Attached files
file | filename |
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EX-31.2 - EXHIBIT 31.2 - Molycorp, Inc. | c05639exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - Molycorp, Inc. | c05639exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - Molycorp, Inc. | c05639exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-34827
Molycorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
27-2301797 (I.R.S. Employer Identification No.) |
|
5619 Denver Tech Center Parkway, Suite 1000 | ||
Greenwood Village, Colorado (Address of principal executive offices) |
80111 (Zip Code) |
(303) 843-8040
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes o No þ
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
As of
September 2, 2010, the registrant had 82,253,700 shares of common stock, par value $0.001 per
share, outstanding.
MOLYCORP, INC.
INDEX
PAGE | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
14 | ||||||||
29 | ||||||||
30 | ||||||||
31 | ||||||||
31 | ||||||||
45 | ||||||||
46 | ||||||||
46 | ||||||||
46 | ||||||||
47 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
Table of Contents
MOLYCORP, INC.
(A Company in the Development Stage)
(A Company in the Development Stage)
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share amounts)
June 30, 2010 | December 31, 2009 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 5,232 | $ | 6,929 | ||||
Trade accounts receivable |
777 | 1,221 | ||||||
Inventory |
9,884 | 8,545 | ||||||
Prepaid expenses and other |
2,819 | 1,825 | ||||||
Total current assets |
18,712 | 18,520 | ||||||
Non-current assets: |
||||||||
Property, plant and equipment, net |
$ | 69,802 | $ | 66,352 | ||||
Inventory |
10,201 | 12,090 | ||||||
Intangible asset, net |
671 | 704 | ||||||
Total non-current assets |
80,674 | 79,146 | ||||||
Total assets |
$ | 99,386 | $ | 97,666 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Trade accounts payable |
$ | 4,923 | $ | 2,886 | ||||
Accrued expenses |
3,527 | 5,963 | ||||||
Short-term borrowing related party |
5,008 | | ||||||
Class B stockholder obligation |
15,133 | | ||||||
Current portion of asset retirement obligation |
543 | 693 | ||||||
Total current liabilities |
29,134 | 9,542 | ||||||
Non-current liabilities: |
||||||||
Asset retirement obligation |
$ | 11,294 | $ | 13,509 | ||||
Other non-current liabilities |
83 | | ||||||
Total non-current liabilities |
11,377 | 13,509 | ||||||
Total liabilities |
$ | 40,511 | $ | 23,051 | ||||
Stockholders equity: |
||||||||
Common stock, $0.001 par value; 414,000,000 shares
authorized at June 30, 2010; 0 shares outstanding
at each of June 30, 2010 and December 31, 2009 |
| | ||||||
Class A common stock, $0.001 par value; 60,000,000 shares
authorized at June 30, 2010; 50,112,580 and 44,308,804 shares
outstanding at June 30, 2010 and December 31, 2009, respectively |
50 | 44 | ||||||
Class B common stock, $0.001 par value; 4,000,000 shares authorized
at June 30, 2010; 0 shares outstanding at each of June 30, 2010
and December 31, 2009 - see footnote 4 (j) |
| | ||||||
Additional paid-in capital |
132,526 | 117,232 | ||||||
Deficit accumulated during the development stage |
(73,701 | ) | (42,661 | ) | ||||
Total stockholders equity |
58,875 | 74,615 | ||||||
Total liabilities and stockholders equity |
$ | 99,386 | $ | 97,666 | ||||
See accompanying notes to the condensed, consolidated financial statements.
2
Table of Contents
MOLYCORP, INC.
(A Company in the Development Stage)
(A Company in the Development Stage)
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except share and per share amounts)
Total from | ||||||||||||||||||||
Three Months Ended | Six Months Ended | June 12, 2008 | ||||||||||||||||||
June 30, | June 30, | (Inception) Through | ||||||||||||||||||
2010 | 2009 | 2010 | 2009 | June 30, 2010 | ||||||||||||||||
Net sales |
$ | 1,845 | $ | 1,230 | $ | 4,766 | $ | 2,929 | $ | 13,996 | ||||||||||
Operating costs and expenses: |
||||||||||||||||||||
Cost of goods sold |
(5,517 | ) | (4,897 | ) | (11,370 | ) | (9,624 | ) | (46,182 | ) | ||||||||||
Selling, general and administrative |
(4,254 | ) | (2,869 | ) | (8,734 | ) | (5,191 | ) | (24,156 | ) | ||||||||||
Stock-based compensation |
(15,133 | ) | (242 | ) | (15,133 | ) | (242 | ) | (15,375 | ) | ||||||||||
Depreciation and amortization |
(61 | ) | (42 | ) | (156 | ) | (63 | ) | (366 | ) | ||||||||||
Accretion expense |
(216 | ) | (251 | ) | (479 | ) | (503 | ) | (1,735 | ) | ||||||||||
Operating loss |
(23,336 | ) | (7,071 | ) | (31,106 | ) | (12,694 | ) | (73,818 | ) | ||||||||||
Other income (expense): |
||||||||||||||||||||
Other income |
45 | 83 | 66 | 105 | 301 | |||||||||||||||
Interest income (expense) |
| | | | (184 | ) | ||||||||||||||
Net loss |
$ | (23,291 | ) | $ | (6,988 | ) | $ | (31,040 | ) | $ | (12,589 | ) | $ | (73,701 | ) | |||||
Weighted average shares outstanding (Class A shares) |
48,905,827 | 38,234,354 | 48,165,914 | 38,234,354 | 40,972,647 | |||||||||||||||
Loss per share of Class A common stock: |
||||||||||||||||||||
Basic |
$ | (0.48 | ) | $ | (0.18 | ) | $ | (0.64 | ) | $ | (0.33 | ) | $ | (1.80 | ) | |||||
Diluted |
$ | (0.48 | ) | $ | (0.18 | ) | $ | (0.64 | ) | $ | (0.33 | ) | $ | (1.80 | ) | |||||
See accompanying notes to the condensed, consolidated financial statements.
3
Table of Contents
MOLYCORP,
INC.
(A Company in the Development Stage)
(A Company in the Development Stage)
Condensed Consolidated Statement of Stockholders Equity
(Unaudited)
(In thousands, except share amounts)
Deficit | ||||||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||||||
Additional | During the | Total | ||||||||||||||||||||||||||||||||||
Class A Common Stock | Class B Common Stock (1) | Common Stock | Paid-In | Development | Stockholders | |||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Stage | Equity | ||||||||||||||||||||||||||||
Balance
at December 31, 2009 |
44,308,804 | $ | 44 | | $ | | | $ | | $ | 117,232 | $ | (42,661 | ) | $ | 74,615 | ||||||||||||||||||||
Issuance of shares |
5,679,308 | 6 | | | | | 14,994 | | 15,000 | |||||||||||||||||||||||||||
Exercise of employee options |
124,468 | | | | | | 300 | | 300 | |||||||||||||||||||||||||||
Net loss |
| | | | | | | (31,040 | ) | (31,040 | ) | |||||||||||||||||||||||||
Balance at June 30, 2010 |
50,112,580 | $ | 50 | | $ | | | $ | | $ | 132,526 | $ | (73,701 | ) | $ | 58,875 | ||||||||||||||||||||
(1) | Shares of Class B common stock do not represent an equity interest in the Company for accounting purposes. See footnote 4 (j) for additional information. |
See accompanying notes to the condensed, consolidated financial statements.
4
Table of Contents
MOLYCORP,
INC.
(A Company in the Development Stage)
(A Company in the Development Stage)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Total from | ||||||||||||
Six Months Ended | June 12, 2008 | |||||||||||
June 30, | (Inception) through | |||||||||||
2010 | 2009 | June 30, 2010 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net loss |
$ | (31,040 | ) | $ | (12,589 | ) | $ | (73,701 | ) | |||
Adjustments to reconcile net loss to net cash used
in operating activities: |
||||||||||||
Depreciation and amortization |
2,408 | 1,904 | 7,240 | |||||||||
Accretion of asset retirement obligation |
479 | 503 | 1,735 | |||||||||
Non-cash inventory write-downs |
915 | 5,129 | 19,459 | |||||||||
Non-cash share-based compensation expense |
15,133 | 241 | 15,524 | |||||||||
Loss on sale on assets |
13 | | 15 | |||||||||
Changes in operating assets and liabilities: |
||||||||||||
Accounts receivable |
444 | 446 | (1,328 | ) | ||||||||
Other current assets |
121 | 305 | 466 | |||||||||
Inventory |
(366 | ) | (7,570 | ) | (17,363 | ) | ||||||
Prepaid expenses |
(1,115 | ) | 293 | (2,734 | ) | |||||||
Accounts payable |
1,489 | (607 | ) | 1,877 | ||||||||
Asset retirement obligation |
(304 | ) | (182 | ) | (691 | ) | ||||||
Accrued expenses |
(2,931 | ) | 1,319 | 5,036 | ||||||||
Net cash used in operating activities |
(14,754 | ) | (10,808 | ) | (44,465 | ) | ||||||
Cash flows from investing activities: |
||||||||||||
Acquisition of the Mountain Pass facility |
| | (82,150 | ) | ||||||||
Proceeds from sale of investment in joint venture |
| | 9,700 | |||||||||
Capital expenditures |
(7,260 | ) | (3,526 | ) | (14,866 | ) | ||||||
Proceeds from sale of assets |
9 | | 14 | |||||||||
Net cash used in investing activities |
(7,251 | ) | (3,526 | ) | (87,302 | ) | ||||||
Cash flows provided by financing activities: |
||||||||||||
Capital contributions from stockholders |
15,000 | 7,949 | 125,004 | |||||||||
Proceeds from exercise of options |
300 | | 350 | |||||||||
Short-term borrowings related party |
5,008 | 5,164 | 11,645 | |||||||||
Net cash provided by financing activities |
20,308 | 13,113 | 136,999 | |||||||||
Net change in cash and cash equivalents |
(1,697 | ) | (1,221 | ) | 5,232 | |||||||
Cash and cash equivalents at beginning of the period |
6,929 | 2,189 | | |||||||||
Cash and cash equivalents at end of period |
$ | 5,232 | $ | 968 | $ | 5,232 | ||||||
See accompanying notes to the condensed, consolidated financial statements.
5
Table of Contents
MOLYCORP, INC.
(A Company in the Development Stage)
(A Company in the Development Stage)
Notes to Condensed Consolidated Financial Statements
June 30, 2010
(Unaudited)
(1) Company Background
Molycorp, Inc. (the Company or Molycorp) was formed on March 4, 2010 for the purpose of
continuing the business of Molycorp, LLC in corporate form. On April 15, 2010, the members of
Molycorp, LLC contributed either (a) all of their member interests in Molycorp, LLC or (b) all of
their equity interests in entities that held member interests in Molycorp, LLC (and no other assets
or liabilities) to Molycorp, Inc. in exchange for Molycorp, Inc. Class A common stock.
Accordingly, Molycorp, LLC and Molycorp Minerals, LLC became subsidiaries of Molycorp, Inc. On
June 15, 2010, Molycorp, LLC was merged with and into Molycorp Minerals, LLC. On July 9, 2010,
Molycorp, Inc. completed a 38.23435373-for-one stock split, which has been retroactively reflected
in the historical financial data for all periods presented. On August 3, 2010, Molycorp, Inc.
completed its initial public offering (IPO) of common stock. In connection with its initial public
offering, Molycorp, Inc. issued 29,128,700 shares of common stock at $14.00 per share (including
1,003,700 shares of Molycorp common stock issued in connection with the underwriters option to
purchase additional shares). Total net proceeds of the offering were approximately $379.2 million
after underwriting discounts and commissions and offering expenses payable by Molycorp, Inc.
Immediately prior to the consummation of Molycorp, Inc.s initial public offering, all of the
shares of Class A common stock and Class B common stock were converted into shares of common stock.
Molycorp Minerals, LLC, previously known as Rare Earth Acquisition, LLC (which was formed on
June 12, 2008), acquired the Mountain Pass, California rare earth deposit and associated assets
(the Mountain Pass facility) and assumed certain liabilities from Chevron Mining, Inc.
(Chevron) on September 30, 2008.
The Mountain Pass facility is located in San Bernardino County, California and is the only
significant developed rare earth resource in the western world. Rare earth elements (REEs) are a
group of specialty elements with unique properties that make them critical to many existing and
emerging applications including:
| Clean-energy technologies such as hybrid and electric vehicles, wind turbines and compact florescent lighting; |
| High-technology applications including cell phones, personal digital assistant devices, digital music players, hard disk drives used in computers, computing devices, ear bud speakers and microphones, as well as fiber optics, lasers and optical temperature sensors; |
| Critical defense applications such as guidance and control systems, communications, global positioning systems, radar and sonar; and |
| Advanced water treatment applications including those for industrial, military, homeland security, domestic and foreign aid use. |
The REE group includes 17 elements, namely the 15 lanthanide elements, which are lanthanum,
cerium, praseodymium, promethium (which does not occur naturally), neodymium, samarium, europium,
gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium, and lutetium, and two
elements that have similar chemical properties to the lanthanide elements yttrium and scandium.
The oxides produced from processing REEs are collectively referred to as rare earth oxides
(REOs). Bastnasite is a mineral that contains REEs.
Operations at the Mountain Pass facility began in 1952 under Molybdenum Corporation of America
(MCA). MCA was purchased by Union Oil of California (Unocal) in 1977. In 2002, mining
operations were suspended at the Mountain Pass facility primarily due to softening prices for REOs
and a lack of additional tailings disposal capacity. Chevron Corporation purchased Unocal in 2005.
Prior to the Companys acquisition of the Mountain Pass facility, operations at the Mountain
Pass facility had been suspended with the exception of a pilot processing project to recover
neodymium from lanthanum stockpiles produced prior to Chevrons ownership of the Mountain Pass
facility. The neodymium from lanthanum (NFL) pilot processing project was undertaken to improve
the facilitys REE processing techniques. Since June 12, 2008 (Inception) through March 31, 2010,
revenue was generated primarily from the sale of products associated with the NFL pilot processing
project, which concluded in February 2010. In April 2010, the Company
commenced the second pilot processing campaign to recover cerium, lanthanum, neodymium,
praseodymium and samarium/europium/gadolinium concentrate from bastnasite concentrate stockpiles.
6
Table of Contents
MOLYCORP, INC.
(A Company in the Development Stage)
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(A Company in the Development Stage)
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(2) Basis of Presentation
The Companys acquisition of the Mountain Pass facility has been accounted for as an
acquisition of net assets and not a business combination. As described below, the Companys current
business plan includes investing substantial capital to restart mining operations, construct and
refurbish processing facilities and other infrastructure, and to expand into metal and alloy
production. Molycorp will continue as a development stage company until these activities have been
completed, which is currently expected to be by the end of 2012.
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America (GAAP)
for interim financial information and Regulation S-X promulgated under the Securities Exchange
Act of 1934. While the December 31, 2009 balance sheet information was derived from the Companys
audited financial statements, for interim periods, GAAP and Regulation S-X do not require all
information and notes that are required in the annual financial statements, and all disclosures
required by GAAP for annual financial statements have not been included. Therefore, the
accompanying unaudited financial statements should be read in conjunction with Molycorps
Consolidated Financial Statements and related Notes for the year ended December 31, 2009, and the
period from June 12, 2008 (Inception) through December 31, 2008, included in Molycorps
Registration Statement on Form S-1 (Registration No. 333-166129) and related prospectus dated July
29, 2010 and filed with the Securities and Exchange Commission pursuant to Rule 424(b) under the
Securities Act of 1933. The accompanying unaudited condensed consolidated financial statements
reflect all adjustments, which are normal and recurring in nature, and which, in the opinion of
management, are necessary for the fair presentation of Molycorps financial position, results of
operations and cash flows at June 30, 2010, and for all periods presented. The accompanying
unaudited condensed consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary. All intercompany balances and transactions have been eliminated in
consolidation.
