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