any reason, or to update the reasons actual
results could differ materially from those anticipated in these forward-looking
statements, even if new information becomes available in the future, except as
otherwise required by applicable law.
The following discussion and analysis should be read in conjunction with our
September 30, 2012 unaudited condensed consolidated financial statements and
related notes included herein. This Quarterly Report on Form 10-Q also contains
statistical data and estimates we obtained from industry publications and
reports generated by third parties. Although
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we believe that the publications and reports are reliable, we have not
independently verified their data.
Overview
We are one of the world's leading rare earth products and rare metals companies
that combine a world-class rare earth resource at Mountain Pass, California,
with world-leading ultra-high-purity rare earth and rare metal materials
processing capabilities. We are vertically integrated across the global rare
earth mine-to-magnetics supply chain and we produce custom engineered materials
from 13 different rare earths, plus yttrium, with purity levels of up to 6N
(99.9999%), and from five other metals (niobium, tantalum, gallium, indium and
rhenium) at purity levels of up to 8N (99.999999%).
Rare earth products are critical inputs in many existing and emerging
applications including: clean energy technologies, such as hybrid and electric
vehicles and wind power turbines; multiple high-tech uses, including mobile
devices, fiber optics, lasers and hard disk drives; critical defense
applications, such as guidance and control systems and global positioning
systems; and advanced water treatment technology for use in industrial, military
and outdoor recreation applications. Global demand for rare earth elements, or
REEs, is projected by industry analysts to steadily increase both due to
continuing growth in existing applications and increased innovation and
development of new end uses. We have made significant investments, and expect to
continue to invest, in developing technologically advanced applications and
proprietary applications for individual REEs.
The foundation for our "mine-to-magnets" strategy is our Molycorp Mountain Pass
facility. Our Molycorp Mountain Pass facility is the largest, most fully
developed rare earth mine outside of China and has been producing rare earth
products for approximately 60 years. Upon completion of Project Phoenix Phase 1,
which we anticipate to occur in the fourth quarter of 2012, we expect our
Molycorp Mountain Pass facility to have production cash costs lower than those
publicly reported for China by government officials and those reported for other
non-Chinese rare earth projects. We are targeting a full planned production rate
of approximately 19,050 mt of REO per year in the fourth quarter of 2012, an
annual production capacity of 40,000 mt of REO by the end of 2012 and, if
customer demand and end-market conditions warrant, a full planned production
rate of 40,000 mt of REO per year as early as mid-2013.
We also own several of the leading rare earth processing facilities in the
world. Our Molycorp Silmet facility, located in Sillamäe, Estonia, is one of the
largest REO and rare metals producers in Europe. Our Molycorp Metals & Alloys,
or MMA, facility, located in Tolleson, Arizona, is the only producer of
neodymium and samarium magnet alloy and other specialty alloy products in the
United States.
We also have created a joint venture with Daido Steel Co., Ltd., or Daido, and
Mitsubishi Corporation, or Mitsubishi, in the form of a private company,
Intermetallics Japan, or IMJ, to manufacture sintered NdFeB permanent rare earth
magnets. The sintered NdFeB magnet manufacturing facility we are constructing in
Japan through IMJ remains on schedule for production in early 2013. The
next-generation magnets the joint venture will manufacture do not depend on the
use of patents held by other magnet companies and will deliver greater
performance with less reliance on dysprosium, a relatively scarce rare earth.
The joint venture has been provisionally awarded a supply agreement for a
next-generation electric vehicle with a major automotive manufacturer. As demand
for sintered NdFeB magnets continues to rise in the advanced automotive, wind
energy, home appliance, industrial motors and other markets, all of the joint
venture partners are prepared to invest in additional facilities as needed.
As a result of the Molycorp Canada acquisition in June 2012, we became a leading
global producer, processor and developer of NdFeB magnetic powders, or Neo
Powders, rare earths and zirconium based engineered materials and applications
and other rare metals and their compounds. These innovative products are
essential in many of today's high-technology products. Neo Powders are used in
the production of high performance, bonded NdFeB permanent magnets, which are
found in micro motors, precision motors, sensors and other applications
requiring high levels of magnetic strength, flexibility, small size and reduced
weight. This acquisition allows us to manufacture also a line of mixed rare
earth/zirconium oxides and to reclaim, refine and market high value niche metals
and their compounds including gallium, indium and rhenium used in wireless,
light emitting diode, or LED, flat panel display, turbine, solar and catalyst
applications. Through the Molycorp Canada acquisition we have expanded our
operations to include joint ventures and majority owned manufacturing facilities
in Jiangyin, Jiangsu Province, China; Zibo, Shandong Province, China; Tianjin,
China; Hyeongok Industrial Zone in South Korea; Korat, Thailand; Stade, Germany;
Sagard, Germany; Peterborough, Ontario; Napanee, Ontario; Blanding, Utah; and
Quapaw, Oklahoma. Additionally, we now conduct research and product development
through laboratories in Singapore and Abingdon, United Kingdom.
Our combined workforce of approximately 2,677 employees includes scientists,
engineers, chemists, technologists and highly skilled workers in 27 locations
across 11 countries.
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Material Changes in Results of Operations
The comparability of our operating results during 2012 and 2011 is significantly
affected by the Molycorp Canada acquisition on June 11, 2012. This Quarterly
Report on Form 10-Q includes the results of Molycorp Canada for the third
quarter of 2012 and for the period from June 12, 2012 to September 30, 2012.
Recent Developments
Issuance of 6.00% Convertible Senior Notes due 2017 and Concurrent Offering of
Shares of Common Stock
On August 22, 2012, in separate underwritten public offerings, we issued $360
million aggregate principal amount of our 6.00% Convertible Senior Notes due
2017, which we refer to as the 6.00% Convertible Notes, and 12,000,000 shares of
our common stock, which we refer to as the Primary Shares, at a price to the
public of $10.00 per share. Certain of our officers, directors and other related
parties participated in both offerings, but no underwriting fees were paid with
respect to the purchases by the insiders. On August 28, 2012, the underwriters
of the 6.00% Convertible Notes exercised their option to purchase an additional
$54 million aggregate principal amount of the Notes. On August 31, 2012, the
underwriters of the Primary Shares exercised their option to purchase an
additional 1,800,000 Primary Shares.
Concurrently with the offering of the 6.00% Convertible Notes and the Primary
Shares, we entered into a share lending agreement with Morgan Stanley Capital
Services LLC, or MSCS, an affiliate of Morgan Stanley & Co. LLC, under which we
agreed to loan to MSCS up to 13,800,000 shares of our common stock. We entered
into the share lending agreement to facilitate the 6.00% Convertible Notes
offering.
Acquisition of Neo Material Technologies Inc. (now known as Molycorp Canada)
On June 11, 2012, we completed the acquisition of all of the outstanding equity
of Molycorp Canada's predecessor company pursuant to the terms of an arrangement
agreement, which we refer to as the Arrangement Agreement, for an aggregate
purchase price of approximately $1,192.3 million. Pursuant to the Arrangement
Agreement, Molycorp Canada's former shareholders elected to receive: a) cash
consideration equal to Cdn $11.30 per share of the predecessor company's common
stock; b) share consideration of 0.4242 shares of Molycorp common stock or
0.4242 shares, which we refer to as the Exchangeable Shares, issued by MCP
Exchangeco Inc., our wholly-owned Canadian subsidiary, which are exchangeable
for shares of our common stock on a one for one basis, per each share of the
predecessor company's common stock; or c) a combination of cash and shares of
Molycorp common stock or Exchangeable Shares, all subject to the proration
mechanics set forth in the Arrangement Agreement. The consideration paid to
Molycorp Canada's former shareholders was comprised of approximately $908.2
million in cash, exclusive of realized losses on the contingent forward contract
to purchase Canadian dollars, accounted for a separate transaction apart from
the business combination. Additionally, approximately 13,545,426 shares of
Molycorp common stock and 507,203 Exchangeable Shares were issued and
collectively valued at $284.1 million based on the closing price of the
Company's common stock on the acquisition date in accordance with the relevant
accounting guidance.
Substantial Repayment of 5.00% Subordinated Unsecured Convertible Debentures
As a result of the Molycorp Canada acquisition, we assumed $230.0 million
principal amount of subordinated unsecured convertible debentures due December
31, 2017 (the "Debentures") that bear interest at an annual rate of 5.00%, as
further discussed in Note 14 of the Condensed Consolidated Financial Statements
included in this Quarterly Report on Form 10-Q. In August 2012, holders of $9.4
million aggregate principal amount of Debentures elected to convert, while
holders of $217.9 million aggregate principal amount of Debentures elected to
have their Debentures repurchased for cash plus accrued interest. As a result of
the conversion, a total of $8.0 million, including accrued interest, was paid in
cash with the remainder converted into 99,723 shares of our common stock. As of
September 30, 2012, $2.7 million principal amount of the Debentures was
outstanding.