The Company has evaluated subsequent events through September 2, 2010, which is the date the
accompanying financial statements were available to be issued.
(3) Capital Requirements
Most of the facilities and equipment acquired with the Mountain Pass facility are at least 20
years old and must be modernized or replaced. Under its current business plan, the Company intends
to spend approximately $511 million through 2012 to restart mining operations, construct and
refurbish processing facilities and other infrastructure at the Mountain Pass facility and expand
into metals and alloys production. Capital expenditures under this plan total approximately $53
million in 2010. The Company expects to finance these expenditures, as well as its working capital
requirements, with the $379.2 million of net proceeds, after underwriters discounts and
commissions and offering expenses payable by Molycorp, from its initial public offering of
common stock, anticipated revenue from operations and debt financing, project financing, and/or federal
government programs, including the U.S. Department of Energy loan guarantee program for which the
Company submitted an application in June 2010.
(4) Summary of Significant Accounting Policies
(a) Use of Estimates
The preparation of the financial statements, in accordance with GAAP, requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Management bases its
estimates on the Companys historical experience and on various other assumptions that are believed
to be reasonable under the circumstances. Actual results may differ significantly from these
estimates under different assumptions and conditions.
Significant estimates made by management in the accompanying financial statements include the
collectability of accounts receivable, the recoverability of inventory, the useful lives and
recoverability of long-lived assets such as property, plant and equipment and intangible asset, and
the adequacy of the Companys asset retirement obligations. The current economic environment has
increased the degree of uncertainty inherent in these estimates and the underlying assumptions.
(b) Revenue and Cost of Goods Sold
Revenue is recognized when persuasive evidence of an arrangement exists, the risks and rewards
of ownership have been transferred to the customer, which is generally when title passes, the
selling price is fixed or determinable, and collection is reasonably assured. Title generally
passes upon shipment of product from the Mountain Pass facility. Prices are generally set at the
time of, or prior to, shipment. Transportation and distribution costs are incurred only on sales
for which the Company is responsible for delivering the product. Our reported revenues are
presented net of freight and shipping costs.
7
Table of Contents
MOLYCORP, INC.
(A Company in the Development Stage)
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(A Company in the Development Stage)
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Cost of goods sold includes the cost of production as well as inventory write-downs caused by
market price declines. Primary production costs include labor, supplies, maintenance costs,
depreciation, and plant overhead.
(c) Inventories
Inventories consist of work-in-process, finished goods, stockpiles of bastnasite and lanthanum
concentrate, and materials and supplies. Inventory cost is determined using the lower of weighted
average cost or estimated net realizable value. Inventory expected to be sold in the next 12 months
is classified as a current asset in the consolidated balance sheets.
Write-downs to estimated net realizable value are charged to cost of goods sold. Many factors
influence the market prices for REOs and, in the absence of established prices contained in
customer contracts, management uses an independent pricing source to evaluate market prices for
REOs at the end of each quarter. For the three months ended June 30, 2010 and 2009, the Company
recognized write-downs of $0.3 million and $3.0 million, respectively, as a result of production costs in excess of
certain REO market prices. For the six months ended June 30, 2010 and 2009, and cumulatively for
the period from June 12, 2008 (Inception) through June 30, 2010, the Company recognized write-downs
of $0.9 million, $5.1 million and $19.5 million, respectively, as a result of production costs in excess of certain
REO market prices.
The Company evaluates the carrying value of materials and supply inventories each quarter
giving consideration to slow-moving items, obsolescence, excessive levels, and other factors and
recognizes related write-downs as necessary.
At June 30, 2010 and December 31, 2009, inventory consisted of the following (in thousands):
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Current: |
||||||||
Work in process |
$ | 5,104 | $ | 4,797 | ||||
Finished goods |
3,464 | 2,685 | ||||||
Materials and supplies |
1,316 | 1,063 | ||||||
Total current |
$ | 9,884 | $ | 8,545 | ||||
Long-term: |
||||||||
Concentrate stockpiles |
$ | 9,733 | $ | 11,844 | ||||
Finished goods |
468 | 246 | ||||||
Total long-term |
$ | 10,201 | $ | 12,090 | ||||
(d) Property, Plant and Equipment, net
Property, plant and equipment associated with the acquisition of the Mountain Pass facility
was recorded at estimated fair value as of the acquisition date. Expenditures for new property,
plant and equipment and improvements that extend the useful life or functionality of the asset are
capitalized. The Company capitalized $5.0 million and $3.0 million in plant modernization costs for
the three months ended June 30, 2010 and 2009, respectively, and $8.4 million and $3.4 million in
plant modernization costs in the six months ended June 30, 2010 and 2009, respectively.
Mineral properties at June 30, 2010 and December 31, 2009 represent the purchase price
allocated to mineral resources associated with the Mountain Pass facility. The Company will begin
to amortize such mineral properties using the units of production method over estimated proven and
probable reserves once mining operations resume, which is currently expected to occur in late 2011.
At June 30, 2010 and December 31, 2009, property, plant and equipment consisted of the
following (in thousands):
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Land |
$ | 800 | $ | 800 | ||||
Land improvements (15 years) |
15,414 | 17,954 | ||||||
Buildings and improvements (4 to 27 years) |
8,458 | 8,458 | ||||||
Plant and equipment (2 to 12 years) |
19,547 | 12,065 | ||||||
Vehicles (7 years) |
1,046 | 1,023 | ||||||
Computer software (5 years) |
1,168 | 1,116 | ||||||
Furniture and fixtures (5 years) |
42 | 41 | ||||||
Construction in progress |
7,307 | 6,506 | ||||||
Mineral properties |
23,138 | 23,138 | ||||||
Property, plant and equipment at cost |
76,920 | 71,101 | ||||||
Less accumulated depreciation |
(7,118 | ) | (4,749 | ) | ||||
Property, plant and equipment, net |
$ | 69,802 | $ | 66,352 | ||||
8
Table of Contents
MOLYCORP, INC.
(A Company in the Development Stage)
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(A Company in the Development Stage)
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
In accordance with ASC 360, Property Plant and Equipment, long-lived assets such as property,
plant and equipment, mineral properties and purchased intangible assets subject to amortization,
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
In connection with an updated asset retirement obligation analysis prepared as of June 30,
2010, the Company determined that its asset retirement obligation was overstated by approximately
$2.5 million as a result of not reducing its prior estimate for costs of soil remediation performed
prior to the Companys acquisition of the Mountain Pass facility. As the depreciation of the
overstated asset retirement costs and accretion of the asset retirement obligation had an
immaterial impact on the Companys net loss for all periods previously presented and cumulatively
since inception, the Company reduced its asset retirement cost asset and asset retirement
obligation by approximately $2.5 million effective April 1, 2010.
(e) Intangible Asset
The Company acquired its trade name in connection with the Mountain Pass facility acquisition.
Amortization is provided using the straight-line method based on an estimated useful life of 12
years. Amortization expense for each of the three months ended June 30, 2010 and 2009 was $16,250.
Amortization expense for the six months ended June 30, 2010 and 2009, and cumulatively for the
period from June 12, 2008 (Inception) through June 30, 2010 was $32,500, $32,500 and $114,500,
respectively. Amortization expense is estimated to be $65,000 annually for the following five
years.
(f) Investment in Joint Venture
In connection with the Mountain Pass facility acquisition, the Company acquired a one-third
interest in a joint venture with Sumitomo Metals Industries, Ltd. of Japan (Sumitomo) called
Sumikin Molycorp (SMO). The Company disposed of its interest in the joint venture to Sumitomo on
July 9, 2009 for cash consideration of $9.7 million and recognized no gain.
(g) Accrued Expenses
Accrued expenses at June 30, 2010 and December 31, 2009 consisted of the following: (in
thousands):
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Waste disposal |
$ | 508 | $ | 1,500 | ||||
Completion bonus |
| 1,445 | ||||||
Defined contribution plan |
455 | 988 | ||||||
Other |
2,564 | 2,030 | ||||||
Total accrued expenses |
$ | 3,527 | $ | 5,963 | ||||
(h) Asset Retirement Obligation
The Company accounts for reclamation costs, along with other costs related to the closure of
the Mountain Pass facility, in accordance with ASC 410-20, Asset Retirement Obligations. This
standard requires the Company to recognize asset retirement obligations at estimated fair value in
the period in which the obligation is incurred. The Company recognized an asset retirement
obligation and corresponding asset retirement cost of $13.3 million in connection with the Mountain
Pass facility acquisition. The liability was initially measured at fair value and is subsequently
adjusted for accretion expense and changes in the amount or timing of the estimated cash flows.
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MOLYCORP, INC.
(A Company in the Development Stage)
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(A Company in the Development Stage)
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
In connection with an updated asset retirement obligation analysis prepared as of June 30,
2010, the Company determined that its asset retirement obligation was overstated by approximately
$2.5 million as a result of not reducing its prior estimate for costs of soil remediation performed
prior to the Companys acquisition of the Mountain Pass facility. Because the depreciation of the
overstated asset retirement costs and accretion of the asset retirement obligation had an
immaterial impact on the Companys net loss for all periods previously presented and cumulatively
since inception, the Company reduced its asset retirement cost asset and asset retirement
obligation by approximately $2.5 million effective April 1, 2010. The asset retirement cost was
capitalized as part of the carrying amount of the related long-lived assets and is being
depreciated over the assets remaining useful lives. Depreciation expense associated with the asset
retirement cost was $0.2 million and $0.3 million for the three months ended June 30, 2010, and
2009, respectively. Depreciation expense associated with the asset retirement cost was $0.5
million, $0.6 million and $2.0 million for the six months ended June 30, 2010, and 2009, and
cumulatively for the period from June 12, 2008 (Inception) through June 30, 2010, respectively. The
following table presents the activity in our asset retirement obligation (in thousands):
Six Months | Year | |||||||
Ended | Ended | |||||||
June 30, 2010 | December 31, 2009 | |||||||
Balance at beginning of period |
$ | 14,202 | $ | 13,583 | ||||
Obligations settled |
(304 | ) | (387 | ) | ||||
Accretion expense |
479 | 1,006 | ||||||
Revision in estimated cash flows |
(2,540 | ) | | |||||
Balance at end of period |
$ | 11,837 | $ | 14,202 | ||||
The Company is required to provide the applicable governmental agencies with financial
assurances relating to its closure and reclamation obligations. At June 30, 2010, the Company had
financial assurance requirements of $27.4 million that were satisfied with surety bonds secured by
letters of credit provided by individual investors, which have been placed with California state
and regional agencies.
(i) Income Taxes
Molycorp is subject to federal and state income taxes and will file consolidated income tax
returns. Molycorp recognizes income taxes under the asset and liability method. Deferred tax
assets and liabilities are recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates
expected to apply to taxable income in the periods in which the deferred tax liability or asset is
expected to be settled or realized. Molycorp records a valuation allowance if, based on available
information, it is deemed more likely than not that its deferred income tax assets will not be
realized in full. The Companys net loss of $23.3 million for the three months ended June 30, 2010
included $15.1 million in stock-based compensation expense, which is a permanent difference between
its losses for financial reporting and income tax purposes. Molycorp has generated a deferred
income tax benefit of $3.4 million for the three months ended June 30, 2010. However, as
realization of these tax benefits is not assured, we have established a valuation allowance of $3.4
million against the balance of related deferred tax assets in excess of deferred tax liabilities.
(j) Class B Stockholder Obligations
Effective
November 1, 2009, 5,880,000 incentive shares of Molycorp
Minerals, LLC were issued to
certain employees and independent directors of the Company. At the time of issuance, due to
Molycorp Minerals, LLCs option to repurchase vested shares of terminated participants at a price
other than fair value, these incentive shares were classified as liabilities for accounting purposes and were valued at
zero using the intrinsic valuation method. On April 15, 2010, all holders of incentive shares
contributed their incentive shares to Molycorp, Inc.
in exchange for 78,788 shares of Class B common stock of Molycorp, Inc., 26,263 shares of
which vested immediately with an additional 26,263 shares vesting on September 30, 2010 and the
remaining 26,262 shares vesting on September 30, 2011. The shares of Class B common stock are
non-transferable and the Company has the right to repurchase vested shares upon the termination of
employment for any reason.
The shares of Class B common stock automatically convert into shares of common stock, based on
a conversion factor, upon an IPO. On August 3, 2010, Molycorp completed an IPO of common stock
at an offering price of $14.00 a share, at which time the shares of Class B common stock were
converted into 2,232,740 shares of common stock, 744,247 of which vested on the date of issuance
with the remaining 1,488,493 vesting over a period of six months following the IPO.
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MOLYCORP, INC.
(A Company in the Development Stage)
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(A Company in the Development Stage)
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The Company recognized the exchange of incentive shares for shares of Class B common stock as
a modification on April 15, 2010, and the new liability was revalued using the fair value method.
The Company estimated the fair value of the awards as $31.3 million based on the $14.00 offering
price of the IPO and the common stock conversion rate. The $15.1 million vested portion of the shares was
recognized as compensation expense as of the April 14, 2010 issuance date with the $16.2 million in remaining
compensations being recognized ratably over the vesting period.
(k) Stockholders Equity
Stockholders interests are represented by 50,112,580 and 44,308,804 shares of the Companys
Class A common stock at June 30, 2010 and December 31, 2009, respectively. Paid-in capital in the
consolidated balance sheets represents amounts paid by stockholders or interests earned under
certain stock compensation agreements. For the six months ended June 30, 2010, the Company
received contributions from its stockholders totaling $15.0 million in exchange for 5,679,308
shares of Class A common stock.
(l) Earnings (loss) per Share
Basic earnings (loss) per share is computed by dividing the Companys net income (loss) by the
weighted average number of shares of Class A common stock outstanding during the period. Diluted
earnings (loss) per share reflects the dilution of potential Class A common stock in the weighted
average number of common shares outstanding during the period, if dilutive. For this purpose, the
treasury stock method and if converted method, as applicable, are used for the assumed proceeds
upon the exercise of common stock equivalents at the average selling prices of the shares during
the year. For the six months ended June 30, 2009, potential shares associated with 145,214
outstanding stock options were excluded from the calculation of diluted earnings per share as their
effect would have been anti-dilutive due to the Companys net loss for the period. There were no
outstanding stock options or other potential shares outstanding for the six months ended June 30,
2010. Consequently, the Company does not have any adjustments between earnings per share and
diluted earnings per share.
Basic earnings (loss) are not allocated to Class B shares as, for accounting purposes, Class B
shares do not represent an equity interest in the Company and do not participate in the
distribution of earnings.
(m) Comprehensive income (loss)
The Company does not have any items entering into the determination of comprehensive income
(loss) other than net income (loss) for the three-month and six-month periods ended June 30, 2010
and 2009.
(5) Commitments and Contingencies
(a) Self Insurance
The Company is self-insured for employee healthcare costs, subject to a related stop-loss
agreement with an insurance company. The Companys accrued liability associated with this
obligation was $0.1 million at June 30, 2010 and December 31, 2009.
(b) Future Operating Lease Commitments
The Company has certain operating leases for office space, land and certain equipment.
Remaining annual minimum payments under these leases at June 30, 2010 were $0.2 million in 2010 and
$0.1 million in 2011.
