Case 1000 words Copyright Molycorp: Financing the Production of Rare Earth Minerals Harvard Business School Case #214-054 HBS Courseware 9-214-710

Case 1000 words Copyright

Molycorp: Financing the Production of Rare Earth Minerals

Harvard Business School Case #214-054

HBS Courseware 9-214-710

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1000 words

Copyright

Molycorp: Financing the Production of Rare Earth Minerals
Harvard Business School Case #214-054
HBS Courseware 9-214-710
Rev: 10/15/15
This courseware was prepared by Professors Ben Esty and Scott Mayfield solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2015 President and Fellows of Harvard College. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

Exhibit 3

Exhibit 3 Molycorp Income Statement: 2010 to 2012 (US$ millions)
Year Ending 12/31 6 Months Ending 6/30
2009 2010 2011 2011 2012
Revenue $ 7.1 $ 35.2 $ 396.8 $ 125.9 $ 189.0
Costs of Goods Sold 21.8 28.8 154.2 55.1 145.3
Gross Profit (14.7) 6.4 242.7 70.8 43.8
SG&A 12.7 45.2 56.7 22.5 65.6
Research & Development (R&D) – 0 2.3 7.7 3.0 9.7
Depreciation 1.2 6.9 15.2 5.4 11.1
Earnings Before Interest and Tax (EBIT) (28.6) (48.1) 163.1 39.9 (42.6)
Net Interest 0.2 (0.2) 0.4 (0.2) 9.7
Restructuring and Other Charges (0.2) 3.0 15.8 – 0 47.6
Profit Before Tax (PBT) (28.6) (50.8) 146.9 40.1 (99.9)
Tax Expense (Credit) – 0 – 0 28.6 (6.4) (29.5)
Minority Interest – 0 – 0 0.8 1.0 (0.7)
Net Income (28.6) (50.8) 117.5 45.6 (69.7)
Common Dividends 0.0 0.0 0.0 0.0 0.0
Sources: S&P Capital IQ (accessed 11/8/13), and Molycorp Annual Reports, various years.

Exhibit 4

Exhibit 4 Molycorp Balance Sheet: 2009 to 2012 (US$ millions)
As of December 31st June 30th
2009 2010 2011 2012
Assets
Cash & Short-Term Investments $ 6.9 $ 316.4 $ 418.9 $ 369.3
Accounts Receivable 1.2 16.4 70.7 118.4
Inventory 8.5 18.8 111.9 319.9
Other Assets 1.8 1.8 37.5 105.4
Current Assets 18.5 353.4 639.0 913.0
Net PP&E 66.4 94.0 561.6 1,153.3
Goodwill – 0 – 0 3.4 505.0
Intangibles 0.7 0.6 3.1 491.9
Other Long-Term Assets 12.1 31.5 47.9 96.0
Total Assets 97.7 479.6 1,255.1 3,159.2
Liabilities
Short-Term Borrowing – 0 3.1 0.9 – 0
Accounts Payable 2.9 13.0 161.6 287.9
Accrued Expenses 5.9 4.2 12.9 51.5
Current Portion of LT Debt – 0 – 0 1.5 263.2
Other Current Liabilities 0.7 0.4 1.7 35.0
Current Liabilities 9.5 20.7 178.6 637.6
Long-Term Debt – 0 – 0 196.5 835.0
Deferred Tax Liabilities – 0 – 0 18.9 172.7
Other Non-current Liabilities 13.5 12.3 15.8 50.9
Total Liabilities 23.1 33.0 409.9 1,696.2
Shareholder Equity 74.6 446.5 845.2 1,463.0
Total Liabilities & Equity 97.7 479.6 1,255.1 3,159.2
Other Items
Total Shares Outstanding 45.0 82.3 83.9 109.9
Current Ratio 1.9 17.1 3.6 1.4
Debt-to-Total Capital (book value) 0% 1% 19% 43%
Sources: S&P Capital IQ (accessed 11/8/13), and Molycorp Annual Reports, various years.

Exhibit 7

Exhibit 7 Current Market Rates as of August 3, 2012
US Treasury Yields Corporate Bond Yields
(constant maturity) (10-year maturity)
Maturity Yield Credit Rating Yield
1 month 0.03% AAA 2.35%
6 months 0.08% AA 2.45%
1 year 0.16% A 2.65%
3 years 0.33% BBB 3.60%
5 years 0.67% BB 6.10%
10 years 1.60% B 7.35%
30 years 2.65% CCC 10.92%
Sources: Federal Reserve Selected Interest Rates (Daily)-H.15; BondsOnline Group, Thomson Reuters, and casewriter estimates.