Modernization and Expansion of our Molycorp Mountain Pass Facility
Project Phoenix remains on track to begin producing at our Phase 1 annual rate
of 19,050 mt of REO in the fourth quarter of 2012. Additionally, we are on track
to achieve an annual production capacity of 40,000 mt of REO by the end of 2012
and, if customer demand and end-market conditions warrant, a full planned
production rate of 40,000 mt of REO per year as early as mid-2013.
Project Phoenix construction advanced to the point where the concentrate
production circuit became operational. This means that we are now producing rare
earth concentrate at our Molycorp Mountain Pass facility with new processes and
in new
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facilities as part of Project Phoenix, including the following:
• Mining of approximately 2,500 metric tons of fresh ore and/or overburden
per day, 4 days/week
• Combined Heat & Power, or CHP, Unit
• Crushing / Blending
• First Stage Crack Facility
• Mill & Flotation Circuit
• Cerium Production Unit
• Paste Tailings Facility
• Paste Tailings Permanent Disposal Facility
• Natural Gas Pipeline Lateral
The concentrate being produced with fresh ore at the Molycorp Mountain Pass
facility is being processed into separated REOs by our existing separations
facility. In addition, concentrates are being shipped to our existing
separations facilities at the Molycorp Silmet, and is being stockpiled for
eventual processing in our new separations facilities under construction at the
Molycorp Mountain Pass facility as part of Project Phoenix.
Our on-site CHP plant began feeding low-cost, high-efficiency electrical power
and steam to plants and buildings across the Molycorp Mountain Pass facility in
early September 2012. Installing CHP technologies at the Molycorp Mountain Pass
facility contributes to several major goals in our business plan:
• Reducing our Cost of Production - We expect that producing our own
electricity, heat, and steam will reduce our cost of power from what we
traditionally paid at the Molycorp Mountain Pass facility, of $0.16 cents
per kilowatt-hour for non-interruptible service, to less than $0.03 per
kilowatt-hour. This will help us in achieving the lowest cost of
production in the industry.
• Maintaining Environmental Superiority - We designed our CHP plant to be
extraordinarily energy efficient. In fact, when fully operational, it is
expected to operate above 80% efficiency, with a peak efficiency as much
as 85% (Lower Heating Value). That approaches the maximum practical
efficiency for a thermal power generation plant, which we expect will
result in less emissions and reduced energy consumption for the same
output.
In mid-September 2012, we achieved two other milestones in the modernization and
expansion of our Molycorp Mountain Pass facility: start-up and commissioning
operations of our new water treatment plant and our neodymium/praseodymium, or
NdPr, separation facility. When fully operational, the Project Phoenix water
treatment facility will help us recycle process water that historically was
treated as wastewater. This technology puts us on track to achieving our goals
of operating as a near-zero wastewater discharge facility and maintaining
environmental superiority in rare earth production at the Molycorp Mountain Pass
facility. This technology also helps drive down our production costs. The
start-up and commissioning of our NdPr separation facility is also a very
significant milestone to achieving Phase 1 production in the fourth quarter of
2012, and ultimately effectuating Molycorp's vertical integration business
model. Being able to feed NdPr oxide from our high efficiency operations at
Mountain Pass to our NdFeB magnet powder and sintered NdFeB magnet manufacturing
supply chains is core to our entire mine-to-magnets business strategy.
During the third quarter of 2012, we also started up our new Project Phoenix
heavy rare earth concentrate facility at Mountain Pass. This facility will
produce heavy rare earth concentrate from freshly mined Mountain Pass ore
containing the full range of heavy rare earth elements, such as samarium,
europium, gadolinium, terbium, dysprosium, and others. Because of our
acquisition of Molycorp Canada, we have the ability to proceed directly to
separation and purification of that concentrate into many high-purity, custom
engineered heavy rare earth products. As our global business expands, we plan
to incorporate the high-purity separations technologies now operating in our
Jiangyin facility in China to other Molycorp locations, such as Mountain Pass,
California; Tolleson, Arizona; and/or Sillamäe, Estonia.
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Factors Affecting our Results of Operations
Sales
The quantities we sell are affected by the production capabilities of our rare
earth products and rare metals processing facilities, and by a combination of
global and regional supply and demand factors, including the production level of
certain industries relying on rare earth products, such as the automotive and
electronics industries, China REEs export quotas and regulations, prices of
REEs, and the demand and sophistication of downstream applications with rare
earths content. Sales of our products are also subject to seasonal decreases in
the first quarter of each year as companies react to the Chinese New Year
holiday shutdown.
Cost of Sales
Our cost of sales includes the processing costs and the cost of certain raw
materials we purchased from outside vendors, which we allocated to the products
we produced at our operating facilities. In addition, our cost of sales reflects
the cost allocated to the inventory we acquired as part of various business
acquisitions. Because many of our costs are fixed, as our production increases
or decreases, our average cost per metric ton produced decreases or increases,
respectively. Primary production costs include direct labor and benefits,
chemicals, natural gas, depreciation and amortization, electricity, maintenance,
operating supplies and other plant overhead expenses. Our cost of sales may also
reflect the write-down of inventory based on current prices for our products,
which could materially affect our consolidated net results of operations.
Our most significant variable costs are chemicals, raw materials and
electricity. In early September 2012, our on-site CHP plant began feeding
low-cost, high efficiency electrical power and steam to plants and buildings
across the Molycorp Mountain Pass facility. As a result, natural gas costs will
replace third-party electricity costs, which we expect will help us bring our
power costs down significantly as further described in the Recent Developments
section above. In the future, we also intend to produce more of our chemicals
for the Molycorp Mountain Pass facility at an on-site plant, which we expect
will reduce our variable chemical costs in that facility.
We expect our labor and benefits costs to increase through at least the
remainder of 2012 due to the addition of personnel and contractors required to
implement Project Phoenix Phase 1 and Project Phoenix Phase 2. In addition to
volume fluctuations, our variable costs, such as electricity, operating supplies
and chemicals, are influenced by general economic conditions that are beyond our
control.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist primarily of personnel
and related costs, including stock-based compensation, legal, accounting and
other professional fees, occupancy costs and information technology costs. We
continue to experience increased selling, general and administrative expenses as
we expand our business, including our recent acquisition of Molycorp Canada,
operate as a publicly traded company and construct our new facilities at
Mountain Pass.
Corporate Development
Our corporate development expenses consist of travel costs, legal and advisory
fees that we incur in connection with business acquisitions and other business
development activities we pursue as part of our "mine-to-magnets" strategy.
Research and Development
We incur expenses to improve the efficiency of our REO processing operations,
develop new applications for individual REEs, research value added rare metals
applications and perform exploratory drilling. These expenses, which we
anticipate to continue to increase, consist primarily of salaries, outside
labor, material and equipment. The acquisition of Molycorp Canada will further
bolster our research and development, or R&D, activities with the addition of
labs in Singapore and the United Kingdom and process development capabilities at
most of the production facilities.
Interest Expenses
We are incurring significantly higher interest costs as a result of issuing
additional indebtedness in 2012 to partially finance the Molycorp Canada
acquisition, including the repayment of Molycorp Canada's indebtedness, and to
fund the remaining capital expenditures under Project Phoenix Phase 1 and Phase
2. The substantial majority of our interest costs is currently capitalized.
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Income Taxes
We are a Subchapter C corporation and, therefore, are subject to federal and
state income taxes on our taxable income. We account for income taxes in
accordance with Accounting Standard Codification 740, Income Taxes. This
guidance requires the recognition of deferred tax assets and liabilities for the
tax effect of temporary differences between the financial statement and tax
basis of recorded assets and liabilities at enacted statutory tax rates. This
guidance also requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The recoverability of deferred tax assets is
based on both our historical and anticipated earnings levels and is reviewed
each reporting period to determine if any additional valuation allowance is
necessary when it is more likely than not that amounts will not be recovered. We
have concluded that no valuation allowance was required as of September 30,
2012, and a $2.2 million valuation allowance was required as of September 30,
2011.
We review our deferred tax assets and liabilities each reporting period using
the enacted tax rate expected to apply to taxable income for the period in which
the deferred tax asset or liability is expected to be realized. The statutory
income tax rates that are applied to our current and deferred income tax
calculations are significantly impacted by the jurisdictions in which we do
business. Changes in jurisdiction income tax rates and apportionment laws will
result in changes in the calculation of our current and deferred income taxes.