(c) Completion Bonus
In connection with the Mountain Pass facility acquisition, the Company assumed a $0.4 million
obligation related to a completion bonus payable to union employees who worked on the NFL pilot
processing development project. Under the terms of the related labor agreement, eligible employees
were entitled to a bonus of 40 hours of pay at the employees base rate for every month spent on
the project, regardless of the number of hours worked. The Company recognized the related costs
associated with this bonus as employees worked on the project. At December 31, 2009, the accrued
completion bonus was $1.4 million. The accrued completion bonus was paid in March 2010.
(d) Labor Contract
Certain Mountain Pass facility employees are covered by a collective bargaining agreement with
the United Steelworkers of America, which expires on March 15, 2012. At June 30, 2010, 71
employees, or approximately 56% of the Companys workforce, were covered by this collective
bargaining agreement.
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MOLYCORP, INC.
(A Company in the Development Stage)
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(A Company in the Development Stage)
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(e) Reclamation Surety Bonds
At June 30, 2010, Molycorp had placed $27.4 million of surety bonds with California state and
regional agencies to secure its Mountain Pass facility closure and reclamation obligations.
(f) Insurance Premium Financing Agreement
At June 30, 2010, Molycorp was a party to a short-term premium financing agreement related to
its property insurance policies. The unpaid principal balance of $0.2 million is included in
accrued expenses in the consolidated balance sheet. The agreement requires monthly principal and
interest payments of $41,592 through November 2010.
(g) Licenses and Permits
The Company is subject to numerous and detailed federal, state and local environmental laws,
regulations and permits including health and safety, environmental, and air quality. The Company
must obtain a number of additional permits in order to complete the plant modernization and
expansion. The Company is subject to strict conditions, requirements and obligations relating to
various environmental and health and safety matters in connection with the current permits, and the
Company anticipates additional conditions, requirements and obligations associated with the
additional permits required for future operations, including the modernization and expansion of the
Mountain Pass facility. Certain conditions could be imposed in order to obtain the required permits
including requirements to conduct additional environmental studies and collect and present data to
government authorities pertaining to the potential impact of current and future operations upon the
environment. Accordingly, the required permits may not be issued, maintained or renewed in a timely
fashion if at all, or may be issued or renewed upon conditions that restrict the Companys ability
to conduct its operations economically. Any failure, significant delay or significant change in
conditions that is required to obtain, maintain or renew permits, could have a material adverse
effect on the Companys business, results of operations and financial condition.
(6) Stock-Based Compensation
Molycorp accounts for stock-based compensation based upon the fair value of the awards at the
time of grant. The expense associated with such awards is recognized over the service period
associated with each issuance. There are no performance conditions associated with these awards.
The Company issued an option to its Chief Executive Officer on April 10, 2009 for the purchase
of 145,214 shares of Company common stock (giving effect to the corporate reorganization and the
conversion of Class A common stock into common stock in connection with the IPO). The option
vested, and the related expense of $241,000 was recognized on the date of grant. At December 31,
2009, there were vested options outstanding for the purchase of 124,468 shares of common stock with
a stated exercise price of $2.41 per share. On February 1, 2010, the remaining options were
exercised.
(7) Concentrations
(a) Limited Number of Products
The Companys current operations are limited to the production and sale of REOs from
stockpiled concentrates and it does not have the capability to significantly alter its product mix
prior to completing the modernization and expansion of the Mountain Pass facility and the restart
of mining operations. Sales of lanthanum concentrate accounted for 66% and 87% of our sales and
lanthanum oxide accounted for 24% and 6% of our sales for the three months ended June 30, 2010 and
2009, respectively. Sales of lanthanum concentrate accounted for 72% and 73% of our sales and
lanthanum oxide accounted for 18% and 18% of our sales for the six months ended June 30, 2010 and
2009, respectively.
(b) Limited Number of Customers
There is a limited market for the Companys lanthanum concentrate and its two largest
customers comprised 88% (79% of the total corresponds to the Companys largest customer and 9% of
the total corresponds to the second largest customer) of the Companys total product revenue for
the three months ended June 30, 2010. For the three months ended June 30, 2009, the Companys two
largest customers comprised 87% (57% of the total corresponds to the Companys largest customer and
30% of the total corresponds to the Companys second largest customer) of the total product
revenue. The Companys two largest customers comprised 89% (77% of the total corresponds to the
Companys largest customer and 12% of the total corresponds to the second largest customer) of the
Companys total product revenue for the six months ended June 30, 2010. For the six months ended
June 30, 2009, the Companys three largest customers comprised 86% (58%, 15% and 13% of the total
corresponds to the Companys first, second and third largest customers, respectively) of the total
product revenue.
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MOLYCORP, INC.
(A Company in the Development Stage)
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(A Company in the Development Stage)
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(c) Single Geographic Location
Currently, the Companys only mining and production facility is the Mountain Pass facility and
the Companys viability is based on the successful modernization and expansion of its operations.
The deterioration or destruction of any part of the Mountain Pass facility, or legal restrictions
related to current or anticipated operations at the Mountain Pass facility, may significantly
hinder the Companys ability to reach or maintain full planned production rates within the expected
time frame, if at all.
(8) Related-Party Transactions
In February 2009, certain of the Companys stockholders incurred certain costs in providing
letters of credit and/or cash collateral to secure the surety bonds issued for the benefit of
certain regulatory agencies relating to the Companys Mountain Pass facility closure and
reclamation obligations. The total amount of collateral provided by stockholders at June 30, 2010
was $18.2 million. The Company has agreed to pay each such stockholder a 5% annual return on the
amount of collateral provided. Under the terms of the agreement, the stockholders may receive
quarterly payments, delayed payments, or payments-in-kind. During each of the three months ended
June 30, 2010 and 2009, the Company recognized approximately $0.2 million in compensation expense
to stockholders under this agreement. During the six months ended June 30, 2010 and 2009, the
Company recognized approximately $0.4 million and $0.3 million, respectively, in compensation to
the stockholders under this agreement, which is included in selling, general and administrative
expense in the consolidated statement of operations. Accrued expenses in the consolidated balance
sheets included payables to stockholders totaling $1.0 million and $0.6 million at June 30, 2010
and December 31, 2009, respectively, relating to these agreements.
In June 2010, the Company entered into a transaction with a stockholder under which it
borrowed approximately $5.0 million, secured by certain product inventories. Borrowing under this
agreement required an initial interest rate of 6% based on three month LIBOR plus a margin, which
is adjusted every three months. At June 30, 2010, interest payable associated with the agreement
totaled $12,500.
During the quarter ended June 30, 2010, Molycorp and Traxys North America LLC jointly marketed
and sold certain lanthanum oxide, cerium oxide and erbium oxide products. Per the terms of this
arrangement, Molycorp and Traxys North America LLC split gross margin equally once all costs
associated with the sale have been recovered by both parties. As a result of this arrangement,
Molycorp purchased 198 thousand pounds of lanthanum oxide from Traxys North America LLC for $0.5
million and 7.7 thousand pounds of cerium oxide for $25,000 during the quarter ended June 30, 2010.
At June 30, 2010, the Company recorded a receivable from Traxys of $14,000 related to the final
settlement on sales of erbium oxide. Related party payable related to product purchases was $0.3
million at June 30, 2010.
(9) Subsequent Events
On August 3, 2010, Molycorp completed its IPO of common stock. In connection with its IPO,
Molycorp, Inc. issued 29,128,700 shares of common stock at $14.00 per share (including 1,003,700
shares of Molycorp common stock issued in connection with the
underwriters option to purchase additional shares). Total proceeds of the offering were
approximately $379.2 million after underwriting discounts and commissions and offering expenses
payable by Molycorp, Inc. Immediately prior to the IPO, all shares of Class B common stock were
converted into shares of common stock and reclassified as equity interests rather than liability
interests. The following table sets forth our balance sheet as of June 30, 2010:
| on an actual basis; and |
| on a pro-forma basis to give effect to the conversion of the shares of Class B common stock of Molycorp into shares of common stock upon the completion of the IPO, resulting in a $15.1 million reduction in current liabilities and a corresponding increase to equity; and |
| on a pro-forma basis to give effect to the proceeds from the IPO, resulting in a $379.2 million increase in current assets and a corresponding increase to equity. |
(In thousands) | Actual | Pro Forma | ||||||
Total current assets |
$ | 18,712 | $ | 397,912 | ||||
Total non-current assets |
80,674 | 80,674 | ||||||
Total assets |
99,386 | 478,586 | ||||||
Total current liabilities |
29,134 | 14,001 | ||||||
Total non-current liabilities |
11,377 | 11,377 | ||||||
Total liabilities |
40,511 | 25,378 | ||||||
Total stockholders equity |
58,875 | 453,208 | ||||||
Total liabilities and stockholders equity |
$ | 99,386 | $ | 478,586 | ||||
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
In this Quarterly Report on Form 10-Q, unless the context requires otherwise, references to
Molycorp, we, our or us refer to Molycorp, LLC and its consolidated subsidiaries prior to
our corporate reorganization (as described under the heading Overview Presentation below) and
Molycorp, Inc. and its consolidated subsidiaries after the corporate reorganization. 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. Factors that may cause actual results to
differ materially from expected results described in forward-looking statements include, but are
not limited to: our ability to secure sufficient capital to implement our business plans; our
ability to complete our modernization and expansion efforts and reach full planned production rates
for rare earth oxides and other planned downstream products; uncertainties associated with our
reserve estimates and non-reserve deposit information; uncertainties regarding global supply and
demand for rare earth materials; 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 Part II, Item 1A
of this Quarterly Report on Form 10-Q.
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 unaudited
condensed consolidated financial statements and related notes included herein. The historical
financial data discussed below prior to the completion of the initial public offering of Molycorp,
Inc. reflects the historical results of operations and financial position of Molycorp, LLC and, for
any time period prior to the formation of Molycorp, LLC on September 9, 2009, those of Molycorp
Minerals, LLC, or Molycorp Minerals. The historical financial data does not, unless otherwise
noted, give effect to the completion of the initial public offering of Molycorp, Inc.
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 we believe that the
publications and reports are reliable, we have not independently verified their data.
Overview
Presentation
Molycorp Minerals, a Delaware limited liability company formerly known as Rare Earth
Acquisition, LLC, was formed on June 12, 2008 to purchase the Mountain Pass, California rare earth
deposits and associated assets, or the Mountain Pass facility, from Chevron Mining Inc., a
subsidiary of Chevron Corporation, on September 30, 2008. Molycorp, LLC, a Delaware limited
liability company, which was the parent of Molycorp Minerals, was formed on September 9, 2009.
Molycorp, Inc. was formed on March 4, 2010 as a new Delaware corporation that did not, prior to the
date of the consummation of its initial public offering, conduct any material activities.
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On April 15, 2010, the members of Molycorp, LLC contributed either (a) all of their member
interests in Molycorp, LLC or (b) all of their equity interests in entities that hold member
interests in Molycorp, LLC (and no other assets or liabilities) to Molycorp, Inc. in
exchange for shares of Molycorp, Inc. Class A common stock. Additionally, all of the holders
of profits interests in Molycorp Minerals, which were represented by incentive shares, contributed
all of their incentive shares to Molycorp, Inc. in exchange for shares of Molycorp, Inc. Class B
common stock. As a result, Molycorp, LLC and Molycorp Minerals became subsidiaries of Molycorp,
Inc. We refer to this process as the corporate reorganization. On June 15, 2010, Molycorp, LLC
was merged with and into Molycorp Minerals.
On July 9, 2010, Molycorp, Inc. completed a 38.23435373-for-one stock split, which has been
retroactively reflected in the historical financial data for all periods presented. On August 3,
2010, Molycorp, Inc. completed its initial public offering of common stock. In connection with its
initial public offering, Molycorp, Inc. issued 29,128,700 shares of common stock at $14.00 per
share (including 1,003,700 shares of Molycorp common stock issued in connection with the
underwriters option to purchase additional shares). Total net proceeds of the offering were
approximately $379.2 million after underwriting discounts and commissions and offering expenses
payable by Molycorp, Inc. Immediately prior to the consummation of Molycorp, Inc.s initial public
offering, all of the shares of Class A common stock and Class B common stock were converted into
shares of common stock.
Our Company
We are the only rare earth oxide, or REO, producer in the Western hemisphere and own one of
the worlds largest, most fully developed rare earth projects outside of China. Following the
execution of our mine-to-magnets strategy, as described below, and completion of our
modernization and expansion efforts, we expect to be one of the worlds most integrated producers
of rare earth products, including oxides, metals, alloys and magnets. Our rare earths are critical
inputs in existing and emerging applications including: clean energy technologies, such as hybrid
and electric vehicles and wind power turbines; multiple high-tech uses, including fiber optics,
lasers and hard disk drives; numerous 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 to steadily increase both due to continuing growth in existing applications and increased
innovation and development of new end uses.
Our goals are to:
| develop innovative rare earth technologies and products vital to green energy, high-tech, defense and industrial applications; |
| be commercially sustainable, globally competitive, profitable and environmentally superior; |
| act as a responsible steward of our rare earth resources; and |
| use our technology to improve the daily lives of people throughout the world. |
We have made significant investments, and expect to continue to invest, in developing
technologically advanced and proprietary applications for individual REEs. We are in the process of
modernizing and expanding our production capabilities at our Mountain Pass, California facility in
order to integrate the rare earths supply chain: mining; oxide processing; production of metals and
alloys; and, as part of our mine-to-magnets strategy, the production of rare earth-based magnets.
Our vision is to be the rare earth products and technology company recognized for its ETHICS
Excellence, Trust, Honesty, Integrity, Creativity and Safety. Since July 2005, the Mountain Pass
facility has not had a lost-time accident and has received the coveted Sentinels of Safety award
from the Mine Safety and Health Administration, or the MSHA, for three of the last four years.
Our Mine Process and Development Plans
We are preparing to recommence mining operations, which we expect to occur in 2011.
Prior to the expected completion of our modernization and expansion efforts, we expect to produce
approximately 3,000 mt per year in the aggregate of cerium products, lanthanum concentrate,
didymium oxide and heavy rare earth concentrates from stockpiled feedstock. Recommencement of
mining operations is expected to coincide with the modernization of our processing capabilities in
order to efficiently produce at a rate of 19,050 mt of REO per year.
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Our modernization and expansion plans envision adding facilities and equipment for metal
conversion and alloy production at the Mountain Pass facility or an off-site property. In November
2009, we entered into a non-binding letter of intent to acquire a third-party producer of rare
earth metals and alloys in the United States, although we have not yet been able to enter into a
definitive agreement.
If we are able to enter into a definitive agreement and complete the acquisition, instead of
adding such facilities and equipment at Mountain Pass, we would transport cerium, lanthanum,
neodymium, praseodymium, dysprosium, terbium and samarium oxide products from our Mountain Pass
facility to that off-site location, or another location, which already possesses the technological
capability to produce rare earth metals and alloys. Additionally, we have entered into a
non-binding letter of intent with Neo Material Technologies Inc., or Neo Material, that, among
other things, contemplates a technology transfer agreement pursuant to which Neo Material may
provide us with technical assistance and know-how with respect to the production of rare earth
metals, alloys and magnets.
