Q1 is a seasonally slow quarter in the rare earth industry due to the Chinese New Year holiday. However, MCP had strong operational performance through Q1. It is starting to see more regular sustained business activity and in mid-March, pricing in China began to strengthen, demonstrating revived demand. Supply and demand fundamentals suggest a tight market, which should lead to stabilized prices.
As discussed in detail below, MCP is on track with its three operational priorities:
Project Phoenix. The first operational priority is Project Phoenix, and MCP is meeting its accelerated schedule of beginning continuous Phase I operations by the beginning of the fourth quarter. Last quarter, MCP announced the sequential startup of several parts of the Project Phoenix facility. Now, it is adding a new sequence in the circuit---it is starting its new mill, flotation circuit and paste tailings plant, which will complete the rare earth concentrate production circuit portion of the project. It plans to run the mill for a 3-week period, produce a large amount of concentrate to process, and then pause to milling to optimize the unit. The entire concentrate circuit will run intermittently between now and the beginning of continuous Phase 1 operations.
Before full Phase 1 production will begin, MCP plans to move from grid power to power from its natural gas fueled combined heat and power plant, and start up: (1) its new full-size multi-stage cracking process, (2) the solvent exchange and heavy’s concentrate production, (3) the rare earth oxide facilities, and (4) the product finishing capabilities of the plant. MCP believes it will see economies of scale in its business when it completes and ramps up Project Phoenix production.
XSORBX. MCP's number two priority is XSORBX, which is the company's proprietary water purification technology. MCP is seeing increased demand for this product. MCP's XSORBX business is in its early commercialization stage and MCP is focusing on the recreational water purification market. It has signed a recent contract to a single customer that nearly doubles its 2011 sales volume. It is on track to meet its 2012 goal of selling approximately 1000 tons of XSORBX.
In addition to the recreational water purification market, MCP is developing XSORBX for use in other water application markets, such as pond remediation, municipal waste water, industrial waste water, municipal drinking water and point of use drinking water solutions.
There is great potential in the XSORBX market,. For instance, a 12.5 percent market penetration in the United States market alone would consume all of the cerium that MCP would produce at full Phase 2 production.
Of the five or six different water purification categories that MCP will be using XSORBX, it anticipates an equivalent cerium oxide price of between $11 a kilogram to $95 a kilogram. It would like to push much of the use of XSORBX to the higher end of that range.
MCP sees an advantage in using cerium in the XSORBX product, where is there no competition by rare earth producers, as opposed to the two main markets that use cerium. On the financials, XSORBX is placed in the cerium category, but may later be separated out.
Acquisition of Neo Materials. MCP's third priority is the proposed acquisition of Neo Materials. MCP has already received clearance from the United States, and it has an application pending in Canada, which started a clock that should end on May 18. Neo Material's shareholder vote is on May 30 and MCP expects a favorable vote. Additionally, court approval is required. Assuming all approvals are given, the deal should close in the second or third quarter of 2012.
The acquisition of Neo Materials should fuel MCP's growth in a number of ways:
- Exposure to multi-national corporate customers. 70
percent of all rare earth sales occur in China. However, most of
Neo's customers in China are from large multinational companies
from other countries that had moved their manufacturing to China
years ago. These companies are looking for reliable rare earth
mineral suppliers that can produce for their factories all over
the world. The acquisition of Neo Materials will place MCP closer
to those customers.
- Accelerate production at the Phoenix Project. Neo
Material has processing and distribution strengths that can be
leveraged with the Phase I production in the Phoenix Project, and
which will help MCP ramp up Phase 2 production faster than had
been anticipated. Immediately after closing, MCP intends to use
Neo Material's technology to accelerate its development of
ultrahigh-purity separations capabilities for heavy rare earth at
its Mountain Pass and Molycorp Silmet facilities. It has tens of
tons of the concentrate at Mountain Pass and with Neo's
technology, it will be able to process the concentrate almost
immediately into ultrahigh purity products.
- Entrance in the magnet powder market. Neo also has
a patented magnet powder through its Magnequench subsidiary, which
will give MCP a significant presence in the bonded
neodymium-iron-boron magnet market. MCP plans to manufacture
sintered neodymium-iron-boron magnets with its joint-venture
partners Daido Steel and Mitsubishi Corporation. The forecasted
annual growth rate for permanent rare earth magnets is between 8%
to 12%. Thus, expending into these markets should allow MCP to
broaden its revenue streams starting in 2013.