The effects of any changes are recorded in the period of enactment and can
increase or decrease the net deferred tax assets and liabilities on the balance
sheet.
Environmental
Our operations are subject to numerous and detailed environmental laws,
regulations and permits, including those pertaining to employee health and
safety, environmental permitting and licensing, air quality standards,
greenhouse gases, or GHG, emissions, water usage and pollution, waste
management, plant and wildlife protection, handling and disposal of radioactive
substances, remediation of soil and groundwater contamination, land use,
reclamation and restoration of properties, the discharge of materials into the
environment and groundwater quality and availability.
We retain, both within Molycorp and outside Molycorp, the services of
reclamation and environmental, health and safety, or EHS, professionals to
review our operations and assist with environmental compliance, including with
respect to product management, solid and hazardous waste management and
disposal, water and air quality, asbestos abatement, drinking water quality,
reclamation requirements, radiation control and other EHS issues.
We have spent, and anticipate that we will continue to spend, financial and
managerial resources to comply with environmental requirements. For example, we
have acquired enough air emission offset credits for both Project Phoenix
Phase 1 and Project Phoenix Phase 2. In addition, at our Molycorp Mountain Pass
facility during the third quarter of 2012 and 2011, we incurred operating
expenses of approximately $1.9 million and $2.5 million, respectively,
associated with environmental compliance requirements.
The costs we anticipate to incur as part of our on-going mine reclamation
activities at the Molycorp Mountain Pass facility, which we expect to continue
throughout closure and post-closure periods of our mining operations, are
included in asset retirement obligation disclosure in Note 13 of the Condensed
Consolidated Financial Statements, included elsewhere in this Quarterly Report
on Form 10-Q.
As part of our continuous efforts to comply with environmental laws and
regulations, in 2011 we identified liner defects in three of the onsite
evaporation ponds at the Molycorp Mountain Pass facility. This led to minor
groundwater contamination issues that are limited to a small area directly
underneath the evaporation ponds. In order to remediate this issue, we will
replace the primary lining system in two of our evaporation ponds. We estimate
the cost of these items to range between $2.4 million and $4.6 million, which
will be treated as capital expenditures in 2012. The evaporation ponds in which
the lining tears have been detected were substantially drained in 2011 to allow
for a detailed inspection of the lining system, and the related costs were
recorded as of December 31, 2011. We also estimated that we will incur
approximately $17.0 million for wastewater transportation and disposal costs in
2012, primarily for the removal and disposal of any wastewater generated in
excess of the existing evaporation capability of all ponds at the Mountain Pass
facility, until all facilities currently under construction as part of Project
Phoenix Phase 1 and Phase 2 are operational and properly coordinated. We have
already incurred $13.0 million of these costs through September 30, 2012.
We cannot predict the impact of new or changed laws, regulations or permit
requirements, including the matters discussed below, or changes in the way such
laws, regulations or permit requirements are enforced, interpreted or
administered. Environmental laws and regulations are complex, change frequently
and have tended to become more stringent over time. It is
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possible that greater than anticipated environmental expenditures will be
required in 2012 or in the future, including expenditures as a result of our
acquisitions of MMA, Molycorp Silmet and Molycorp Canada. We expect continued
government and public emphasis on environmental issues will result in increased
future investment for environmental controls at our operations. Additionally,
with increased attention paid to emissions of GHGs, including carbon dioxide,
current and future regulations are expected to affect our operations. We will
continue to monitor developments in these various programs and assess their
potential impacts on our operations.
Violations of environmental laws, regulations and permits can result in
substantial penalties, court orders to install pollution control equipment,
civil and criminal sanctions, permit revocations, facility shutdowns and other
sanctions. In addition, environmental laws and regulations may impose joint and
several liabilities, without regard to fault, for costs relating to
environmental contamination at our facilities or from wastes disposed of at
third-party waste facilities. The proposed expansion of our operations is also
conditioned upon securing the necessary environmental and other permits and
approvals. In certain cases, as a condition to procuring such permits and
approvals, we are required to comply with financial assurance requirements. The
purpose of these requirements is to assure the government that sufficient
company funds will be available for the ultimate closure, post-closure care
and/or reclamation at our facilities. We typically obtain bonds as financial
assurance for these obligations and, as of September 30, 2012, we had placed a
total of $28.8 million of surety bonds with California state and regional
agencies. These bonds require annual payment and renewal. In the second quarter
of each year, we are required to provide the State of California with an updated
estimate of the costs associated with the mine reclamation. This estimate is
reviewed and approved by the State of California, after which we are responsible
for making any necessary changes to surety bonds placed with the State of
California.
As a result of new construction activity at the Molycorp Mountain Pass facility
associated with our modernization and expansion project, additional lands have
been disturbed since the last mine reclamation cost estimate in 2010, resulting
in an increase in the mine reclamation obligation from $3.3 million to
$4.1 million. The additional $0.8 million surety amount was placed with the
County of San Bernardino and the State of California earlier in 2012. The EPA
has announced its intention to establish a new financial assurance program for
hardrock mining, extraction and processing facilities under the Federal
Comprehensive Environmental Response Compensation and Liability Act or the
"Superfund" law, which may require us to establish additional bonds or other
sureties. We cannot predict the effect of any such requirements on our
operations at this time.
Our Molycorp Sillamäe facility has an Integrated Environmental Permit, which
controls its operations in general, and Radiation Practice Licenses for the
management of radioactive materials. The Integrated Environmental Permit must be
renewed when and if we expand our operations in that facility. The Radiation
Practice Licenses are renewed approximately every five years. Some of Radiation
Practice Licenses are due for renewal in 2013 and some in 2015.
We are also subject both to Chinese national and local environmental protection
regulations, which currently impose a graduated schedule of fees for the
discharge of waste substances, require the payment of fines for discharges
exceeding the standards, and provide for the closure of any facility that fails
to comply with orders requiring it to cease or remedy certain activities causing
environmental damage. Our Chinese joint ventures, Jiangyin Jia Hua Advanced
Material Resources Co., Ltd., or Jiangyin, and Zibo Jia Hua Advanced Material
Resources Co., Ltd., or Zibo, produce waste water from their solvent extraction
processes. In the case of Jiangyin, its expansion in 1995 included an upgrading
of its waste water processing and treatment procedures, as a result of which its
waste water passes all environmental requirements. Jiangyin pays an agreed fee
once a year for the discharge of waste waters. In the case of Zibo, the plant
was designed to make use of waste water discharge facilities of an adjacent
petrochemical complex, which has a variable monthly charge based on usage. Zibo
is also obliged to pay a monthly environmental administration fee to the
municipal government of Linzi. Waste water has met the requirements set by local
authorities for all environmental standards. Both Jiangyin and Zibo were
inspected in 2012 as part of an environmental audit and have received the
Chinese Ministry of Environmental Protection's approval for compliance with
applicable environmental laws. However, there is no assurance that Chinese
national or local authorities will not impose additional regulations which would
require additional expenditures that may have a material adverse effect on the
profitability of the joint ventures.
As part of the recycling of gallium, indium, and rhenium scrap into saleable
metal, a significant degree of waste material is generated during the leaching
and ion-exchange-barren process. We have adequate procedures in place to ensure
that waste generated from these processes are appropriately contained and
disposed of in a safe and responsible manner. Our operations in Ontario, Canada
are subject to provincial regulation under the Ontario Ministry of Environment
and must periodically submit documentation to validate the waste disposal
process throughout the year.
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Discussion and Analysis of our Reportable Segments
In the third quarter of 2012, we reorganized our operations into four new
reportable segments to better reflect our primary activities as a global rare
earths and magnetics producer: Resources; Chemicals and Oxides; Magnetic
Materials and Alloys; and Rare Metals. The new composition of our reportable
segments is based on a combination of product lines and technologies that align
with our mine-to-magnet strategy. See Note 3 of the Condensed Consolidated
Financial Statements included elsewhere in this Quarterly Report on Form 10-Q
for further details.
The following analysis presents operating results on a gross basis (i.e., before
intercompany eliminations). We believe this presentation provides a better
understanding of the performance of each reportable segment in terms of
contribution to our vertically integrated operations. Some of the information
for the nine months ended September 30, 2012 is actually for the period from
June 12, 2012 (the beginning of the reporting period of Molycorp Canada) through
September 30, 2012.