We anticipate the cost of restarting mining operations, the modernization and expansion of our
Mountain Pass facility and the addition of rare earth metal and alloy production capabilities to be
approximately $511 million. Our estimated capital expenditures of $511 million does not include
corporate, selling, general and administrative expenses, which we estimate to be an additional $5
million to $10 million per year. We expect to finance these expenditures, as well as our working
capital requirements, with the $379.2 million in net proceeds
from our initial public offering or IPO and anticipated cash
flows from operations, combined with traditional debt financing, project financing, and/or
government programs, including the U.S. Department of Energy loan guarantee program for which we
submitted an application in June 2010. On July 21, 2010, the DOE notified Molycorp that its Part I
submission under the loan guarantee program had been reviewed and deemed eligible for submission of
a Part II application.
We have entered into a third and independent non-binding letter of intent to form a
collaborative joint venture with a third-party manufacturer of NdFeB magnets in the United States.
This joint venture will provide us with access to the technology, people and facilities to convert
our rare earth materials into the high-performance permanent magnets required for production of
hybrid and electric vehicles, wind power turbines, high-tech applications and numerous advanced
defense systems on which the U.S. economy and national security depend. The consummation of such a
joint venture, in conjunction with our current modernization plans, the potential acquisition of a
third-party rare earth metal and alloys producer and the potential technology transfer agreement
with Neo Material, is expected to provide us with the capability to mine, process, separate and
alloy individual REEs before manufacturing them into NdFeB magnets. This downstream integration,
which we refer to as our mine-to-magnets strategy, would make us the only fully integrated producer
of NdFeB magnets outside of China, helping to secure a rare earth supply chain for the Rest of
World.
Our Products and Markets
Since our acquisition of the Mountain Pass facility, we have been producing and selling small
quantities of REOs from our pilot processes using stockpiled feedstocks. The purpose of this effort
has been to significantly improve our solvent extraction technology and to develop other key
technologies that will be utilized in the new process. We recently completed processing stockpiled
lanthanum-rich feedstock to produce didymium oxide (a combination of neodymium and praseodymium)
and a higher purity lanthanum concentrate than we previously produced. In July 2010, we began
selling our didymium oxide primarily to customers in the magnet industry. Lanthanum concentrate
produced from the stockpiled material, which we sell to customers in the fluid catalytic cracking
industry, has been our primary source of revenue to date.
We commenced a second pilot processing campaign in the second quarter of 2010 in an effort to
commercially demonstrate our new cracking technology and to further optimize our processing
technologies and improve recovery rates compared to historical operations at the Mountain Pass
facility. Through this effort, we are producing cerium and lanthanum products, as well as didymium
oxide from bastnasite concentrate stockpiles. Between now and the start-up of the new processing
facility, we anticipate producing samarium/europium/gadolinium concentrate, also from bastnasite
concentrate stockpiles. With these additional products, we have begun expanding and diversifying
our customer base. For example, we began selling our cerium products to customers in the
automobile emissions catalyst production industry and we completed our initial sale of XSORBX® to
the water treatment industry.
Key Industry Factors
Demand for Rare Earth Products
Global consumption of REEs is projected to steadily increase due to continuing growth in
existing applications and increased innovation and development of new end uses. For example, the
integration of rare earth permanent magnet drives into wind power turbines has substantially
reduced the need for gearboxes, which increases overall efficiency and reliability. If Mountain
Pass and other rare earth projects do not commence production when anticipated, there will be a gap
between forecasted demand and forecasted supply. We believe that this anticipated market dynamic
will underpin strong pricing.
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As a result of the global economic crisis, rare earth product prices declined by approximately
50% during 2008 and through the third quarter of 2009. According to Metal Pages, from October 2009
to mid-August 2010, prices for rare earths have risen by approximately 400% on average.
Furthermore, over the same period, prices for some of the most common rare earths (cerium oxide,
lanthanum oxide, neodymium oxide, didymium oxide and rare earth carbonate) have risen by more than
700% on average.
Supply of Rare Earth Products
China has dominated the global supply of REOs for the last ten years and, it is estimated that
China accounted for approximately 97% of global REO production in 2008. Even with our planned
production, global supply is expected by analysts to remain tight due to the combined effects of
growing demand and actions taken by the Chinese government to restrict exports. The Chinese
government heightened international supply concerns in August 2009 when Chinas Interior Ministry
signaled that it would further restrict exports of Chinese rare earth resources. Citing the
importance of REE availability to internal industries and the desire to conserve resources, the
Chinese government has announced export quotas, increased export tariffs and introduced a mining
quotas policy that, in addition to imposing export quotas and export tariffs, also imposes
production quotas and limits the issuance of new licenses for rare earth exploration. On July 8,
2010, Chinas Ministry of Industry and Information Technology issued the export quota for the
second half of 2010, which reduced exports by 72% compared with the same period in 2009 and 40% for
the year ended December 31, 2010 as compared to the year ended December 31, 2009. Chinas internal
consumption of rare earths is expected to continue to grow, leaving the Rest of World with less
supply during a period of increasing global demand. China also dominates the manufacture of rare
earth metals, producing substantially all of the worlds supply, and the manufacture of NdFeB
magnets, producing approximately 80% of the worlds supply. Neither capability currently exists in
the United States.
China has also announced a national stockpile program, as has South Korea. Additionally, Japan
has increased its national stockpile program. The U.S. Department of Defense is conducting a study,
which is expected to be completed by September 2010, to determine its rare earth requirements and
supply chain vulnerabilities and whether to build a strategic stockpile. These stockpile programs
will likely accelerate the pace of the projected global REE deficit.
As a result of the internal industrial development and economic, environmental and regulatory
factors in China, there is uncertainty with respect to the availability of rare earth products from
China. Although Chinese production of rare earth materials is increasing, export quotas imposed by
the Chinese government are decreasing, thus reducing the amount of rare earth materials that China
may export to the rest of the world. This reduction is occurring at a time when the demand for REEs
is growing significantly.
Factors Affecting Our Results
Modernization and Expansion of Mountain Pass Facility
We anticipate a dramatic change in our business and results of operations upon the completion
of our planned modernization and expansion of our Mountain Pass facility and the commencement of
metal, alloy, and magnet production in 2012. In addition, we expect to produce and sell a
significantly expanded slate of products, including specialty cerium products for water treatment,
neodymium and praseodymium metal, neodymium iron boron and samarium cobalt alloys for magnets,
europium, gadolinium, and terbium oxides for phosphors, and dysprosium and terbium for magnets.
We acquired the Mountain Pass facility on September 30, 2008 from Chevron Mining Inc., which
became the owner of the Mountain Pass facility in 2005 after Unocal Corporation merged with Chevron
Corporation. Unocal Corporation had suspended most operations at the Mountain Pass facility by
2002 and, except for pilot processing activities, they remained suspended under Chevron Mining
Inc.s ownership. Additionally, significant reclamation work was completed at the Mountain Pass
facility under Chevron Mining Inc.s ownership.
We plan to utilize the assets we acquired from Chevron Mining Inc. as a foundation to build an
integrated rare earth products and technology company, which requires considerable additional
capital investment. We believe the application of improved technologies, along with the capital
investment, will allow us to create a sustainable business by cost effectively producing high
purity rare earth products. In addition to the modernization and expansion of the Mountain Pass
facility, we expect to significantly broaden our operations through the addition of a number of
downstream activities and products, including metal production, alloying and magnet production.
Accordingly, we expect our products and customer base to change significantly upon full
implementation of our mine-to-magnets strategy.
We processed lanthanum, which comprised 72% and 73% of our sales for the six months ended June
30, 2010 and 2009, respectively, from the stockpiled lanthanum material held in ponds since
suspension of processing operations by Unocal Corporation in 2002. As a result of this campaign, we
were able to significantly improve our solvent extraction technologies and capabilities.
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We commenced a second pilot processing campaign in the second quarter of 2010 in an effort to
commercially demonstrate our new cracking technology and to further optimize our processing
technologies and improve recovery rates compared to historical operations at the Mountain Pass
facility. Through this effort, we are producing cerium and lanthanum products, as well as didymium
oxide from bastnasite concentrate stockpiles. Between now and the start-up of the new processing
facility, we anticipate producing samarium/europium/gadolinium concentrate, also from bastnasite
concentrate stockpiles. With these additional products, we have begun expanding and diversifying
our customer base. For example, we began selling our cerium products to customers in the
automobile catalyst production industry and we completed our initial sale of XSORBX® to the water
treatment industry. Upon completion of the modernization and expansion, we will produce each of
the following nine elements: lanthanum, cerium, praseodymium, neodymium, samarium, europium,
gadolinium, terbium and dysprosium; in various chemical compounds and/or metal forms including
alloys.
Revenues
Our prices and product mix are determined by a combination of global and regional supply and
demand factors. Our revenue is currently derived principally from the sale of lanthanum and is
based on the price and quantities of lanthanum we sell. The percentage of our revenues from sales
of lanthanum were 72% and 73% for the six months ended June 30, 2010 and 2009, respectively, net of
any transportation costs that we incur. The quantities we sell are determined by the production
capabilities of the Mountain Pass facility and by demand for our product, which is also influenced
by the level of purity and consistency we are able to achieve. Our revenue also includes of sales
of finished products acquired as part of our acquisition of the Mountain Pass facility.
Prices for lanthanum we sold to our two largest customers were primarily based on fixed-price
contracts. Our contract with one of these customers expired on December 31, 2009 and our contract
with the other customer expired in April 2010. Although prices for REOs have generally increased
since October 2009, this increase followed a period of generally lower prices corresponding with
the global financial crisis beginning in 2008. Many factors influence the market prices for REOs
and, in the absence of established pricing in customer contracts, our sales revenue will fluctuate
based upon changes in the prevailing prices for REOs. We use various industry sources, including
certain publications, in evaluating prevailing market prices and establishing prices for our
products because there are no published indices for rare earth alloys or magnets.
Cost of Goods Sold
Our cost of goods sold reflects the cost allocated to our inventory acquired as part of our
acquisition of the Mountain Pass facility and, with respect to our lanthanum sales, the subsequent
processing costs incurred to produce the product. Because many of our costs are fixed costs as
opposed to variable costs, as our production increases or decreases, our average cost per ton
decreases or increases, respectively. Primary production costs include direct labor and benefits,
maintenance, natural gas, electricity, operating supplies, chemicals, depreciation and amortization
and other plant overhead expenses.
Currently, our most significant variable costs are chemicals and electricity. In the future,
we intend to produce more of our chemicals at a plant on-site, which will reduce our variable
chemical costs. We also intend to build a co-generation facility to provide power. Following such
steps, natural gas will replace electricity and become our most significant variable cost.
We expect our labor and benefit costs to increase through the remainder of 2010 and continue
increasing through the beginning of 2012 due to the addition of personnel and consultants, as we
prepare to increase production to a rate of 19,050 mt of REO per year by the end of 2012. 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. Other events
outside our control, such as power outages, have in the past interrupted our operations and
increased our total production costs, and we may experience similar events in the future.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist primarily of: personnel and related
costs; legal, accounting and other professional fees; occupancy costs; and information technology
costs. We anticipate an increase in selling, general and administrative expenses as we expand our
business and operate as a publicly traded company. These expenses will include additional legal,
compliance and corporate governance expenses, additional accounting and audit expenses, stock
exchange listing fees, transfer agent and other stockholder-related fees and increased premiums for
certain insurance coverages, among others.
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Income Taxes
Prior to our corporate reorganization, we operated entirely within limited liability
companies, which were not directly liable for the payment of federal or state income taxes and our
taxable income or loss was included in the state and federal tax returns of Molycorp, LLCs
members. The newly formed holding company, Molycorp, Inc., is subject to U.S. federal and state
income taxes. For the six months ended June 30, 2010 we have placed a 100% reserve on our deferred
tax assets.
Environmental
Our operations are subject to numerous and detailed federal, state and local environmental
laws, regulations and permits, including those pertaining to employee health and safety,
environmental permitting and licensing, air quality standards, greenhouse gas, 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. The majority of these resources will be
expended through our capital investment budget. We expect to spend approximately $187 million, not
including the costs of air emissions offset credits, which may become necessary and, if required,
could cost up to $20 million, on environmentally-driven capital projects between the remainder of
2010 and the end of 2012 on our modernization and expansion project. In addition, in the six-month
period ending June 30, 2010 and 2009, we incurred operating expenses of approximately $0.4 million
and $1.5 million, respectively, associated with environmental compliance requirements.
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 possible that
greater than anticipated environmental expenditures will be required in the second half of 2010 or
in the future. 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, new regulations could
go into effect that may 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 liability, without regard to fault, for costs relating to
environmental contamination at our facility 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 June
30, 2010, we had placed $27.4 million of surety bonds with California state and regional agencies.
These bonds are currently collateralized by letters of credit provided by our initial investors,
and we intend to replace such collateral arrangements with collateral provided directly by us
during the third quarter of 2010. These bonds require annual payment and renewal. The U.S.
Environmental Protection Agency, or 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, known as CERCLA, 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.
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Results of Operations
Three Months Ended June 30, 2010 and 2009
Three Months Ended June 30, | ||||||||||||
(In thousands) | 2010 | 2009 | Change | |||||||||
Net sales |
$ | 1,845 | $ | 1,230 | $ | 615 | ||||||
Cost of goods sold |
(5,517 | ) | (4,897 | ) | (620 | ) | ||||||
Selling, general and administrative expenses |
(4,254 | ) | (2,869 | ) | (1,385 | ) | ||||||
Share-based compensation |
(15,133 | ) | (242 | ) | (14,891 | ) | ||||||
Depreciation and amortization expense |
(61 | ) | (42 | ) | (19 | ) | ||||||
Accretion expense |
(216 | ) | (251 | ) | 35 | |||||||
Operating loss |
(23,336 | ) | (7,071 | ) | (16,265 | ) | ||||||
Other income (expense): |
||||||||||||
Other income |
45 | 83 | (38 | ) | ||||||||
Net loss |
$ | (23,291 | ) | $ | (6,988 | ) | $ | (16,303 | ) | |||
Revenues
For the three months ended June 30, 2010 and 2009, our revenues were approximately $1.8
million and $1.2 million, respectively. Lanthanum concentrate accounted for 66% and 87% of our
sales and lanthanum oxide accounted for 24% and 6% of our sales for the three months ended June 30,
2010 and 2009, respectively. There is a limited market for our lanthanum and our two largest
customers comprised 89% and 87% of our total product revenue for the three months ended June 30,
2010 and 2009, respectively. We anticipate cerium concentrate, XSORBX®, lanthanum and didymium
oxide to make up a significant percentage of our total sales until we complete the modernization
and expansion of the Mountain Pass facility. We currently sell 100% of our lanthanum to customers
in the United States.
We expect increased revenues in the second half of 2010, primarily attributable to sales of
additional products to be produced during our second pilot processing campaign. Upon completion of
the modernization and expansion of the Mountain Pass facility and the full implementation of our
mine-to-magnets strategy, we expect to produce cerium, lanthanum, neodymium, praseodymium,
samarium, dysprosium and terbium oxide and metal products, europium and gadolinium oxide products
and NdFeB and samarium cobalt alloys. We intend to use some of the NdFeB alloy and dysprosium metal
product in our magnet production plant. Our new products are expected to have significantly more
applications than our current products, exposing us to a larger population of potential customers.
In addition, we estimate that generally higher REE prices in 2010, as compared to early 2009, will
contribute to our increased revenue in 2010.
Cost of Goods Sold
Our cost of goods sold for three months ended June 30, 2010 and 2009 totaled approximately
$5.5 million and $4.9 million, respectively. Included in the cost of goods sold for the three
months ended June 30, 2010 and 2009 are write-downs of inventory to estimated net realizable value
of $0.3 million and $3.0 million, respectively. Lower of cost or market write-downs were higher
during the second quarter of 2009 compared to the same period in 2010, due to lower market prices
for certain products in 2009. Over the first two quarters of 2010 we have seen a steady increase in
market prices for our primary products. Our principal production costs include chemicals, direct
labor and employee benefits, maintenance labor and materials, contract labor, operating supplies,
depreciation, utilities and plant overhead expenses.