- Additional exposure to the LED semiconductor and electronic component markets. By acquiring Neo, MCP would expand its reach into the markets for high-purity gallium, indium and rhenium, which are used in the LED semiconductor and electronic component markets.
MCP anticipates financing 29 percent of the acquitision costs of Neo Materials with Molycorp common stock and the remaining 71% would be secured through a debt offering, as well as proceeds from the Molymet investment and cash from the combined company balance sheets. The debt would replace the company's current bridge financing commitment. Because the pending acquisition has been structured in Canadian dollars, MCP entered is hedging the potential risk of foreign currency fluctuations between the U.S. dollar and the Canadian dollar.
Financials.
MCP had $84.5 million in revenues during Q1. Strong didymium and lanthanum sales contributed to stronger revenues year-over-year. However, cerium sales were lower. The lanthanum sales were up because a U.S. customer placed a large order in the first quarter.
MCP's Q1 2012 sales were $84.5 million compared to $26.3 million in Q1 2011. The sales increase is due to increased didymium sales and contributions from Silmet and Molycorp Metals & Alloys or MMA, which were acquired during the second quarter of 2011. MCP sold 719 net metric tons of rare earth oxide equivalent products at an average sales price of $95.05 per kilogram. It also sold an 75 metric tons of rare metals at an average sales price of $182.88 per kilogram. It does not expect any significant changes in volume in Q2 2012 compared with Q1 2011. There is still some effect from the Thailand flooding, but there is stability in orders. Rather than seeing large orders that would be typical this time of year, the company is seeing smaller orders but at a rapid pace. It believes the smaller orders are the result of the price volatility last year and the customer's desire to make sure that all of its end product is sold before the customer makes new orders. MCP's goal is to have 100 percent of phase 1 production contracted out by the end of the year, and it's contracting position is currently 78 percent.
MCP expects to achieve 8,000 to 10,000 metric tons of REO equivalent products across all operating segments in 2012. During the quarter, Mountain Pass produced 615 metric tons of REO equivalent product compared to 730 metric tons during the first quarter of 2011. MCP slowed production to manage inventories. Production at Silmet was 410 metric tons of REO equivalent during the quarter, as well as 170 metric tons of rare metals.
Consolidated gross margin for Q1 was 36.7%. The margins were pressured by higher variable costs from labor and chemicals. Further, MCP incurred intense regulatory inspection at Mountain Pass, which resulted in significant disruptions of production. Once construction winds down and the company gets into a normal operating mode, the regulatory activity should not be as intense. Further, expenditures on the Phoenix Project should decline into the fourth quarter.
Adjusted gross margin on a non-GAAP basis was 44.6%, which was in line with internal expectations.
Gross margin at Mountain Pass was 59.3 percent, compared to 36.5 percent during the first quarter of 2011. The increase in gross margin resulted from a shifting product mix and increased pricing for certain products.
Cost of good sold was higher due to market price adjustments for materials acquired at higher prices. Further, some of Silmet's materials are still being sourced by third parties until MCP achieves Phase I production on Project Phoenix. Once Mountain Pass can source Silmet's materials, margins will improve.
MCP had an adjusted non-GAAP diluted EPS of $0.18.
The balance sheet shows cash and cash equivalents of $609.8 million as of March 31. MCP had capital expenditures totaling $206.5 million on a cash basis. It also invested $3.9 million in its magnet production joint-venture.
MCP has spent $628 million on Project Phoenix so far. It's total EPC capital budget is $895 million.
Reserves
MCP's proven and probable reserves of contained rare earth oxide equivalent at Mountain Pass are $18.4 million short tons at an overage ore grade of 7.98 percent REO and a cutoff grade of 5 percent REO. The reserves have increased by 36% as compared to 2010 levels. MCP is continuing exploration and has completed exploratory drilling near Mountain Pass and is conducting an analysis of this exploration.
WTO action.
MCP does not believe the WTO rare earth action will have an impact on the valuation of the Neo Materials acquisition. If China wins, everything will be the status quo. If the U.S., Japan and European Union win, resulting in export quotas going away, there won't be much change. It could be positive becaue Neo Materials has one of the largest allocations of export quotas to any company in China and currently have extra quotas.
The WTO action will probably take 2 years to unfold. By then, there will be extra Molycorp supply in the world and the extra supply may be the best way to resolve the concerns in the WTO action.
The full transcript of the conference calle can be found on Seeking Alpha at the following link:
http://seekingalpha.com/article/580091-molycorp-s-ceo-discusses-q1-2012-results-earnings-call-transcript
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