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Three and Nine Months Ended September 30, 2012 and 2011
Three months ended
Magnetic
September 30, 2012 (In Chemicals and Materials and Corporate and Total
thousands) Resources Oxides Alloys Rare Metals Eliminations(a) other(b) Molycorp, Inc.
Sales:
External $ 17,150 $ 87,820 $ 74,789 $ 25,845 $ - $ 205,604
Intersegment 3,745 11,559 - - (15,304 ) -
Total sales $ 20,895 $ 99,379 $ 74,789 $ 25,845 $ (15,304 ) $ 205,604
Depreciation, amortization
and accretion $ (4,035 ) $ (5,685 ) $ (8,857 ) $ (1,715 ) $ - $ (43 ) $ (20,335 )
Operating (loss) income $ (23,966 ) $ 2,149 $ 1,419 $ (3,774 ) $ 369 $ (16,526 ) $ (40,329 )
(Loss) income before income
taxes and equity earnings $ (25,506 ) $ 1,201 $ 1,215 $ (3,812 ) $ 369 $ (17,212 ) $ (43,745 )
Total assets at September
30, 2012 (d) $ 1,686,524 $ 565,673 $ 536,299 $ 79,996 $ (161,201 ) $ 178,465 $ 2,885,756
Capital expenditures (c) $ 187,611 $ 2,597 $ 1,432 $ 2,837 $ - $ 1,387 $ 195,864
Magnetic
Nine months ended September Chemicals and Materials and Corporate and Total
30, 2012 (In thousands) Resources Oxides Alloys Rare Metals Eliminations(a) other(b) Molycorp, Inc.
Sales:
External $ 78,162 $ 134,158 $ 125,277 $ 57,054 $ - $ 394,651
Intersegment 5,977 15,496 - - (21,473 ) -
Total sales $ 84,139 $ 149,654 $ 125,277 $ 57,054 $ (21,473 ) $ 394,651
Depreciation, amortization
and accretion $ (8,743 ) $ (7,419 ) $ (10,810 ) $ (4,358 ) $ - $ (96 ) $ (31,426 )
Operating (loss) income $ (23,594 ) $ (21,863 ) $ (1,544 ) $ (1,947 ) $ 24,480 $ (66,804 ) $ (91,272 )
(Loss) income before income
taxes and equity earnings $ (25,044 ) $ (23,663 ) $ (2,381 ) $ (2,998 ) $ 24,480 $ (113,546 ) $ (143,152 )
Capital expenditures (c) $ 675,836 $ 6,615 $ 1,612 $ 6,955 $ - $ 1,733 $ 692,751
(a) The net elimination in operating results includes cost of sales
elimination of $15,673 for three months ended September 30, 2012, and
$45,952 for the nine months ended September 30, 2012. The cost of sales
elimination consists of the intercompany gross profits as well as
elimination of lower of cost or market adjustments related to intercompany
inventory. The $161,201 of total assets elimination is comprised of
$159,009 of intercompany investments and $2,192 of intercompany accounts
receivable and profits in inventory.
(b) Corporate loss before income taxes and equity earnings includes business
development costs, personnel and related costs, including stock-based
compensation expense, accounting and legal fees, occupancy expense,
information technology costs and interest expense. Other consists of
nominal expenses incurred by the sales office in Tokyo, Japan. Total
corporate assets is comprised primarily of cash and cash equivalents.
(c) On an accrual basis excluding capitalized interest.
(d) Excludes goodwill of $501.6 million arising on the Molycorp Canada
acquisition which has not been allocated to its operating segments.
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In prior periods, our basis of segment reporting was the location of our
operations. As a result of the changes in the composition of our reportable
segments discussed above, the prior period operating segments presentation has
been revised for comparative purposes. Some of the information under Chemicals
and Oxides and Rare Metals for the nine months ended September 30, 2011 is
actually for the period from April 1, 2011 (the beginning of the reporting
period of Molycorp Silmet) through September 30, 2011. Some of the information
under Magnetic Materials and Alloys for the nine months ended September 30, 2011
is actually for the period from April 15, 2011(the beginning of the reporting
period of MMA) through September 30, 2011.
Three months ended Magnetic
September 30, 2011 (In Chemicals and Materials and Corporate and Total
thousands) Resources Oxides Alloys Rare Metals Eliminations(e) other(b) Molycorp, Inc.
Sales:
External $ 94,342 $ 15,927 $ 14,449 $ 13,332 $ - $ 138,050
Intersegment 30,535 6,652 - - (37,187 ) -
Total sales $ 124,877 $ 22,579 $ 14,449 $ 13,332 $ (37,187 ) $ 138,050
Depreciation, amortization
and accretion $ (2,715 ) $ (1,627 ) $ 128 $ (1,386 ) $ - $ - $ (5,600 )
Operating income (loss) $ 101,727 $ 2,682 $ 610 $ (3,148 ) $ (22,329 ) $ (12,597 ) $ 66,945
Income before income taxes $ 101,606 $ 1,559 $ 614 $ (4,121 ) $ (22,329 ) $ (13,172 ) $ 64,157
Total assets at September
30, 2011 $ 632,098 $ 52,955 $ 33,032 $ 69,361 $ (154,710 ) $ 552,706 $ 1,185,442
Capital expenditures (c) $ 106,162 $ 2,300 $ - $ - $ - $ - $ 108,462
(e) The total assets elimination of $154,710 is comprised of $102,357 of
intercompany investments and $52,353 of intercompany accounts receivable
and profits in inventory.
Nine months ended Magnetic Total
September 30, 2011 (In Chemicals and Materials and Corporate and Molycorp,
thousands) Resources Oxides Alloys Rare Metals Eliminations other(b) Inc.
Sales:
External $ 180,951 $ 31,419 $ 24,699 $ 26,858 $ - $ 263,927
Intersegment 46,482 10,290 - - (56,772 ) -
Total sales $ 227,433 $ 41,709 $ 24,699 $ 26,858 $ (56,772 ) $ 263,927
Depreciation,
amortization and
accretion $ (7,538 ) $ (1,707 ) $ (271 ) $ (1,456 ) $ - $ - $ (10,972 )
Operating income (loss) $ 163,392 $ 10,333 $ (586 )
$ (175 ) $ (31,514 ) $ (34,684 ) $ 106,766
Income before income
taxes $ 163,234 $ 9,232 $ (580 ) $ (1,124 ) $ (31,514 ) $ (34,945 ) $ 104,303
Capital expenditures (c) $ 218,128 $ 4,672 $ - $ - $ - $ - $ 222,800
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Resources
Sales from our Resources segment were $20.9 million and $84.1 million for the
three and nine months ended September 30, 2012, respectively, as compared to
sales of $124.9 million and $227.4 million for the three and nine months ended
September 30, 2011, respectively. In the third quarter of 2012, this segment
sold 835 mt of products at an average sales price, or ASP, of $25.02 per
kilogram (on a REO basis), as compared to 1,002 mt at an ASP of $124.65 per
kilogram for the corresponding period in 2011. For the nine months ended
September 30, 2012 and 2011, Resources sold 2,032 mt at an ASP of $41.41 per
kilogram, and 2,685 mt of products at an ASP of $84.69 per kilogram,
respectively.
The decrease in volume shipped during the three and nine months ended September
30, 2012 as compared to the corresponding prior periods, was primarily
attributable to limited Bastnasite feedstock due to the new mill coming online
at the same time the last of the historical stockpiles were drawn down.
Prices for the segment's primary products (cerium, lanthanum, neodymium and
praseodymium) have also significantly decreased, as compared to the
corresponding periods in 2011, due to premiums placed on Chinese export quotas
in 2010 combined with the unwinding of speculative purchases that drove prices
for virtually all rare earth elements to a historical peak in July 2011.
Beginning in the second quarter of 2012, prices for most rare earth elements
have stabilized or declined at a slower pace than earlier in the year. We
believe this trend may continue for the remainder of 2012, although there can be
no assurance.
Aggregate production volume at our Resources segment was 565 mt and 1,851 mt for
the three and nine months ended September 30, 2012, respectively, compared to
739 mt and 2,052 mt for the three and nine months ended September 30, 2011,
respectively. We expensed $2.2 million and $7.5 million during the three and
nine months ended September 30, 2012 of production-related costs that would have
otherwise been charged to inventory if we maintained normal production levels
during these periods. This compares to expensing of abnormal production-related
costs of $0.8 million and $4.3 million during the three and nine months ended
September 30, 2011. However, as we complete and begin to commercialize Project
Phoenix Phase 1, we expect to attain increased production levels in future
periods.