Total production costs charged to inventory were $1.5 million and $5.9 million for the three
months ended June 30, 2010 and 2009, respectively. We produced 0.3 million pounds of lanthanum, 0.1
million pounds of didymium oxide and 0.1 million pounds of cerium oxide during the three months
ended June 30, 2010, and 0.8 million pounds of lanthanum and 0.4 million of didymium oxide during
the three months ended June 30, 2009. During the period from May to June 2010, we were
transitioning to our second pilot processing campaign which resulted in decreased output for that
period. With the second pilot processing campaign, we are producing cerium chloride, and cerium hydrate, in
addition to lanthanum chlorohydrate and didymium oxide. As a result of this partial shut-down
during the transition period, labor, maintenance and other costs, such as depreciation expense,
which are normally charged to inventory were expensed as period costs and are reflected in our
higher cost of sales for the three months ended June 30, 2010. Inventory purchases were $0.6
million and less than $0.1 million for the three months ended June 30, 2010 and 2009, respectively.
We primarily purchase lanthanum oxide, cerium oxide and praseodymium oxide that undergo further
processing either at our facility or at an off-site location.
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Our chemical costs were $0.7 million and $1.3 million for the three months ended June 30, 2010
and 2009, respectively. Unit chemical costs are highly correlated to production volumes and are
primarily driven by the market price of the chemicals being used. For the three months ended June
30, 2010 and 2009, the most significant chemical cost was for hydrochloric acid which represented
approximately 43% and 54% of total reagent costs, respectively.
Labor costs, including related employee benefits, allocated to production were $2.1 million
and $1.8 million for the three months ended June 30, 2010 and 2009, respectively. During the second
quarter of 2010, we hired 14 employees covered by a collective bargaining agreement, which led to
higher wage and employee related benefit expenses. During the second quarter of 2010, we also
experienced increase in labor costs due to the annual wage increase required under our union
contract in March 2010. In addition, we recognized $15.1 million in share-based compensation in the
three months ended June 30, 2010 associated with the conversion of the incentive shares to shares
of Class B common stock in anticipation of our IPO. These shares were valued based on the value of
the shares of common stock issued upon conversion of the shares of Class B common stock in
connection with the consummation of our IPO. An additional $16.2 million in share-based
compensation will be recognized over the remaining six-month vesting period.
Maintenance costs, including maintenance labor and supplies, were $0.3 million and $0.5
million for the three months ended June 30, 2010 and 2009, respectively.
Other costs allocated to production include depreciation of $1.5 million and $1.0 million for
the three months ended June 30, 2010 and 2009, respectively. Depreciation allocated to products is
primarily related to buildings, equipment and machinery used in the production process.
Depreciation expense allocated to production was significantly higher during the second quarter of
2010 as compared to the second quarter of 2009, as we have capitalized over $6.5 million of
production equipment and other assets related to the commencement of our second pilot processing
campaign in the second quarter of 2010. These assets are being depreciated over a 32-month period
as they will be decommissioned with the full restart of the mine at the end of 2012. We also
accrued waste disposal charges of $0.5 million and $0.3 million at June 30, 2010 and 2009,
respectively, for disposal of by-products of production that are potentially hazardous.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses for the three months ended June 30, 2010 and
2009 totaled approximately $4.3 million and $2.9 million, respectively. The higher general and
administrative expenses for the second quarter of 2010 as compared to the same period of 2009, are
primarily due to the addition of salaried employees at our corporate office as well as the Mountain
Pass facility, and higher accounting, legal and other professional services fees due to increase in
business development activities.
Operating Losses
Since our inception, we have incurred
significant operating losses. Our operating losses for the three months ended June 30, 2010 and
2009 were $23.3 million and $7.1 million, respectively. We funded our operating losses for these
periods entirely with proceeds from equity contributions from our initial investors.
Six Months Ended June 30, 2010 and 2009
Six Months Ended June 30, | ||||||||||||
(In thousands) | 2010 | 2009 | Change | |||||||||
Net sales |
$ | 4,766 | $ | 2,929 | $ | 1,837 | ||||||
Cost of goods sold |
(11,370 | ) | (9,624 | ) | (1,746 | ) | ||||||
Selling, general and administrative expenses |
(8,734 | ) | (5,191 | ) | (3,543 | ) | ||||||
Share-based compensation |
(15,133 | ) | (242 | ) | (14,891 | ) | ||||||
Depreciation and amortization expense |
(156 | ) | (63 | ) | (93 | ) | ||||||
Accretion expense |
(479 | ) | (503 | ) | 24 | |||||||
Operating loss |
(31,106 | ) | (12,694 | ) | (18,412 | ) | ||||||
Other income (expense): |
||||||||||||
Other income |
66 | 105 | (39 | ) | ||||||||
Net loss |
$ | (31,040 | ) | $ | (12,589 | ) | $ | (18,451 | ) | |||
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Revenues
Net sales were $4.8 million and $2.9 million for the six months ended June 30, 2010 and
2009, respectively. We sold 1.2 million pounds of lanthanum concentrate during the six months ended
June 30, 2010 compared to 0.9 million pounds during the six months ended June 30, 2009. Sales were
higher during the six months ended June 30, 2010 as compared to the same period of 2009, due to
improved economic conditions and customer demand. In addition, our average realized price on sales
of lanthanum concentrate increased to $2.75 per pound in the six months ended June 30, 2010
compared to $2.30 per pound in the six months ended June 30, 2009 as a result of increases in the
market price of our products generally and our entering into a new contract with one of our largest
customers in 2010. Sales of lanthanum oxide also increased to 0.2 million pounds in the six months
ended June 30, 2010 compared to 0.1 million pounds in the six months ended June 30, 2009, which
generated approximately $0.8 million and $0.5 million in product revenue for the respective
periods.
With the start up of our second pilot processing campaign in April 2010, we began
production of cerium oxide in May 2010 and we expect sales to commence by the end of the third
quarter of 2010. We will also continue producing and selling lanthanum concentrate to our two
largest customers and didymium oxide.
Cost of Goods Sold
Our cost of goods sold was $11.4 million and $9.6 million for the six months ended June
30, 2010 and 2009, respectively. The higher costs for the six months ended June 30, 2010 compared
to the same period for 2009, were due to higher sales and costs associated with the temporary
shutdown of our facility during March 2010. These increased costs were partially offset by a
decrease in our lower of cost or market inventory write-downs from $5.1 million in the six months
ended June 30, 2009 to $0.9 million in the six months ended June 30, 2010. Lower of cost or market
write-downs were higher during the six months ended June 30, 2009 as compared to the same period in
2010, due to lower market prices for certain products in 2009. Our processing facility was shut
down during March 2010 due to high water levels in our evaporation ponds. In April and May 2010
operations were limited in preparation for the start up of our second pilot processing campaign,
which decreased production volumes during the first and second quarters of 2010. As a result of the
shut down, labor, maintenance and other costs, such as depreciation expense, normally charged to
inventory were expensed as period costs and are reflected in our higher cost of sales for the six
months ended June 30, 2010 compared to the same period in 2009.
Total production costs charged to inventory were $4.5 million and $11.2 million for the
six months ended June 30, 2010 and 2009, respectively. Production costs for lanthanum concentrate
and didymium oxide were higher in the six months ended June 30, 2009 compared to the same period in
2010, due to higher chemical usage and increased labor costs associated with the bonus for
completion of our neodymium from lanthanum, or NFL, pilot processing campaign. We produced 0.7
million pounds and 1.8 million pounds of lanthanum concentrate for the six months ended June 30,
2010 and 2009, respectively. We also produced 0.2 million pounds and 0.6 million pounds of didymium
oxide during the respective periods. In June 2010 we produced 0.1 million pounds of cerium oxide.
Cerium oxide production is expected to increase significantly in the second half of 2010.
Inventory purchases were $0.8 million and $0.1 million for the six months ended June 30,
2010 and 2009. The primary product we purchased during those periods was lanthanum oxide.
Chemical costs charged to production were $1.1 million and $2.2 million for the six months
ended June 30, 2010 and 2009, respectively. Chemical costs in the six months ended June 30, 2010
were lower compared to the same period in 2009, due to lower production levels and improved
processing techniques that reduced chemical usage. Labor costs and related benefits, charged to
production were $4.0 million and $3.8 million for the six months ended June 30, 2010 and 2009,
respectively. During the six months ended June 30, 2009, labor costs were higher due to the accrual
of the NFL completion bonus that was paid out in March 2010. Although there was not a similar bonus
recognized in the six months ended June 30, 2010, wage increases established under our union
agreement, which took effect in March 2009 and 2010, and the addition of 14 new employees under the
collective bargaining agreement as well as the addition of several salaried employees in 2010,
resulted in higher labor costs during the six months ended June 30, 2010 as compared to the same
period in 2009. In addition, we recognized $15.1 million in
share-based compensation in the six months ended June 30, 2010
associated with the conversion of the incentive shares to shares of
Class B common stock in anticipation of our IPO. These shares were
valued based on the value of the shares of common stock issued upon
conversion of the shares of Class B common stock in connection with
the consummation of our IPO. An additional $16.2 million in
share-based compensation will be recognized over the remaining
six-month vesting period.
Other costs charged to production include maintenance expenses of $0.8 million and $1.0
million; depreciation expense of $2.4 million and $1.9 million; and utility charges of $0.8 million
and $0.9 million for the six months ended June 30, 2010 and 2009, respectively.
In March 2010, we also began blending certain lots of our existing didymium oxide
inventory containing different percentages of neodymium and praseodymium content to meet customer
specifications. As of June 30, 2010, over 0.6 million pounds were blended.
Blended inventory is reclassified from work in process to finished goods. We expect to start
selling the blended didymium oxide product in the third quarter of 2010.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses were $8.7 million and $5.2 million for the
six months ended June 30, 2010 and 2009, respectively. During the first quarter of 2010, we
experienced a significant increase in professional fees primarily due to our initial public
offering, business development activities, as well as increased spending for accounting, IT
consulting and engineering services. We also experienced increased salaries due to addition of
several employees at our corporate office over the last twelve months.
Capital Expenditures
Our capital expenditures, on an accrual basis, totaled $8.4 million and $3.4 million in
the six months ended June 30, 2010 and 2009, respectively. Most of the capitalized costs incurred
during the first half of 2010 are related to our second pilot processing campaign, which commenced
in April 2010, and the startup of our modernization and expansion project at the Mountain Pass
facility. These costs were primarily associated with engineering and consulting fees.
Outlook for the Remainder of 2010
For the second half of 2010, we anticipate China-based producers and suppliers will continue
to limit the quantity of REOs available outside of China, which we expect to increase the price of
REOs. We believe this trends will create opportunities for us to increase sales volumes and
improve pricing terms for our products. While the REO products we are currently able to produce
remain limited by the capability of our existing production facilities, we anticipate further
expanding our products and markets throughout the remainder of the year including market
penetration of our XSORBX® technology into the water treatment industry. We believe that our
revenue for the six months ended December 31, 2010 will be sufficient to fund our operating
activities for the remainder of the year, which includes corporate selling, general and
administrative expense.
We are continuing with the design phase of the plant modernization and expansion process. We
have begun the bidding process of pre-construction services and soil testing in preparation to
commence construction. We will also be entering into a number of construction contracts associated
with the modernization and expansion of our Mountain Pass facility through the remainder of the
year.
Capital Investments
We expect to make significant capital expenditures under our plan to modernize and expand our
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 Mountain Pass facility are at least 20 years old. We have developed an
accelerated modernization plan that includes the refurbishment of the Mountain Pass mine and
related processing facilities in 2010 through 2012 in order to increase REO production. We
anticipate the cost of this project to be approximately $511 million, which includes the following:
| purchase of mining equipment and refurbishment of our existing mill facility, with a total estimated cost of approximately $18 million, of which approximately $5 million is expected to be incurred in 2010; |
| refurbishment and expansion of our separations and extraction plants, with total estimated costs of approximately $50 million for the extraction plant and $213 million for the separations plant, of which approximately $5 million is expected to be incurred for the extraction plant and approximately $21 million is expected to be incurred for the separations plant in 2010; |
| construction of our new combined heat and power facility totaling approximately $44 million, none of which is expected to be incurred in 2010; |
| expansion into metal and alloy production, with total estimated costs of approximately $33 million, of which approximately $10 million is expected to be incurred in 2010; |
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| construction of plant infrastructure totaling approximately $116 million, which includes our new paste tailings filter plant and waste storage and treatment facilities, of which approximately $12 million is expected to be incurred in 2010; and |
| we also expect to incur approximately $26 million of overburden removal in order to restart mining operations and have fresh ore available by 2012, and $11 million for mining and miscellaneous equipment, none of which will be incurred in 2010. |
All of the amounts for future capital spending described above are initial estimates that are
subject to change as the projects are further developed. Total capital spending in 2010 is
expected to be approximately $53 million of which roughly 3 million will be prepayments on contract
agreements.
Liquidity and Capital Resources
Most of the facilities and equipment acquired with the Mountain Pass facility are at least 20
years old and must be modernized or replaced. Under our current business plan, we intend to spend
approximately $511 million through 2012 to restart mining operations, construct and refurbish
processing facilities and other infrastructure at the Mountain Pass facility and expand into metals
and alloys production. Capital expenditures under this plan total approximately $53 million in
2010. We expect to finance these expenditures, as well as our working capital requirements, with
the approximately $379.2 million of net proceeds from our IPO and anticipated cash flows from
operations, combined with traditional debt financing, project financing, and/or federal government
programs, including the U.S. Department of Energy loan guarantee program for which we submitted an
application in June 2010. On July 21, 2010, the DOE notified Molycorp that its Part I submission
under the loan guarantee program had been reviewed and deemed eligible for submission of a Part II
application.
Contractual Obligations
At December 31, 2009, we had the following contractual obligations:
Payments Due by Period | ||||||||||||||||||||
Less Than | More Than | |||||||||||||||||||
Contractual Obligations | Total | 1 Year | 1-3 Years | 4-5 Years | 5 Years | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Operating lease obligations(1) |
$ | 281 | $ | 153 | $ | 128 | $ | | $ | | ||||||||||
Purchase obligations(2) |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Employee bonus obligations(3) |
$ | 1,400 | $ | 1,400 | $ | | $ | | $ | | ||||||||||
Asset retirement obligations(4) |
29,247 | 639 | 4,191 | 1,597 | 22,820 | |||||||||||||||
Total |
$ | 30,928 | $ | 2,192 | $ | 4,319 | $ | 1,597 | $ | 22,820 | ||||||||||
(1) | Represents all operating lease payments for office space, land and office equipment. | |
(2) | Represents non-cancelable contractual commitments for the purchase of materials and services from vendors. | |
(3) | Represents payments due to employees for the completion of our NFL pilot processing campaign. | |
(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. |
At June 30, 2010, there were no remaining employee bonus obligations outstanding, and the
asset retirement obligation was reduced based on an updated analysis. There were no other
significant changes to the contractual obligations subsequent to December 31, 2009.