Exhibit 9

Exhibit 9 Forecasted Operating Assumptions and Cash flow Items ($ Millions)
July-Dec Fiscal Year Ending December 31st
2012 2013 2014 2015 2016 2017
Operating Assumptions
REO Production (tons, thousands) 6.0 25.0 40.0 40.0 40.0 40.0
Percentage of REO allocated to Metals Production 63% 32% 35% 35% 35% 35%
Metals production (tons, thousands) 3.8 8.0 14.0 14.0 14.0 14.0
REO Price ($/kg) 43.2 20.6 19.2 19.5 19.7 20.0
Metal/Alloy Price ($/kg) 104.7 58.1 63.1 63.9 64.8 65.7
REO Cost ($/kg) 26.1 9.3 6.0 6.1 6.2 6.3
Metal/Alloy Cost ($/kg) 82.1 34.4 37.4 37.9 38.4 38.9
Revenue
REO $ 97 $ 350 $ 499 $ 506 $ 513 $ 520
Metals/Alloys 394 465 883 895 908 920
Total Revenue 490 815 1,382 1,401 1,421 1,441
Cost of Sales
REO 58 158 156 158 160 163
Metals/Alloys 309 275 523 530 538 545
Total Cost of Sales 367 433 679 689 698 708
Gross Profit
REO 38 192 343 348 353 358
Metals/Alloys 85 190 360 365 370 375
Total Gross Profit 123 382 703 713 723 733
SG&A 57 100 100 101 103 104
Other Expense 17 9 10 10 10 10
EBITDA 49 273 593 601 610 618
Cash Flow Items
Capital Expenditures 334 70 45 45 45 45
Depreciation 25 125 125 125 125 125
Net Working Capital (1) 301 258 289 293 297 301
Gross Margin 25.1% 46.9% 50.9% 50.9% 50.9% 50.9%
Revenue Growth (2) 20.0% 69.6% 1.4% 1.4% 1.4%
Sources: “Molycorp, Inc.,” P. Misra and P. Sood (Morgan Stanley, 8/13/2012); “Molycorp,” M. Gambardella,
T. Langton, and B. Ossenbeck ( J.P. Morgan, 8/3/ 2012); and casewriter estimates.
Note: (1) Net Working Capital = Accounts Receivable + Inventory – Accounts Payable – Accrued Expenses. Values
are end of period.
(2) FY 2013 revenue growth rate based on annual FY 2012 revenues of $679 million.

Exhibit 10

Exhibit 10 Molycorp and Comparable Mining FirmsFirms (US$ Millions, except where noted.)
Market Average
Ticker & Stock As of June 30, 2012 (book values) Value of Leverage Equity
Company Exchange (a) Revenue Assets Debt Equity Equity (b) D/V (c) Beta (d)
Molycorp, Inc. MCP (NYSE) $ 314.8 $ 3,159.2 $ 1,098.2 $ 1,463.0 $ 2,368.3 7.6% 2.33
Alkane Resources Ltd. ALK (ASX) 1.2 179.5 0.0 175.6 301.8 0.0% 2.35
Avalon Rare Metals, Inc. AVL (TSX/NYSE) 0.0 117.0 0.0 113.1 156.7 0.0% 2.76
Greenland Minerals and Energy Ltd. GGG (ASX) 1.1 57.5 0.0 56.2 235.6 0.0% 1.52
Lynas Corporation Ltd. LYC (ASX) 0.0 1,047.8 412.6 576.8 1,698.4 9.0% 2.12
Quest Rare Minerals Ltd. QRM (TSX/NYSE) 0.1 80.6 0.0 77.8 109.6 0.0% 3.02
Rare Element Resources Ltd. REE (NYSE) 0.0 53.2 0.0 50.7 235.8 0.0% 2.44
Sources: Standard & Poor’s Capital IQ, accessed 12/3/2013; Thomson Reuters Datastream, accessed 12/3/2013;
Bloomberg, accessed 12/3/2013; CRSP, accessed 1/13/2014; and casewriter estimates.
Notes:
(a) NYSE = New York Stock Exchange; ASX = Australian Stock Exchange; TSX = Toronto Stock Exchange.
(b) As of June 30, 2012.
(c) Two-year average debt/value ratio; value equals the book value of debt plus the market value of equity.
(d) The equity beta was measured over two years against the relevant market index for each exchange.
Company Business Description
Alkane Resources Ltd. An Australian mining and exploration company. Projects included the Tomingley Gold Project (planned 2014); the Dubbo Zirconia Project, containing zirconium, niobium and other rare earths; and four copper-gold exploration projects.
Avalon Rare Metals, Inc. A Canadian exploration and development company focused on rare metals and minerals. Its Nechalacho Rare Earth Elements Project was potentially one of the largest new sources of heavy rare earths in the world outside of China.
Greenland Minerals and Energy Ltd. An Australian company focused on developing the Kvanefjeld multi-element project, containing rare earth elements, uranium, and zinc. The company was through the feasibility phase and into mine development.
Lynas Corporation Ltd. An extraction and processing company focused on rare earth mineral deposits located primarily in Australia and Malaysia. Its Mount Weld project, located in Western Australia, was the richest known deposit of rare earth minerals in the world. The company’s state-of-the-art rare earths processing plant in Malaysia was expected to begin production in 2013.
Quest Rare Minerals Ltd. A Canadian exploration company engaged in the identification and discovery of rare earth deposits. Held a 100% interest in the Strange Lake rare earth property in Quebec.
Rare Element Resources Ltd. An American gold and rare earth exploration and development company. Its primary focus was advancing the Bear Lodge Critical Rare Earth Project, located in Colorado, into production.

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