We recognized a $11.3 million and $20.9 million of total inventory write-down to
net realizable value for the three and nine months ended September 30, 2012 as
compared to $0 and $0.6 million for the corresponding periods in 2011,
respectively.
Variable production costs in this segment were affected by rising prices of
chemicals and other raw materials used in our REO production, primarily during
the separation process. However, we intend to produce more of our chemicals for
our Molycorp Mountain Pass facility at an on-site plant in the near future,
which we expect to significantly reduce our variable chemical costs for the
segment. Given the lower level of production attained in the current
quarter-to-date and year-to-date periods, as compared to the corresponding prior
periods, labor cost increases also had a slightly negative effect on the results
of operations for this segment. As of September 30, 2012, we had a total of 365
employees at our Molycorp Mountain Pass facility, as compared to 171 employees
as of September 30, 2011. Staffing increases are directly related to the ramp up
in employees needed to run the larger production facilities, which are in the
process of coming online. In addition, the annual wage increase required under
our union contract took effect in January 2012 for approximately 60% of our
employees at Mountain Pass.
Chemicals and Oxides
Comparative results for the Chemicals and Oxides segment were affected by the
addition to our product mix of REO, salts of REEs, zirconium-based engineered
materials and mixed rare earth/zirconium oxides from the Molycorp Canada
acquisition on June 11, 2012, and REO production from our operations in
Sillamäe, Estonia as a result of our acquisition of Molycorp Silmet on April 1,
2011. This segment did not have sales prior to April 1, 2011.
Chemicals and Oxides' sales were $99.4 million on volume of 1,933 mt and $149.7
million on volume of 2,901 mt for the three and nine months ended September 30,
2012, respectively. This compares to sales for this segment of $22.6 million on
volume of 384 mt and $41.7 million on volume of 888 mt for the three and nine
months ended September 30, 2011, respectively. ASP was $51.41 per kilogram and
$51.59 per kilogram for the three and nine months ended September 30, 2012,
respectively, as compared to $58.79 per kilogram and $46.95 per kilogram for the
corresponding periods in 2011, respectively.
The segment's operating income for the third quarter of 2012 and year-to-date
September 30, 2012 was negatively affected by the release of inventory that was
stepped-up in value in conjunction with the Molycorp Canada acquisition, and by
the write-down of inventory to net realizable value. These adjustments, in the
aggregate, totaled to $15.9 million for the three and $23.7 million for the nine
months ended September 30, 2012, respectively. This compares to an increase in
cost of sales of $10.2 million for the corresponding periods in 2011 from the
release of inventory that was stepped-up in value in conjunction the Molycorp
Silmet acquisition in April 2011.
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Main drivers of the period-over-period decrease in ASP was the change in product
mix combined with the same REE market's factors that affected realized prices in
our Resources segment. Given the current global economic environment, customers
in all market segments we serve have been monitoring closely and, in some
instances, reducing their inventory levels. However, during the third quarter of
2012 we have seen signs that our major customers are getting back to desired
inventory levels, particularly in some markets. For example, demand for our
mixed REO for automotive catalyst applications was positive during the third
quarter of 2012. As a result, we plan to add capacity for the Chemicals and
Oxide segment in 2013 in order to support anticipated growth in this area where
we continue to qualify new products with all our major customers. Moreover, our
recently acquired operations in Jiangyin, China and Zibo, China, which represent
a significant portion of this segment's activity, remain focused on high purity
and sophisticated downstream rare earth products. In the third quarter of 2012,
Zibo passed the final phase of the Chinese environmental inspection process and
we now have full access to our export quotas at both Zibo and Jiangyin for the
remainder of 2012.
Magnetic Materials and Alloys
Comparative results for the Magnetic Materials and Alloys segment were affected
by the inclusion of Neo Powders from the Molycorp Canada acquisition on June 11,
2012, and neodymium and samarium magnet alloy and other specialty alloy products
from the MMA acquisition we completed on April 15, 2011. This segment did not
have sales prior to April 15, 2011.
Magnetic Materials and Alloys' sales were $74.8 million on volume of 1,527 mt
and $125.3 million on volume of 1,959 mt for the three and nine months ended
September 30, 2012, respectively. This compares to sales of $14.4 million on
volume of 226 mt and $24.7 million on volume of 427 mt for the three and nine
months ended September 30, 2011, respectively. ASP was $48.98 per kilogram and
$63.95 per kilogram for the three and nine months ended September 30, 2012,
respectively, as compared to $63.93 per kilogram and $57.84 per kilogram for the
corresponding periods in 2011, respectively. The price for neodymium, the
primary determinant of the price for Neo Powders, which currently account for a
larger portion of the volume we sell in this segment, fell by approximately 11%
during the third quarter of 2012. Therefore, based on our current pricing
methodology, prices for Neo Powders were adjusted accordingly.
The anticipation of falling Neo Powders price generally results in very
conservative purchasing patterns by our customers. To the extent possible,
purchases of Neo Powders are delayed until the month when the price is
anticipated to be lower. This has caused inventory levels to fall to very low
levels throughout the supply chain and has impacted volumes shipped. However,
shipment for high performance Neo Powders improved, as new applications business
- generally replacing standard sintered magnets - grew in the home appliance
industry.
During the third quarter of 2012, the operating income of the Magnetic Materials
and Alloys segment was impacted by increased cost of sales related to purchase
accounting adjustments to the inventory acquired as part of the Molycorp Canada
acquisition, and by the write-down of inventory to net realizable value. These
adjustments were nominal for the three and nine months ended September 30, 2012
and for the corresponding periods in 2011, respectively.
Rare Metals
Comparative results for the Rare Metals segment were affected by the addition to
our product mix of gallium, indium and rhenium from the Molycorp Canada
acquisition on June 11, 2012, and niobium and tantalum from our acquisition of
Molycorp Silmet on April 1, 2011. This segment did not have sales prior to April
1, 2011.
Sales from our Rare Metals segment were $25.8 million and $57.1 million for the
three and nine months ended September 30, 2012, respectively, as compared to
sales of $13.3 million and $26.9 million for the three and nine months ended
September 30, 2011, respectively. In the third quarter of 2012, this segment
sold 96 mt of products at an ASP of $269.22 per kilogram, as compared to 88 mt
at an ASP of $151.50 per kilogram for the corresponding period in 2011. For the
nine months ended September 30, 2012 and 2011, Rare Metals sold 265 mt and 167
mt of products, respectively, at an ASP of $215.30 per kilogram and $160.82 per
kilogram, respectively.
Similarly to the other segments, write-down of inventory to net realizable value
had a negative impact to the operating income of the Rare Metals segment. These
adjustments decreased operating income by $6.2 million and $6.3 million during
the three and nine months ended September 30, 2012. There were no material
adjustments to cost of sales for the corresponding prior year periods in this
segment.
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Selling, General and Administrative Expenses
Our consolidated selling, general and administrative expenses, including
stock-based compensation, were $31.5 million and $78.7 million for the three and
nine months ended September 30, 2012, respectively, as compared to $12.2 million
and $31.5 million for the three and nine months ended September 30, 2011,
respectively. A large portion of the quarter-over-quarter increase was
attributable to higher personnel and related costs stemming from our recent
acquisition of Molycorp Canada, higher information technology costs associated
with on-going improvements and expansion of our Enterprise Resource Planning
system, and larger start-up costs related to the construction of our Molycorp
Mountain Pass facility. The increase from the nine months ended September 30,
2011 to the same period in 2012 was substantially driven by the same factors
describe above for the quarter-over-quarter change.
Corporate Development
Corporate development expenses were $1.1 million and $19.4 million for the three
and nine months ended September 30, 2012, respectively, as compared to $0.6
million and $3.9 million for the three and nine months ended September 30, 2011,
respectively. This significant increase during the nine months ended
September 30, 2012 over the corresponding period in 2011 was primarily related
to the costs we incurred in connection with the Molycorp Canada acquisition in
June 2012. The quarter-over-quarter increase was due to other business
development activities.
Depreciation, Amortization and Accretion
Consolidated depreciation and amortization expenses related to production were
$10.6 million and $19.1 million for the three and nine months ended
September 30, 2012, respectively, as compared to $5.1 million and $9.6 million
for the three and nine months ended September 30, 2011, respectively. The
historical quarter-over-quarter and year-to-date change was primarily related to
the addition of fixed assets in conjunction with the Molycorp Canada
acquisition.
Consolidated depreciation, amortization and accretion expenses unrelated to
production were $9.7 million and $12.4 million for the three and nine months
ended September 30, 2012, respectively, as compared to $0.5 million and $1.4
million for the three and nine months ended September 30, 2011, respectively.