Off-Balance Sheet Arrangements
At June 30, 2010, our only off-balance sheet arrangement in addition to the operating leases
included in Contractual Obligations above, is our agreement to compensate our initial investors
for providing collateral relating to our bonding obligations to various government agencies. In
February 2009, the members of Molycorp Minerals incurred certain costs in providing letters of
credit and/or cash collateral to secure surety bonds issued for the benefit of certain regulatory
agencies relating to our Mountain Pass facility closure and reclamation obligations. The total
amount of collateral provided by these stockholders at June 30, 2010 was $18.2
million. We have agreed to pay each stockholder a 5% annual return on the amount of collateral
provided. Under the terms of the agreement, the stockholders may receive quarterly payments,
delayed payments or receive payments-in-kind. In the third quarter of 2010, we intend to terminate
this agreement with these stockholders by establishing our own cash collateral using a portion of
the net proceeds from our initial public offering.
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Critical Accounting Policies and Estimates
Revenue and Costs of Goods Sold
Revenue is recognized when persuasive evidence of an arrangement exists, the risks and rewards
of ownership have been transferred to the customer, which is generally when title passes, the
selling price is fixed or determinable and collection is reasonably assured. Title generally passes
upon shipment of product from our Mountain Pass facility. Prices are generally set at the time of
or prior to shipment. Transportation and distribution costs are incurred only on sales for which we
are responsible for delivering the product. Our reported revenues are presented net of freight and
shipping costs.
Cost of goods sold includes the cost of production as well as inventory write-downs caused by
market price declines. Primary production costs include labor, supplies, maintenance costs,
depreciation, and plant overhead.
Reclamation
Our asset retirement obligations, or AROs, arise from our San Bernardino County conditional
use permit, approved mining plan and state laws and regulations, which establish reclamation and
closure standards for all aspects of our surface mining operation. Comprehensive environmental
protection and reclamation standards require that we, upon closure of the Mountain Pass facility,
restore the property in accordance with an approved reclamation plan issued in conjunction with our
conditional use permit.
Our AROs are recorded initially at fair value, or the amount at which we estimate we could
transfer our future reclamation obligations to informed and willing third parties. We use estimates
of future third party costs to arrive at the AROs because the fair value of such costs generally
reflects a profit component. It has been our practice, and we anticipate it will continue to be our
practice, to perform a substantial portion of the reclamation work using internal resources. Hence,
the estimated costs used in determining the carrying amount of our AROs may exceed the amounts that
are eventually paid for reclamation costs if the reclamation work were performed using internal
resources.
To determine our AROs, we calculate the present value of the estimated future reclamation cash
flows based upon our permit requirements, which is based upon the approved mining plan, estimates
of future reclamation costs and assumptions regarding the useful life of the asset to be
remediated. These cash flow estimates are discounted on a credit-adjusted, risk-free interest rate
based on U.S. Treasury bonds with a maturity similar to the expected life of the asset.
The amount initially recorded as an ARO for the Mountain Pass facility may change as a result
of changes to the mine permit, and changes in the estimated costs or timing of reclamation
activities. We periodically update estimates of cash expenditures associated with our ARO
obligations in accordance with U.S. GAAP, which generally requires a measurement of the present
value of any increase in estimated reclamation costs using the current credit-adjusted, risk-free
interest rate. Adjustments to the ARO for decreases in the estimated amount of reclamation costs
are measured using the credit-adjusted, risk-free interest rate as of the date of the initial
recognition of the ARO.
At June 30, 2010, our accrued ARO obligation was $11.8 million. Of this amount, approximately
$4.6 million is associated with the demolition and removal of buildings and equipment,
approximately $4.3 million is associated with groundwater remediation and $2.9 million is
associated with the remediation of tailing ponds, removal of land improvements and vegetation.
Property, Plant and Equipment
Property, plant and equipment associated with the acquisition of the Mountain Pass facility is
stated at estimated fair value as of the acquisition date. Expenditures for new property, plant and
equipment and improvements that extend the useful life or functionality of the asset are
capitalized. Depreciation on plant and equipment is calculated using the straight-line method over
the estimated useful lives of the assets. Maintenance and repair costs are expensed as incurred.
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Reserves, Mineral Properties and Development Costs
Mineral properties represent the estimated fair value of the mineral resources associated with
the Mountain Pass facility. We will begin to amortize such mineral properties using the units of
production basis over estimated proven and probable reserves once mining operations resume, which
is currently expected to occur in late 2010 or in 2011.
Inventory
Inventories consist of work-in-process, finished goods, stockpiles of bastnasite and lanthanum
concentrate and materials and supplies. Inventory cost is determined using the lower of weighted
average cost or estimated net realizable value. Inventory expected to be sold in the next 12 months
is classified as a current asset in the consolidated balance sheet. Cash flows related to the sale
of inventory are classified as operating activities in the consolidated statements of cash flows.
Write-downs to estimated net realizable value are charged to cost of goods sold. Many factors
influence the market prices for REOs and, in the absence of established prices contained in
customer contracts, management uses Metal Pages as an independent pricing source to evaluate market
prices for REOs at the end of each quarter. Metal Pages is a widely recognized pricing source
within our industry, which collects and summarizes data from rare earth producers in China and
Europe. We make appropriate modifications to the Metal Pages prices, when applicable, to account
for differences between the REO grade of our inventory and the REO grade assumed in the
corresponding Metal Pages price.
We evaluate the carrying value of finished goods and materials and supplies inventories each
quarter giving consideration to slow-moving items, obsolescence, excessive levels and other factors
and recognize related write-downs as necessary. Finished goods inventories that may not meet
customer specifications or current market demand, and quantities that exceed a two year supply,
generally require write-downs to estimated net realizable value.
We evaluate our stockpiled concentrates each quarter and recognize write-downs as necessary to
adjust the carrying value to estimated net realizable value. Our analysis utilizes current market
prices from Metal Pages and estimated costs to complete the processing of our concentrates to REOs.
Costs associated with the processing of concentrates through our planned modernized facilities are
based on internal and external engineering estimates and primarily include labor and benefits,
utilities, chemicals, operating supplies, maintenance, depreciation and amortization and plant
overhead expenses. Our estimated costs per pound of REO to be produced in our modernized facilities
are significantly lower than our current production costs per pound, resulting in a higher carrying
value for our stockpiled concentrates. The use of new and proprietary technologies will allow us to
improve our process recoveries and substantially reduce our water consumption. We will reduce our
energy costs through the use of a natural gas powered co-generation power plant that will be
installed as part of our modernization project. Additionally, we intend to produce our own
hydrochloric acid and sodium hydroxide and recycle our acid and base, thereby reducing our cost of
reagents. We estimate, based upon our current business plan and estimated future demand for the
component rare earth elements to be recovered, that our inventory of stockpiled concentrates will
be fully utilized in the production of our rare earth products by March 31, 2013.
Asset Impairments
We account for asset impairment in accordance with ASC 360, Property Plant and Equipment.
Long-lived assets such as property, plant and equipment, mineral properties and purchased
intangible assets subject to amortization are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is
considered to exist if the total estimated future cash flow on an undiscounted basis is less than
the carrying amount of the related assets. An impairment loss is measured and recorded based on the
discounted estimated future cash flows. Changes in significant assumptions underlying future cash
flow estimates or fair values of assets may have a material effect on our financial position and
results of operations.
Factors we generally consider important in our evaluation and that could trigger an impairment
review of the carrying value of long-lived assets include the following:
| significant underperformance relative to expected operating results; |
| significant changes in the way assets are used; |
| underutilization of our tangible assets; |
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| discontinuance of certain products by us our by our customers; | ||
| a decrease in estimated mineral reserves; and |
| significant negative industry or economic trends. |
The recoverability of the carrying value of our mineral properties is dependent upon the
successful development, start-up and commercial production of our mineral deposit and the related
processing facilities. Our evaluation of mineral properties for potential impairment primarily
includes assessing the existence or availability of required permits and evaluating changes in our
mineral reserves, or the underlying estimates and assumptions, including estimated production
costs. The determination of our proven and probable reserves is based on extensive drilling,
sampling, mine modeling, and the economic feasibility of accessing the reserves. Assessing the
economic feasibility requires certain estimates, including the prices of REOs to be produced and
processing recovery rates, as well as operating and capital costs. The estimates are based on
information available at the time the reserves are calculated.
Although we believe the carrying values of our long-lived assets were realizable as of the
relevant balance sheet date, future events could cause us to conclude otherwise.
Recent Accounting Pronouncements
There are no recent accounting pronouncements that will have an impact on our consolidated
financial statements.
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GLOSSARY OF SELECTED MINING TERMS
The following is a glossary of selected mining terms used in this quarterly report 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 worlds 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. | |
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. | |
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 metal and/or metal minerals, and discarding the waste and minor amounts of metal and/or metal minerals. The resulting concentrate of minerals typically has an order of magnitude higher content of minerals than the beginning ore material. | |
Dysprosium
|
Dysprosium (Dy) is used in high power neodymium iron boron magnets to enhance thermal stability. | |
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) is a silvery-white, malleable and ductile rare-earth metal. Gadolinium has exceptionally high absorption of neutrons and therefore is used for shielding in neutron radiography and in nuclear reactors. Because of its paramagnetic properties, solutions of organic gadolinium complexes and gadolinium compounds are the most popular intravenous medical magnetic resonance imaging contrast agents in MRI. | |
Grade
|
The average REE content, as determined by assay of a ton of ore. | |
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. | |
Monazite
|
Monazite is a reddish-brown phosphate mineral. Monazite minerals are typically accompanied by concentrations of uranium and thorium. Because of this, there is no significant rare earth production from monazite today. Monazite is becoming more attractive because it typically has elevated concentrations of heavy rare earths. | |
Neodymium
|
Neodymium (Nd) is used in the production of NdFeB permanent magnets. These permanent magnets, which maximize the power/cost ratio, are used in a large variety of motors and mechanical systems. Cellular phones, vehicle systems and certain lasers contain both neodymium magnets and capacitors, which produce powerful electronic generation and boost the power of these devices. | |
Ore
|
That part of a mineral deposit which could be economically and legally extracted or produced at the time of reserve determination. |
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Overburden
|
In surface mining, overburden is the material that overlays an ore deposit. Overburden is removed prior to mining. | |
Praseodymium
|
Praseodymium (Pr) comprising about 4% of the lanthanide content of bastnasite, is a common coloring pigment. Along with neodymium, praseodymium is used to filter certain wavelengths of light. Praseodymium is used in photographic filters, airport signal lenses, and welders glasses. As part of an alloy, praseodymium is used in permanent magnet systems designed to make smaller and lighter motors. Praseodymium is also used in automobile and other internal combustion engine pollution control catalysts. | |
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. | |
Samarium
|
Samarium (Sm) is a silvery-white metallic element that is predominantly used to produce high temperature, high power samarium cobalt. | |
Terbium
|
Terbium (Tb) is a soft, malleable, silvery-grey element of the lanthanide series, used in x-ray and color television tubes. | |
Yttrium
|
Yttrium (Y) is predominantly utilized in auto-catalysts. Other uses include resonators, microwave communication devices and other electronic devices. |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Our operations may be impacted by commodity prices, geographic concentration, changes in
interest rates and foreign currency exchange rates.
Commodity Price Risk
Our principal products, including cerium, lanthanum, praseodymium, neodymium, europium,
samarium, gadolinium, dysprosium, and terbium, are commodities but are not traded on any commodity
exchange. As such, direct hedging of the prices for future production cannot be undertaken. We do
not currently have any long-term sales contracts with customers, so prices will vary with the
transaction and individual bids received. Our products are primarily marketed to manufacturer as
component materials. Prices will vary based on the demand for the end products being produced with
the mineral resources we mine and process.
Our net sales and profitability are determined principally by the price of the rare earth
products that we produce and, to a lesser extent, by the price of natural gas and other supplies
used in the production process. The prices of our rare earth products are influenced by the price
and demand of the end products that our products support, including clean energy technologies. A
significant decrease in the global demand for these products may have a material adverse effect on
our business. We currently have no hedging contracts in place and intend to consider hedging
strategies in future.
Our costs and capital investments are subject to market movements in other commodities such as
natural gas and chemicals. We may enter into derivative contracts for a portion of the expected
usage of these products, but we do not currently have any derivative contracts and we do not
anticipate entering into derivative agreements before the end of 2010.
Interest Rate Risk
We
do not currently have any significant debt obligations. As a result,
we would not be materially impacted
by variation in interest rates at this time. Our exposure to interest rate risk would increase if,
for example, we obtain and utilize debt facilities in the future.
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ITEM 4. | CONTROLS AND PROCEDURES. |
Disclosure Controls and Procedures
The Company maintains a set of disclosure controls and procedures designed to ensure that
information required to be disclosed by the Company in reports that it files or submits under the
Exchange Act, is recorded, processed, summarized and reported within the time periods specified in
SEC rules and forms. In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the
period covered by this quarterly report, an evaluation was carried out under the supervision and
with the participation of the Companys management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of its disclosure controls and procedures. Based on that
evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures, as of the end of the period covered by this quarterly
report, were effective.
Internal Control over Financial Reporting
In connection with the preparation of our consolidated financial statements included in the
Registration Statement on Form S-1 (Registration No. 333-166129) that we filed in connection with
our initial public offering, we identified deficiencies in our internal control over financial
reporting which, when considered in the aggregate, represent a material weakness. A material
weakness in internal control over financial reporting is defined as a deficiency, or a combination
of deficiencies, such that there is a reasonable possibility that a material misstatement of the
annual or interim financial statements will not be prevented or detected on a timely basis. A
deficiency in internal control over financial reporting exists when the design or operation of a
control does not allow management or employees, in the normal course of performing their assigned
functions, to prevent or detect misstatements on a timely basis. We
review the sufficiency of our internal controls over financial
reporting and implement additional controls on an ongoing basis as
deemed appropriate by management.
In late 2009, we commenced remediation actions which included hiring several individuals with
significant accounting, auditing and financial reporting experience and devoting significant
resources to improving our system of processing and internal controls. Specifically, we hired a
Chief Financial Officer, a Corporate Controller and a Director of Financial Reporting, and in early
2010, we hired an Accounting Manager for the Mountain Pass facility, all of whom are Certified
Public Accountants. We also installed additional functionality and increased the integration of
our information technology systems to increase automation and
accuracy within our processes. During the three months ended
June 30, 2010, management continued refining and formalizing our
control processes including the implementation of additional and more
timely review and approval procedures. We have also established an
Audit Committee in conjunction with our IPO.
This quarterly report does not include a report of managements assessment regarding internal
control over financial reporting or an attestation report of our registered public accounting firm
due to a transition period established by the rules of the SEC for newly public companies. Under
Rule 12b-2 of the Exchange Act, we will be required to obtain an audit report from our independent
registered public accounting firm beginning in 2011 regarding the effectiveness of our internal
controls over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS. |
From time to time, we may be involved in litigation relating to claims arising out of our
operations in the normal course of business. As of the date of this report, no legal proceedings
are pending against us that we believe individually or collectively could have a materially adverse
effect upon our financial condition, results of operations or cash flows.
ITEM 1A. | RISK FACTORS. |
RISK FACTORS
The risks described below could materially and adversely affect our results of operations,
financial condition, liquidity and cash flow. These risks are not the only risks that we face.
Our business operations could also be affected by additional factors that are not presently known
to us or that we currently consider to be immaterial to our operations.
Risks Related to Our Business
The production of rare earth products is a capital-intensive business and our ongoing
modernization and expansion efforts at the Mountain Pass facility to reach full planned
production rates by 2012 will require the commitment of substantial resources. Any unanticipated
costs or delays associated with our ongoing modernization and expansion efforts at the Mountain
Pass facility could have a material adverse effect on our financial condition or results of
operations.
Our ongoing modernization and expansion efforts at the Mountain Pass facility to reach full
planned production rates by 2012 require the commitment of substantial resources for operating
expenses and capital expenditures. We expect to incur approximately $511 million in capital costs
prior to the end of 2012. Our estimated expenses may increase in subsequent years as consultants,
personnel and equipment associated with advancing development and commercial production are added.
The progress of our modernization and expansion efforts at the Mountain Pass facility and the
amounts and timing of expenditures will depend in part on the following:
| the refurbishment or replacement of a significant portion of the existing process, plant and equipment that consists of aging or outdated facilities and equipment, retooling and development and the preparation of the mine pit for renewed production of ore; |
| obtaining and maintaining required federal, state and local permits; |
| the results of consultants analysis and recommendations; |
| negotiating contracts for equipment, earthwork, construction, equipment installation, labor and completing infrastructure and construction work; |
| negotiating sales and off-take contracts for our planned production; |
| the execution of any joint venture agreements or similar arrangements with strategic partners; and |
| other factors, many of which are beyond our control. |
Most of these activities require significant lead times and must be advanced concurrently. Any
unanticipated costs or delays associated with our ongoing modernization and expansion efforts at
the Mountain Pass facility could have a material adverse effect on our financial condition or
results of operations and could require us to seek additional capital, which may not be available
on commercially acceptable terms or at all.
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The actual amount of capital required for the expansion and modernization of the Mountain Pass
facility may vary materially from our current estimates, in which case we would need to raise
additional funds, which may delay completion and have a material adverse effect on our business
and financial condition.
The anticipated funding required to complete the expansion and modernization of the Mountain
Pass facility is based on certain estimates and assumptions we have made about the additional
facilities, equipment, labor, permits and other factors required to complete the project. If any of
these estimates or assumptions change, the actual timing and amount of capital required to complete
the expansion and modernization of the Mountain Pass facility may vary materially from what we
anticipate. Additional funds may be required in the event of significant departures from our
current expansion and modernization plan, unforeseen delays, cost overruns, engineering design
changes or other unanticipated expenses. There can be no assurance that additional financing will
be available to us, or, if available, that it can be obtained on a timely basis and on commercially
acceptable terms.
We may be unsuccessful in raising the necessary capital to execute our current business plan.
Under our current business plan, we intend to spend approximately $511 million through 2012 to
restart mining operations, construct and refurbish processing facilities and other infrastructure
at the Mountain Pass facility and expand into metals and alloys production. If the assumptions on
which we based our estimated capital expenditures of $511 million change or are inaccurate, we may
require additional funding. We also plan to use up to approximately $27.4 million, all of which is
expected to be used in 2010, for letters of credit and/or cash collateral to secure surety bonds
issued for the benefit of certain regulatory agencies related to our Mountain Pass facility closure
and reclamation obligation. In addition, we may require additional financing as part of our
proposed collaborative joint venture with a third-party manufacturer of NdFeB magnets. Our
estimated capital expenditures of $511 million do not include corporate, selling, general and
administrative expenses, which we estimate to be an additional $5 million to $10 million per year.
We expect to finance these capital expenditures, as well as our working capital requirements
and cash collateral requirements related to the surety bonds described above, with the
approximately $379.2 million in net proceeds from our IPO and anticipated cash flows from
operations, combined with traditional debt financing, project financing, additional public or
private equity offerings and/or federal government programs, including the U.S. Department of
Energy loan guarantee program for which we submitted an application in June 2010. There can be no
assurance that we will be successful in raising the incremental capital needed to fully execute our
business plan on terms acceptable to us, or at all.
We currently have limited sources of revenue from our operations, and in order to restart
mining operations and modernize and expand the Mountain Pass facility, we will need to obtain the
remainder of our financing needs or obtain alternative sources of financing.
If we finance the necessary capital to execute our current business plan through a securities
offering or debt financing, you may experience dilution in the event of an equity financing, or
we may be highly leveraged in the event of a debt financing.
We may finance the capital expenditures necessary for our modernization and expansion costs
and to fund all of our cash collateral requirements through a public or private offering of
securities or debt financing. An equity offering will have the effect of diluting the proportionate
equity interest and voting power of holders of our common stock. A debt financing may result in us
being highly leveraged, and our level of indebtedness could restrict our ability to execute our
current business plan.
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Our growth depends on the modernization and expansion of our Mountain Pass facility, which is our
only rare earth mining, manufacturing and processing facility.
Our only rare earth mining, manufacturing and processing facility at this time is the Mountain
Pass facility. Our continued viability is based on successfully implementing our strategy,
including our modernization and expansion plans at the Mountain Pass facility,
successfully commencing mining operations at the Mountain Pass facility and reaching full
planned production rates in accordance with our expected timeframe. The deterioration or
destruction of any part of the Mountain Pass facility may significantly hinder our ability to reach
or maintain full planned production rates within the expected time frame or at all. If we are
unsuccessful in reaching and maintaining full planned production rates for REOs at the Mountain
Pass facility, within expected time frames or at all, we may not be able to build a sustainable or
profitable business.
We may not successfully establish or maintain collaborative, joint venture and licensing
arrangements, or establish new ones, which could adversely affect our ability to develop and
commercialize our rare earth products.
A key element of our business strategy is to utilize vertical integration through further
downstream processing of our REOs into rare earth metal alloys and finished magnets for
clean-energy, high-technology and defense applications. To implement this mine-to-magnets
vertical integration successfully, we will need to license certain intellectual property related to
these downstream processes and form a joint venture with an existing magnet producer for the final
production of finished rare earth magnets. While we signed a non-binding letter of intent in
November 2009 to acquire a producer of rare earth metals and alloys that would, if consummated,
provide us with a license for certain technology related to the production of rare earth metals and
alloys, we may not be able to finalize a definitive agreement and successfully consummate the
acquisition. In addition, other licenses that may be necessary for some of these downstream
processing steps have not yet been obtained, and we are currently only in negotiations with respect
to a joint venture for the production of finished magnets and have only entered into a non-binding
letter of intent with Neo Material that contemplates a technology transfer agreement with respect
to the production of rare earth metals, alloys and magnets. Any failure to establish or maintain
collaborative, joint venture or licensing arrangements for the production of downstream products on
favorable terms could adversely affect our business prospects, financial condition or ability to
develop and commercialize downstream rare earth products.
We may not be able to convert existing letters of intent with customers for the sale of REO
products into binding contracts, which may have a material adverse effect on our financial
position and results of operations.
We are working to establish stable revenue streams for the rare earth minerals and products we
produce at the Mountain Pass facility. Upon reaching full planned production rates for REOs and
other planned downstream products at the Mountain Pass facility, we expect to produce 19,050 mt of
REO per year. As of September 1, 2010, we had 19 non-binding letters of intent to sell certain of
our rare earth products and our non-binding letter of intent with Neo Material also contemplates
the sale of certain rare earth products. Prior to reaching full planned production rates for REOs
and other planned downstream products at the Mountain Pass facility, we intend to enter into
short-term sales contracts and long-term sales contracts, that include periodic price adjustments,
with existing and new customers. However, there can be no assurance that these customers will enter
into binding sales contracts for the same amount of REO products as in the letters of intent, or at
all. The failure to enter into such binding contracts may have a material adverse effect on our
financial position and results of operations.
We have limited commercial production and revenues and there can be no assurance that we will
successfully reach full planned production rates for REOs and other planned downstream products
at the Mountain Pass facility or other facilities and obtain profitability.
We currently have limited commercial production and revenues from the Mountain Pass facility
and have carried on our business at a loss since inception. We expect to continue to incur losses
unless and until we achieve full planned production rates and generate sufficient revenues to fund
our continuing operations. We expect to incur substantial losses for the foreseeable future related
to operating expenses, modernization and expansion activities and other capital expenditures, which
may increase in subsequent years as needed consultants, personnel and equipment are retained as we
continue to implement our business plan. The amounts and timing of expenditures will depend on the
progress of our ongoing modernization and expansion efforts, the results of consultants analysis
and recommendations, the rate at which operating losses are incurred, the execution of any joint
venture agreements with strategic partners and other factors, many of which are beyond our control.
As a result, we may not ever achieve profitability.
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We rely on two customers for a significant portion of our revenue from sales of lanthanum, and
the loss of either of these customers, or significant changes in prices or other terms with
either of these customers, prior to the completion of the restart of our mining operations and
modernization and expansion of the Mountain Pass facility, could have a material adverse effect
on our business, results of operations and financial condition.
Sales of lanthanum accounted for 72% and 73% of our net sales and lanthanum oxide accounted
for 24% and 18% of our net sales for the six months ended June 30, 2010 and 2009, respectively.
There is a limited market for our lanthanum and two customers together comprised 89% and 73% of our
total product revenue for the six months ended June 30, 2010 and 2009, respectively. Both of our
contracts with these two customers have expired and we currently sell to them on a spot basis. We
anticipate that sales of lanthanum and didymium oxide will make up a significant percentage of our
net sales until we complete the modernization and expansion of the Mountain Pass facility.
If our total sales of lanthanum to these two customers are reduced or if the prices we realize
from these customers are reduced before we are able to reduce costs, our operating revenues would
likely be materially adversely affected. As a result, significant changes in volume, prices or
other terms with these customers, prior to the completion of the restart of our mining operations
and modernization and expansion of the Mountain Pass facility could have a material adverse effect
on our business, results of operations and financial condition.
We may be adversely affected by fluctuations in demand for, and prices of, rare earth products.
Because our sole source of revenue is the sale of rare earth minerals and products, changes in
demand for, and the market price of, rare earth minerals and products could significantly affect
our profitability. The value and price of our common stock and our financial results may be
significantly adversely affected by declines in the prices of rare earth minerals and products.
Rare earth minerals and product prices may fluctuate and are affected by numerous factors beyond
our control such as interest rates, exchange rates, inflation or deflation, fluctuation in the
relative value of the U.S. dollar against foreign currencies on the world market, global and
regional supply and demand for rare earth minerals and products, and the political and economic
conditions of countries that produce rare earth minerals and products.
As a result of the global economic crisis, rare earth product prices declined by approximately
50% during 2008 and through the third quarter of 2009. Similarly, there can be no assurance that
the recent increase in market prices will be sustained in future periods. Protracted periods of low
prices for rare earth minerals and products could significantly reduce revenues and the
availability of required development funds in the future. This could cause substantial reductions
to, or a suspension of, REO production operations, impair asset values and reduce our proven and
probable rare earth ore reserves.
Demand for our products may be impacted by demand for downstream products incorporating rare
earths, including hybrid and electric vehicles, wind power equipment and other clean technology
products, as well as demand in the general automotive and electronic industries. Lack of growth in
these markets may adversely affect the demand for our products.
In contrast, extended periods of high commodity prices may create economic dislocations that
may be destabilizing to rare earth minerals supply and demand and ultimately to the broader
markets. Periods of high rare earth mineral market prices generally are beneficial to our financial
performance. However, strong rare earth mineral prices also create economic pressure to identify or
create alternate technologies that ultimately could depress future long-term demand for rare earth
minerals and products, and at the same time may incentivize development of otherwise marginal
mining properties.
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Our business will be adversely affected if we do not successfully implement new processing
technologies and capabilities.
Our processing technologies and capabilities are key components of our competitive strengths
and are expected to contribute to low operating costs and increasing the life of the ore body at
the Mountain Pass facility. In the second quarter of 2010, we began to process bastnasite
concentrate from our stockpiles in an effort to significantly improve these technologies and
capabilities and optimize
recovery rates. Although this effort has been successful at pilot-scale level with over 95%
recovery, we may not be able to scale the new technology and recovery rates to commercial levels,
or may not be able to do so by 2011, as planned. We are also working to optimize other steps in our
production process. Any failure may affect our ability to achieve the expected benefits of the new
technologies and may have a material adverse effect on our financial condition or results of
operations.
We operate in a highly competitive industry.
The rare earths mining and processing markets are capital intensive and competitive. Our
Chinese competitors may have greater financial resources, as well as other strategic advantages to
maintain, improve and possibly expand their facilities. Additionally, the Chinese producers have
historically been able to produce at relatively low costs due to domestic economic factors. Even
upon successful implementation of the new processing technologies and capabilities at the Mountain
Pass facility, if we are not able to achieve anticipated costs of production, then any strategic
advantages that our competitors may have over us, such as lower labor costs, could have a material
adverse effect on our business.
An increase in the global supply of rare earth products, dumping and predatory pricing by our
competitors may materially adversely affect our profitability.
The pricing and demand for our products is affected by a number of factors beyond our control,
including growth of economic development and the global supply and demand for REO products. It is
estimated that China accounted for approximately 97% of global REO production in 2008. China also
dominates the manufacture of metals and NdFeB magnets from rare earths, a capacity that is not
currently found in the United States. Once we reach full planned production rates for REOs and
other planned downstream products, the increased competition may lead our competitors to engage in
predatory pricing behavior. Any increase in the amount of rare earth products exported from other
nations and increased competition may result in price reductions, reduced margins and loss of
potential market share, any of which could materially adversely affect our profitability. As a
result of these factors, we may not be able to compete effectively against current and future
competitors.
We may not be able to adequately protect our intellectual property rights. If we fail to
adequately enforce or defend our intellectual property rights, our business may be harmed.
Much of the technology used in the markets in which we compete is protected by patents and
trade secrets, and our commercial success will depend in significant part on our ability to obtain
and maintain patent and trade secret protection for our products and methods. To compete in these
markets, we rely on a combination of trade secret protection, nondisclosure and licensing
agreements, patents and trademarks to establish and protect our proprietary intellectual property
rights, including our proprietary rare earth production processes that are not patented. We also
have a proven technology and product development group and as of June 30, 2010, held 18 issued and
pending U.S. patents and patent applications, and 146 issued and pending foreign patents and patent
applications. We intend to rely on patented products, such as XSORBX®, and related
licensing agreements to establish proprietary markets for low demand REEs. These intellectual
property rights may be challenged or infringed upon by third parties or we may be unable to
maintain, renew or enter into new license agreements with third-party owners of intellectual
property on reasonable terms. In addition, our intellectual property may be subject to infringement
or other unauthorized use outside of the United States. In such case, our ability to protect our
intellectual property rights by legal recourse or otherwise may be limited, particularly in
countries where laws or enforcement practices are undeveloped or do not recognize or protect
intellectual property rights to the same extent as the United States. Unauthorized use of our
intellectual property rights or our inability to preserve existing intellectual property rights
could adversely impact our competitive position and results of operations. The loss of our patents
could reduce the value of the related products. In addition, the cost to litigate infringements of
our patents, or the cost to defend ourselves against patent infringement actions by others, could
be substantial.
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Proprietary trade secrets and unpatented know-how are also very important to our business. We
rely on trade secrets to protect certain aspects of our technology, especially where we do not
believe that patent protection is appropriate or obtainable. However, trade secrets are difficult
to protect. Our employees, consultants, contractors, outside scientific collaborators and other
advisors may
unintentionally or willfully disclose our confidential information to competitors, and
confidentiality agreements may not provide an adequate remedy in the event of unauthorized
disclosure of confidential or proprietary information. Enforcing a claim that a third party
illegally obtained and is using our trade secrets is expensive and time consuming, and the outcome
is unpredictable. Moreover, our competitors may independently develop equivalent knowledge, methods
and know-how. Failure to obtain or maintain trade secret protection could adversely affect our
competitive business position.
We may not be able to obtain additional patents and the legal protection afforded by any
additional patents may not adequately protect our rights or permit us to gain or keep any
competitive advantage.