The increase in both comparative periods was mainly due to the addition of
approximately $492.0 million in amortizable intangible assets acquired in
connection with the Molycorp Canada acquisition.
Research and Development
Consolidated research and development expenses were $8.9 million and $18.6
million for the three and nine months ended September 30, 2012, respectively, as
compared to $2.1 million and $5.2 million for the three and nine months ended
September 30, 2011, respectively. The quarterly and year-to-date period over
period increase was attributable primarily to our efforts to improve the
efficiency of our REO processing operations, to develop new applications for
individual REEs, research value added rare metals applications, and perform
exploratory drilling. These expenses, which we anticipate to continue to
increase in the foreseeable future, consist primarily of salaries, outside
labor, material and equipment.
Interest Expense
Interest expense related to all our long-term indebtedness was substantially
capitalized through the third quarter of 2012. The larger interest expense we
incurred for the three and nine months ended September 30, 2012, as compared to
the corresponding periods in 2011, related primarily to the payment of a
commitment fee of approximately $7.9 million for a bridge loan we secured with a
financial institution prior to the issuance in May 2012 of $650.0 million
aggregate principal amount of 10% senior secured notes due 2020, which we refer
to as our Senior Notes, and $1.7 million of interest accrued that we paid upon
the repurchase of the majority of the $230.0 million aggregate principal amount
of Debentures in August 2012. See Note 14 to the Condensed Consolidated
Financial Statements included elsewhere in this Quarterly Report on Form 10-Q
for further detail on our indebtedness. Non-capitalized interest expense was
nominal in 2011.
Foreign exchange (losses) gains
Net foreign currency transaction gains were $1.9 million and $0.7 million during
the three and nine months ended September 30, 2012, respectively. This compares
to foreign currency transaction losses of $2.0 million and $1.8 million during
the three and nine months ended September 30, 2011, respectively. These gains
and losses relate primarily to the revaluation in Euro of U.S. dollar monetary
balances owed by Molycorp Silmet.
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Other Expense
Other expense increased by approximately $37.5 million in the nine months ended
September 30, 2012 from the corresponding period in 2011, primarily as a result
of a loss recognized upon settlement of the contingent forward contract we
entered into to purchase Canadian dollars with a notional amount of Cdn $870.0
million to manage the foreign currency exposure with respect to our acquisition
of Molycorp Canada.
Capital Expenditures
Our consolidated capital expenditures, on an accrual basis and excluding
capitalized interest, totaled $195.9 million and $692.8 million for the three
and nine months ended September 30, 2012, as compared to $105.4 million and
$219.0 million for the three and nine months ended September 30, 2011,
respectively. The majority of these capitalized costs relate to Project Phoenix
Phase 1 and Project Phoenix Phase 2 at our Molycorp Mountain Pass facility.
Related Party Transactions
We had no payments in 2012 and made principal payments of $0.6 million and $2.3
million for the three and nine month period ended September 30, 2011,
respectively, under the inventory financing arrangement with Traxys North
America LLC, which we refer to collectively with its affiliates, as Traxys and
affiliates, a subsidiary of one of our stockholders, Traxys S.a.r.l.
We and Traxys and affiliates jointly market and sell certain lanthanum oxide,
cerium oxide, misch metal and erbium oxide products. Pursuant to the terms of
this other arrangement, we and Traxys and affiliates split gross margin equally
once all costs associated with the sale are recovered by both parties. In
addition, we purchased $6.2 million of lanthanum oxide from Traxys and
affiliates during the nine months ended September 30, 2011. We did not have any
material purchases from Traxys and affiliates in 2012.
During the period from January 1, 2012 to June 11, 2012, we sold neodymium/
praseodymium oxides for $4.3 million and heavy rare earths for $1.6 million to
Neo Material Technologies, Inc.
For the quarter ended September 30, 2012 and for the period from June 12, 2012
to September 30, 2012, we purchased $1.4 million and $1.9 million, respectively,
of compounds from Toda Magnequench Magnetic Materials Co. Ltd., or TMT (an
equity method investee acquired as part of Molycorp Canada), and we sold $1.3
million and $1.4 million of Neo Powders to TMT, respectively.
During the same periods, we purchased metals and received services from Ganzhou
Keli Rare Earth New Material Co., Ltd., or Keli (an equity method investee
acquired as part of Molycorp Canada), amounting to $16.1 million and $21.4
million, respectively.
For the quarter ended September 30, 2012 and for the period from June 12, 2012
to September 30, 2012, we purchased $1.3 million and $1.7 million of gallium
metal, respectively, from Ingal Stade (an equity method investee acquired as
part of Molycorp Canada).
Outlook for the Remainder of 2012
We anticipate China-based producers and suppliers will continue to limit the
quantity of REO available outside of China for the remainder of 2012. On several
occasions, the Chinese government has called for greater use of rare earths for
China's own domestic manufacturing as it aims to boost the use of rare earths in
high-end manufacturing. Recently, the Chinese government announced a significant
reduction of mining permits in an effort to further consolidate the rare earth
industry to achieve efficiencies in the industry and curb illegal exports of REE
from China. Independent industry sources have also indicated that China is
importing rare earth materials while investing in downstream operations, thus
increasing the likelihood that China will make greater use of Western rare earth
material in addition to its own. We will continue to progressively expand our
products and markets through the remainder of 2012, including market
penetrations of our SorbXTM (formerly XSORBX) technology into the water
treatment industry. Additionally, we will continue to supply Molycorp Silmet and
MMA with rare earth feedstocks, and our Molycorp Mountain Pass facility will
increase shipments of certain REO to our facilities in Asia for use in
value-added and downstream rare earth applications. However, the volume of rare
earth products we are able to produce at our Mountain Pass facility will remain
limited by the capability of our existing production facilities while ramping up
to Project Phoenix Phase 1 production capacity. We expect our REO production in
2012 to be between 8,000 mt and 10,000 mt
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across our facilities at Mountain Pass, Molycorp Silmet and MMA. We believe that
our consolidated sales in 2012 will be sufficient to fund our normal operating
activities throughout the year, including consolidated selling, general and
administrative expenses. Based on our ongoing monitoring of the rare earth
industry and our business, we expect that our cash flow from operations for the
remainder of 2012 will likely be less than we originally expected.
Capital Investments
We are incurring significant capital expenditures under our plans to modernize
and expand our Molycorp Mountain Pass facility, as well as consistent
expenditures to replace assets necessary to sustain safe and reliable
production. Most of the facilities and equipment acquired in connection with the
acquisition of the Molycorp Mountain Pass facility are at least 20 years
old. We are executing an accelerated modernization plan that includes the
refurbishment of the Molycorp Mountain Pass mine and related processing
facilities through 2012 in order to increase our REO production. We implemented
a plan to accelerate Project Phoenix Phase 1 start-up to take advantage of
favorable project economics at a time when the REO markets were robust. This
acceleration, if successful, will help to improve the diversity of global
supply, which continues to be an urgent matter for rare earth consumers. By
accelerating Project Phoenix Phase 1 start-up, we also expect to reduce the
overall project risk by allowing for a more orderly and sequential startup of
the various circuits and facilities of this complex project.
Cash expenditures for Project Phoenix Phase 1, Project Phoenix Phase 2 and other
remaining 2012 capital projects related to operations at the Molycorp Mountain
Pass facility are expected to total approximately $170.0 million for the fourth
quarter of 2012, and approximately $305.0 million in the first half of 2013,
respectively.
These estimated cash expenditures described above represent the estimated
remaining expenditures for Project Phoenix Phase 1, Project Phoenix Phase 2 and
our other remaining 2012 capital projects related to operations at the Molycorp
Mountain Pass facility. Including the applicable remaining expenditures, the
aggregate cost of Project Phoenix Phase 1 and Project Phoenix Phase 2 is
estimated to be approximately $1.25 billion for engineering, procurement and
construction, or EPC, preliminary engineering, insurance, permitting, legal,
start-up, commissioning and other costs. All amounts for future capital spending
are estimates that include certain discretionary amounts and are subject to
change as the projects are further developed. These estimates do not include
capitalized interest.
The estimated total costs for Project Phoenix Phase 1 and Project Phoenix Phase
2 include estimated additional EPC expenditures totaling up to $150.0 million
for corrections resulting from certain defective engineering work, other
engineering, design and scope changes and other cost increases. We are pursuing
actions to recoup certain costs arising from defective engineering work,
including making claims against applicable insurance policies, although there
can be no assurance that we will be able to recoup all or any portion of such
costs. We regularly monitor our capital projects to identify opportunities to
reduce their total costs.
We expect to incur capital expenditures of approximately $10.0 million during
the fourth quarter of 2012 at all our other operating facilities.
Liquidity and Capital Resources
We expect to fund the remaining capital expenditures under Project Phoenix Phase
1, Project Phoenix Phase 2 and other capital expenditures related to operations
at Molycorp Mountain Pass and all other operating facilities, as well as working
capital and other cash requirements, with our available cash balances of $436.0
million at September 30, 2012, anticipated future cash flow from operations and
potential proceeds from revolving credit facilities or certain equipment
financing that we are currently pursuing in our normal process of properly
managing our cash and working capital requirements.
There can be no assurance that we will be successful in securing access to
additional cash proceeds through the revolving credit facilities and lease or
loan financing for certain equipment that we are currently pursuing, or other
forms of financing on commercially acceptable terms, or at all. Accordingly, if
necessary, we believe we have the ability to curtail capital expenditures and
revise our current business plan to the extent necessary to preserve adequate
liquidity sufficient to sustain operations.
Other cash requirements are expected to include an additional contribution of
approximately $3.8 million to IMJ in September 2013. The actual remittance
amounts to IMJ will vary depending on the future exchange rate between the U.S.
dollar and the Japanese Yen and the achievement of certain milestones by the
joint venture. We also anticipate making cash investments in other current and
new ventures consistent with our mine-to-magnets strategy totaling approximately
$8.0 million in the fourth quarter of 2012 and approximately $20.0 million in
2013.
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Cash Used in Operating Activities
Net cash used in operating activities was $47.2 million during the nine months
ended September 30, 2012, as compared to a positive cash flow from operations of
$28.7 million for the same period in 2011. This change was primarily driven by
lower sales prices combined with a significant increase in operating expenses,
including corporate development costs associated with the Molycorp Canada
acquisition and the loss of $37.5 million recognized upon settlement of the
contingent forward contract described above.
Investing Activities
Net cash used in investing activities increased to $1.3 billion during the nine
months ended September 30, 2012 as compared to $198.0 million for the same
period in 2011. This increase was due primarily to our acquisition of Molycorp
Canada, higher capital expenditures as part our modernization and expansion plan
at Molycorp Mountain Pass and our contributions to IMJ.
Financing Activities
Net cash provided from financing activities increased from $415.1 million during
the nine months ended September 30, 2011 to $1.3 billion during the same period
in 2012, due to the issuance of $650.0 million aggregate principal amount of our
Senior Notes, Molymet's $390.2 million investment in our common stock, the
issuance of $414.0 million aggregate principal amount of our 6.00% Convertible
Notes, the issuance of 13,800,000 Primary Shares, and bank advances of $9.5
million. These cash inflows were partially offset by the repayment of $227.5
million aggregate principal amount of the Debentures acquired as part of the
Molycorp Canada acquisition, including interest, the $8.5 million preferred
stock dividend that we paid through September 1, 2012, and $0.9 million of other
short-term debt repayments.
Liquidity of Subsidiaries
Our total $436.0 million of cash and cash equivalents at September 30, 2012 is
comprised of: 1) $175.4 million held by Molycorp Minerals, LLC; 2) $0.7 million
held by Molycorp Silmet; 3) $3.8 million held by MMA; 4) $256.0 million held by
Molycorp Canada; and 5) $0.1 million held by our sales office in Tokyo, Japan.
At September 30, 2012, our foreign operating subsidiaries held cash and cash
equivalents in foreign countries as follows (in thousands):
China (including Hong Kong) $ 144,398
Barbados 22,315
Canada 25,426
Japan 12,338
Germany 5,504
United Kingdom 2,070
Thailand 1,197
Korea 451
Singapore 563
Estonia 725Total cash and cash equivalents in foreign countries 214,987
United States 221,038
Total cash and cash equivalents $ 436,025
Approximately 17% of the total cash and cash equivalents held by our foreign
operating subsidiaries relate to undistributed earnings that are considered
indefinitely reinvested in these foreign subsidiaries. If such earnings were
repatriated, additional tax expense may result, although the calculation of such
additional taxes is not practicable.
In addition to cash and cash equivalents, the primary sources of liquidity of
our operating subsidiaries are cash provided by operations and, in the case of
our operations in China, Japan and Estonia, borrowing under certain bank loans.
From time to time, the sources of liquidity for our operating subsidiaries may
be supplemented by short-term loans from Molycorp Minerals, LLC. At September
30, 2012, Molycorp Minerals, LLC advanced funds, in the form of interest bearing
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unsecured promissory notes, to Molycorp Silmet for $17.2 million, and to MMA for
$3.0 million, including accrued interest. Our operating subsidiaries' liquidity
generally is used to fund their working capital requirements, capital
expenditures and third-party debt service requirements.
Contractual Obligations
At September 30, 2012, we had the following contractual obligations, in
thousands:
Payments Due by Period
Less Than More ThanContractual Obligations Total 1 Year 1 - 3 Years
4 - 5 Years 5 Years
(In thousands)
Operating lease
obligations(1) $ 9,826 $ 1,417 $ 5,929 $ 1,110 $ 1,370Purchase obligations and
other commitments(2) 287,819 284,534 1,798 538 949
Employee obligations(3) 1,952 1,952 - - -
Asset retirement
obligations(4) 36,721 1,955 9,402 568 24,796
Debt and capital lease
obligations, including
fixed interest payments 2,060,871 140,745 540,858 582,174 797,094
Total $ 2,397,189 $ 430,603 $ 557,987 $ 584,390 $ 824,209
(1) Represents all operating lease payments for office space, land and office
equipment.
(2) Represents contractual commitments for the purchase of materials and
services from vendors. Amount includes $2.4 million of potential
environmental obligations related to defects in pond liners, and $8.0
million in acquisition related commitments.
(3) Represents primarily payments due to employees for awards under our annual
incentive plan.
(4) Under applicable environmental laws and regulations, we are subject to reclamation and remediation obligations resulting from our operations. The
amounts presented above represent our estimated future undiscounted cash
flows required to satisfy the obligations currently known to us.
Off-Balance Sheet Arrangements
As of September 30, 2012, our only off-balance sheet arrangements are the
operating leases and purchase obligations included in the contractual
obligations table above.
Recent Accounting Pronouncements
In December 2011, the Financial Accounting Standard Board, or FASB, issued ASU
2011-12, Deferral of the Effective Date for Amendments to the Presentation of
Reclassifications of Items Out of Accumulated Other Comprehensive Income in
ASU 2011-05. ASU 2011-12 defers the requirement that companies present
reclassification adjustments for each component of Accumulated Other
Comprehensive Income, or AOCI, in both net income and other comprehensive income
on the face of the financial statements. Companies will continue to be required
to present amounts reclassified out of AOCI on the face of the financial
statements or disclose those amounts in the notes to the financial statements.
During the deferral period, there is no requirement to separately present or
disclose the reclassification adjustments into net income. For the three and
nine month periods ended September 30, 2012, we did not have any
reclassification adjustments for components of AOCI.
In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment.
Under this updated guidance, an entity will have the option to first assess
qualitatively whether it is necessary to perform the current two-step goodwill
impairment test. If an entity believes, as a result of its qualitative
assessment, that it is more-likely-than-not that the fair value of a reporting
unit is less than its carrying amount, the quantitative impairment test is
required. Otherwise, no further testing is necessary. The update does not change
how an entity performs the two-step impairment test under the current guidance.
This ASU is effective for annual and interim goodwill impairment tests performed
for fiscal years beginning after December 15, 2011. Early adoption is permitted.
We do not expect the adoption of this updated guidance to have a significant
impact on our
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financial statements.
GLOSSARY OF SELECTED REEs, RARE METALS AND MINING TERMS
The following is a glossary of selected REEs, rare metals and mining terms used
in this quarterly report on Form 10-Q that may be technical in nature:
Assay The analysis of the proportions of metals in ore, or the testing of
an ore or mineral for composition, purity, weight, or other
properties of commercial interest.
Bastnasite Bastnasite is a mixed-lanthanide fluoro-carbonate mineral (Ln F CO3)
that currently provides the bulk of the world's supply of the light
REEs. Bastnasite and monazite are the two most common sources of
cerium and other REEs. Bastnasite is found in carbonatites, igneous
carbonate rocks that melt at unusually low temperatures.
Bonded magnet Bonded neodymium-magnets are prepared by melt spinning a thin ribbon
of the Nd-Fe-B alloy. The ribbon contains randomly oriented Nd2Fe14B
nano-scale grains. This ribbon is then pulverized into particles,
mixed with a polymer and either compression or injection molded into
bonded magnets. Bonded magnets offer less flux than sintered
magnets, but can be net-shape formed into intricately shaped parts
and do not suffer significant eddy current losses.
Cerium Cerium (Ce) is a soft, silvery, ductile metal which easily oxidizes
in air. Cerium is the most abundant of the REEs, and is found in a
number of minerals, including monazite and bastnasite. Cerium has
two relatively stable oxidation states, enabling both the storage of
oxygen and its widespread use in catalytic converters. Cerium is
also widely used in glass polish.
Concentrate A mineral processing product that generally describes the material
that is produced after crushing and grinding ore, effecting
significant separation of gangue (waste) minerals from the desired
metal and/or metal minerals, and discarding the wasteminerals. The
resulting "concentrate" of minerals typically has an order of
magnitude higher content of minerals than the beginning ore
material.
Cut-off grade The lowest grade of mineralized material that qualifies as ore in a
given deposit. The grade above which minerals are considered
economically mineable considering the following parameters:
estimates over the relevant period of mining costs, ore treatment
costs, general and administrative costs, refining costs, royalty
expenses, by-product credits, process and refining recovery rates
and price.Didymium Didymium is a natural and unseparated combination of neodymium and
praseodymium, which is approximately 75% neodymium and 25%
praseodymium, depending on the ore.
Dysprosium A few percent of Dysprosium (Dy) is often added to high power
neodymium iron boron magnets to increase their resistance to
demagnetization. A minor use of dysprosium is in the
magnetostrictive alloy, based on DyTbFe called terfenol-D.Europium Europium (Eu) is desirable due to its photon emission. Excitation of
the europium atom, by absorption of electrons or by UV radiation,
results in changes in energy levels that create a visible emission.
Almost all practical uses of europium utilize this luminescent
behavior.
Gadolinium Gadolinium (Gd) absorbs neutrons and therefore is used for shielding
and controlling neutron radiography and in nuclear reactors. Because
of its paramagnetic properties, solutions of organic gadolinium
complexes and gadolinium compounds are popular intravenous contrast
enhancing agents for medical Magnetic Resonance Imaging contrast
agents in (MRI). Gadolinium is sometimes added to samarium cobalt
magnets to make their magnetic properties less temperature
dependent.
Gallium Elemental gallium is not found in nature, but it is easily obtained
by smelting. Very pure gallium metal has a brilliant silvery color
and its solid metal fractures conchoidally like glass. Almost all
gallium is used for microelectronics.
Grade The average REE content, as determined by assay of a metric ton of
ore.Indium A rare, very soft, malleable and easily fusible post-transition
metal that is chemically similar to gallium and thallium, and shows
intermediate properties between these two. Indium's current primary
application is to form transparent electrodes from indium tin oxide
(ITO) in liquid crystal displays and touchscreens, and this use
largely determines its global mining production. It is widely used
in thin-films to form lubricated layers. It is also used for making
particularly low melting point alloys, and is a component in some
lead-free solders.
Lanthanum Lanthanum (La) is the first member of the Lanthanide series.
Lanthanum is a strategically important rare earth element due to its
use in fluid bed cracking catalysts, FCCs, which are used in the
production of transportation and aircraft fuel. Lanthanum is also
used in fuel cells and batteries.
Mill A processing plant that produces a concentrate of the valuable
minerals contained in an ore.
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Mineralization The process or processes by which a mineral or minerals are
introduced into a rock, resulting in a valuable or potentially
valuable deposit.
Monazite Monazite is a reddish-brown phosphate mineral. Monazite minerals are
typically accompanied by concentrations of uranium and thorium. This
has historically limited the processing of monazite, however this
mineral is becoming more attractive because it typically has
elevated concentrations of mid-to heavy rare earths.
Niobium Niobium is a rare, soft, grey, ductile transition metal found in the
minerals pyrochlore, the main commercial source for niobium, and
columbite. Niobium is used mostly in alloys, the largest part in
special steel such as that used in gas pipelines. Although alloys
contain only a maximum of 0.1%, that small percentage of niobium
improves the strength of the steel. The temperature stability of
niobium-containing superalloys is important for its use in jet and
rocket engines. Niobium is used in varioussuperconducting
materials.
Neodymium Neodymium (Nd) has two major uses. It is key constituent of NdFeB
permanent magnets and it is an additive to capacitor dielectrics.
NdFeB magnets maximize the power/weight ratio, and are found in a
large variety of motors, generators, sensors and hard disk drives.
Capacitors containing neodymium are found in cellular telephones,
computers and nearly all other electronic devices. A minor
application of neodymium is in lasers.
Ore That part of a mineral deposit which could beeconomically and
legally extracted or produced at the time of reserve determination.
Overburden In surface mining, overburden is the material that overlays an ore
deposit. Overburden is removed prior to mining.
Praseodymium Praseodymium (Pr) comprises about 4% of the lanthanide content of
bastnasite and has a few specific applications, based mainly on its
optical properties. It is a common coloring pigment, and is used in
photographic filters, airport signal lenses, and welder's glasses.
Because it chemically and magnetically is so similar to its
neighbors neodymium and lanthanum, it is typically found in small
amounts in applications where neodymium and lanthanum are popular,
such as NdFeB magnets and catalysts. These latterapplications are
actually the largest uses for praseodymium because the magnet and
catalyst markets are so large. Thus praseodymium plays an important
role, in extending the availability of the more popular neodymium
and lanthanum.Probable reserves Reserves for which quantity and grade and/or quality are computed
from information similar to that used for proven reserves, but the
sites for inspection, sampling, and measurement are farther apart or
are otherwise less adequately spaced. The degree of assurance,
although lower than that for proven reserves, is high enough to
assume continuity between points of observation.Proven reserves Reserves for which (a) quantity is computed from dimensions revealed
in outcrops, trenches, workings or drill holes; grade and/or quality
are computed from the results of detailed sampling; and (b) the
sites for inspection, sampling and measurement are spaced so closely
and the geologic character is so well defined that size, shape,
depth and mineral content of reserves are well established.
Recovery The percentage of contained metal actually extracted from ore in the
course of processing such ore.Reserves That part of a mineral deposit which could be economically and
legally extracted or produced at the time of the reserve
determination. Same definition as 'ore'
Rhenium It is a silvery-white, heavy, third-row transition metal. With an
estimated average concentration of 1 part per billion (ppb), rhenium
is one of the rarest elements in the Earth's crust. The free element
has the third-highest melting point and highest boiling point of any
element. Rhenium resembles manganese chemically and is obtained as a
by-product of molybdenum and copper ore's extraction and refinement.
Nickel-based superalloys of rhenium are used in the combustion
chambers, turbine blades, and exhaust nozzles of jet engines. These
alloys contain up to 6% rhenium, making jet engineconstruction the
largest single use for the element, with the chemical industry's
catalytic uses being next-most important.
Samarium Samarium (Sm) is predominantly used to produce samarium cobalt
magnets. Although these magnets are slightly lesspowerful than
NdFeB magnets at room temperature, samarium cobalt magnets can be
used over a wider range of temperatures and are less susceptible to
corrosion.
Sintered magnet Sintered neodymium-magnets are prepared by the raw materials being
melted in a furnace, cast into a mold and cooled to form ingots. The
ingots are pulverized and milled to tiny particles. This undergoes a
process of liquid-phase sintering whereby the powder is magnetically
aligned into dense blocks which are then heat-treated, cut to shape,
surface treated and magnetized.
Tantalum Tantalum is a rare, hard, blue-gray, lustrous transition metal that
is highly corrosion resistant. It is part of therefractory metals
group, which are widely used as minor component in alloys. The
chemical inertness of tantalum makes it a valuable substance for
laboratory equipment and a substitute for platinum, but its main use
today is in tantalum capacitors in electronic equipment such as
mobile phones, DVD players, video game systems and computers.
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Terbium Terbium (Tb) is used primarily as a phosphor, either in fluorescent
lamps or x-ray screens. It can replace dysprosium in NdFeB magnets
but usually does not because of its cost. A minor use of terbium is
in the magnetostrictive alloy, based on DyTbFe called terfenol-D.
Yttrium Yttrium (Y), although not a lanthanide series element, is often
considered to be a rare earth element and its behavior is similar to
heavy rare earth elements. It is predominantly utilized in lighting
applications and ceramics. Other uses include resonators, lasers,
microwave communication devices and other electronic devices.
Zirconium oxide A white amorphous powder that is insoluble in water and highly
refractory, used as a pigment for paints, a catalyst, and an
abrasive.
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