Our ability to obtain additional patents is uncertain and the legal protection afforded by
these patents is limited and may not adequately protect our rights or permit us to gain or keep any
competitive advantage. In addition, the specific content required of patents and patent
applications that are necessary to support and interpret patent claims is highly uncertain due to
the complex nature of the relevant legal, scientific and factual issues. Changes in either patent
laws or interpretations of patent laws in the United States or elsewhere may diminish the value of
our intellectual property or narrow the scope of our patent protection. Even if patents are issued
regarding our products and processes, our competitors may challenge the validity of those patents.
Patents also will not protect our products and processes if competitors devise ways of making
products without infringing our patents.
If we infringe, or are accused of infringing, the intellectual property rights of third parties,
it may increase our costs or prevent us from being able to sell our existing products or
commercialize new products.
There is a risk that we may infringe, or may be accused of infringing, the proprietary rights
of third parties under patents and pending patent applications belonging to third parties that may
exist in the United States and elsewhere in the world that relate to our rare earth products and
processes. Because the patent application process can take several years to complete, there may be
currently pending applications that may later result in issued patents that cover our products and
processes. In addition, our products and processes may infringe existing patents.
Defending ourselves against third-party claims, including litigation in particular, would be
costly and time consuming and would divert managements attention from our business, which could
lead to delays in our expansion and modernization efforts. If third parties are successful in their
claims, we might have to pay substantial damages or take other actions that are adverse to our
business. As a result of intellectual property infringement claims, or to avoid potential claims,
we might:
| be prohibited from, or delayed in, selling or licensing some of our products or using some of our processes unless the patent holder licenses the patent to us, which it is not required to do; |
| be required to pay substantial royalties or grant a cross license to our patents to another patent holder; or |
| be required to redesign a product or process so it does not infringe a third partys patent, which may not be possible or could require substantial funds and time. |
In addition, we could be subject to claims that our employees, or we, have inadvertently or
otherwise used or disclosed trade secrets or other proprietary information of third parties.
If we are unable to resolve claims that may be brought against us by third parties related to
their intellectual property rights on terms acceptable to us, we may be precluded from offering
some of our products or using some of our processes.
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Power shortages at the Mountain Pass facility may temporarily delay mining and processing
operations and increase costs, which may materially adversely impact our business.
Due to its position on the regional electric grid, the Mountain Pass facility faces occasional
power shortages during peak periods. Instability in electrical supply in past years has caused
sporadic outages and brownouts and higher costs. Such outages and brownouts have had a negative
impact on production. We plan to install a natural gas powered co-generation power plant as part of
our modernization and expansion of the Mountain Pass facility to reduce energy costs at the
Mountain Pass facility as well as minimize or eliminate our reliance on the regional electric power
grid. If the co-generation power plant is not installed, or is significantly delayed, we will
remain subject to the effects of occasional power outages and brownouts and could experience
temporary interruptions of mining and processing operations. We then may be unable to fill customer
orders in a timely manner and may be subject to higher power costs at the Mountain Pass facility.
As a result, our revenue could be adversely impacted and our relationships with our customers could
suffer, adversely impacting our ability to generate future revenue. In addition, if power to the
Mountain Pass facility is disrupted during certain phases of our REO extraction process, we may
incur significant expenses that may adversely affect our business.
Increasing costs or limited access to raw materials may adversely affect our profitability.
We use significant amounts of hydrochloric acid and sodium hydroxide as reagents to process
REOs. We ultimately intend to produce our own hydrochloric acid and sodium hydroxide at the
Mountain Pass facility. While the technology used to produce hydrochloric acid and sodium hydroxide
is well developed, this technology has not yet been implemented at the Mountain Pass facility.
Accordingly, we currently purchase hydrochloric acid and sodium hydroxide in the open market and,
as a result, could be subject to significant volatility in the cost or availability of these
reagents. We may not be able to pass increased prices for these reagents through to our customers
in the form of price increases. A significant increase in the price, or decrease in the
availability, of these reagents before we perfect our ability to produce them on site could
materially increase our operating costs and adversely affect our profit margins from quarter to
quarter.
Fluctuations in transportation costs or disruptions in transportation services could increase
competition or impair our ability to supply rare earth minerals or products to our customers,
which could adversely affect our results of operations.
Finding affordable and dependable transportation is important because it allows us to supply
customers around the world. Labor disputes, derailments, adverse weather conditions or other
environmental events and changes to rail or ocean freight systems could interrupt or limit
available transport services, which could result in customer dissatisfaction and loss of sales
potential and could materially adversely affect our results of operations.
We must process REOs to exacting specifications in order to provide customers with a consistently
high quality product. An inability to perfect the mineral extraction process to meet individual
customer specifications may have a material adverse effect on our financial condition or results
of operations.
We process REOs to meet customer needs and specifications and to provide customers with a
consistently high quality product and a purity higher than previously achieved in prior mining
operations at the Mountain Pass facility. An inability to perfect the mineral extraction process to
meet individual customer specifications may have a material adverse effect on our financial
condition or results of operations. In addition, customer needs and specifications may change with
time. Any delay or failure in developing processes to meet changing customer needs and
specifications may have a material adverse effect on our financial condition or results of
operations.
Diminished access to water may adversely affect our operations.
Currently, processing of REOs requires significant amounts of water. The technology we are
developing to significantly reduce our need for fresh water, including proprietary production of
our own hydrochloric acid and sodium hydroxide from waste water at our own chlor-alkali plant, has
not yet been proven at commercial scale and has not yet been implemented. Although we believe our
existing water rights and water supply are sufficient to meet our projected water requirements, any
decrease or disruption in our
available water supply until this technology is successfully developed may have a material
adverse effect on our operations and our financial condition or results of operations.
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Inaccuracies in our estimates of REO reserves and resource deposits could result in lower than
expected revenues and higher than expected costs.
We base our REO reserve and resource estimates on engineering, economic and geological data
assembled and analyzed by outside firms, which are reviewed by our engineers and geologists. Ore
reserve estimates, however, are necessarily imprecise and depend to some extent on statistical
inferences drawn from available drilling data, which may prove unreliable. There are numerous
uncertainties inherent in estimating quantities and qualities of REO reserves and non-reserve REO
deposits and costs to mine recoverable reserves, including many factors beyond our control.
Estimates of economically recoverable REO reserves necessarily depend upon a number of variable
factors and assumptions, all of which may vary considerably from actual results, such as:
| geological and mining conditions and/or effects from prior mining that may not be fully identified by available data or that may differ from experience; |
| assumptions concerning future prices of rare earth products, operating costs, mining technology improvements, development costs and reclamation costs; and |
| assumptions concerning future effects of regulation, including the issuance of required permits and taxes by governmental agencies. |
Any inaccuracy in our estimates related to our REO reserves and non-reserve REO deposits could
result in lower than expected revenues and higher than expected costs or a shortened estimated life
for the mine at the Mountain Pass facility.
Period-to-period conversion of probable rare earth ore reserves to proven ore reserves may
result in increases or decreases to the total reported amount of ore reserves. Conversion, an
indicator of the success in upgrading probable ore reserves to proven ore reserves, is evaluated
annually. Conversion rates are affected by a number of factors, including geological variability,
applicable mining methods and changes in safe mining practices, economic considerations and new
regulatory requirements.
Work stoppages or similar difficulties could significantly disrupt our operations, reduce our
revenues and materially adversely affect our results of operations.
As of June 30, 2010, approximately 71 employees at the Mountain Pass facility were covered by
a collective bargaining agreement with the United Steelworkers of America that expires in March
2012. A work stoppage at the Mountain Pass facility could significantly disrupt our operations,
reduce our revenues and materially adversely affect our results of operations.
A shortage of skilled technicians and engineers may further increase operating costs, which may
materially adversely affect our results of operations.
Efficient production of rare earth products using modern techniques and equipment requires
skilled technicians and engineers. In addition, our expansion efforts will significantly increase
the number of skilled technicians and engineers required to successfully operate our business. In
the event that we are unable to hire and train the necessary number of skilled technicians and
engineers, there could be an adverse impact on our labor costs and our ability to reach full
planned production levels in a timely manner, which could have a material adverse effect on our
results of operations.
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We depend on key personnel for the success of our business.
We depend on the services of our senior management team and other key personnel. The loss of
the services of any member of senior management or a key employee could have an adverse effect on
our business. We may not be able to locate, attract or employ on acceptable terms qualified
replacements for senior management or other key employees if their services are no longer
available.
Because of the dangers involved in the mining of minerals and the manufacture of mineral
products, there is a risk that we may incur liability or damages as we conduct our business.
The mining of minerals and the manufacture of mineral products involves numerous hazards,
including:
| unusual and unexpected rock formations affecting ore or wall rock characteristics; |
| ground or slope failures; |
| environmental hazards; |
| industrial accidents; |
| processing problems; |
| periodic interruptions due to inclement or hazardous weather conditions or other acts of God; and |
| mechanical equipment failure and facility performance problems. |
Although we maintain insurance to address certain risks involved in our business, such as
coverage for pollution liability, property damage, business interruption and workers compensation,
there can be no assurance that we will be able to maintain insurance to cover these risks at
economically feasible premiums. Additionally, we cannot be certain that all claims we may make
under our insurance policies will be deemed to be within the scope of, or fully covered by, our
policies. Furthermore, we do not maintain coverage for losses resulting from acts of terrorism. We
might also become subject to liability for environmental damage or other hazards that may be
uninsurable or for which we may elect not to insure because of premium costs or commercial
impracticality. These policies contain limits of coverage and exclusions that are typical of such
policies generally. For example, our pollution liability policy has $20 million aggregate and per
incident limits and excludes, among other things, costs associated with closure, post-closure and
reclamation. The payment of such premiums, or the assumption of such liabilities, may have a
material adverse effect on our financial position and results of operations.
Risks Related to Environmental Regulation
Our operations are subject to extensive and costly environmental requirements; and current and
future laws, regulations and permits will impose significant costs, liabilities or obligations or
could limit or prevent our ability to continue our current operations or to undertake new
operations.
We are subject to numerous and detailed, federal, state and local environmental laws,
regulations and permits, including those pertaining to employee health and safety, environmental
permitting and licensing, air quality standards, 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. These requirements may result in significant costs, liabilities and obligations,
impose conditions that are difficult to achieve or otherwise delay, limit or prohibit current or
planned operations. Consequently, the modernization and expansion of the Mountain Pass facility may
be delayed, limited or prevented and current operations may be curtailed. Failure to comply with
these laws, regulations and permits may result in the assessment of administrative, civil and
criminal penalties, the issuance of injunctions to limit or cease operations, the suspension or
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revocation
of permits and other sanctions. Pursuant to such requirements, we may also be subject to third-party claims, including for damages to
property or injury to persons arising from our operations. Moreover, these environmental
requirements, and the interpretation and enforcement thereof, change frequently and have tended to
become more stringent over time. For example, GHG emission regulation is becoming more rigorous. As
a result of our planned expansion, we expect to be required to report annual GHG emissions from our
operations, and additional GHG emission related requirements are in various stages of development.
The U.S. Congress is considering various legislative proposals to address climate change, including
a nationwide limit on GHGs. In addition, the EPA has issued regulatory findings and the Tailoring
Rule that would subject GHG emissions from stationary sources to the Prevention of Significant
Deterioration and Title V provisions of the federal Clean Air Act. California also may establish
GHG emission regulations pursuant to its Global Warming Solutions Act. If made effective, any such
regulations could require us to modify existing permits or obtain new permits, implement additional
pollution control technology, curtail operations or increase significantly our operating costs. Any
regulation of GHG emissions, including through a cap-and-trade system, technology mandate,
emissions tax, reporting requirement or other program, could adversely affect our business,
financial condition, reputation, operating performance and product demand.
Any future changes in these laws, regulations or permits (or the interpretation or enforcement
thereof) or any sanctions, damages, costs, obligations or liabilities in respect of these matters
could have a material adverse effect on our business, results of operations and financial
condition.
We are subject to the Federal Mine Safety and Health Act of 1977 and the California Occupational
Safety and Health Program, and regulations adopted pursuant thereto, which impose stringent
health and safety standards on numerous aspects of our operations.
Our operations at the Mountain Pass facility are subject to the Federal Mine Safety and Health
Act of 1977, as amended by the Mine Improvement and New Emergency Response Act of 2006, which we
refer to as the Mine Act, and the regulations adopted by the California Occupational Safety and
Health Administration, which impose stringent health and safety standards on numerous aspects of
mineral extraction and processing operations, including the training of personnel, operating
procedures, operating equipment and other matters. Our failure to comply with such standards, or
changes in such standards or the interpretation or enforcement thereof, could have a material
adverse effect on our business, financial condition or otherwise impose significant restrictions on
our ability to conduct mineral extraction and processing operations.
Our operations may affect the environment or cause exposure to hazardous substances, any of which
could result in material costs, obligations or liabilities.
Our operations currently use, and in the past have used, hazardous materials and generate, and
in the past have generated, hazardous and naturally occurring radioactive wastes. The Mountain Pass
facility has been used for mining and related purposes since 1952, and contamination is known to
exist around the facility. We may be subject to claims under environmental laws, regulations and
permits for toxic torts, natural resource damages and other liabilities, as well as for the
investigation and remediation of soil, surface water, groundwater and other environmental media.
The Mountain Pass facility is currently subject to an order issued by the Lahontan Regional Water
Quality Control Board pursuant to which we have conducted various investigatory and remedial
actions, primarily related to certain onsite impoundments, including groundwater monitoring,
extraction and treatment and soil remediation. We are still in the process of delineating the
extent of groundwater contamination at and around the facility and cannot assure you that we will
not incur material costs relating to the remediation of such contamination. Also, prior to our
acquisition of the Mountain Pass facility, leaks in a wastewater pipeline from the Mountain Pass
facility to offsite evaporation ponds on the Ivanpah dry lake bed caused contamination. However,
that contamination is being remediated by Chevron Mining Inc., who retained ownership of the ponds
and the pipeline. A portion of the pipeline extends onto property owned by Molycorp but is part of
the pipeline removal and remediation being conducted by Chevron Mining Inc. at its expense. In
addition to claims arising out of our current or former properties, such claims may arise in
connection with contaminated third-party sites at which we have disposed of waste. As a matter of
law, and despite any contractual indemnity or allocation arrangements or acquisition agreements to
the contrary, our liability for these claims may be joint and several, so that we may be held
responsible for more than our share of any contamination, or even for the entire share. These and
similar unforeseen impacts that our operations may have on the environment, as well as human
exposure to
hazardous or radioactive materials or wastes associated with our operations, could have a
material adverse effect on our business, reputation, results of operation and financial condition.
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We may be unable to obtain, maintain or renew permits necessary for the development or operation of the Mountain Pass facility, which could have a material adverse effect on our business, results of operations and financial condition. |
We must obtain a number of permits that impose strict conditions, requirements and obligations
relating to various environmental and health and safety matters in connection with our current and
future operations, including the modernization and expansion of the Mountain Pass facility. To
obtain certain permits, we may be required to conduct environmental studies and collect and present
data to governmental authorities pertaining to the potential impact of our current and future
operations upon the environment and to take steps to avoid or mitigate those impacts. The
permitting rules, and interpretation thereof, are complex and have tended to become more stringent
over time. In some cases, the public (including environmental interest groups) has rights to
comment upon and submit objections to permit applications and environmental analysis prepared in
connection therewith, and otherwise participate in the permitting process, including challenging
the issuance of permits, validity of environmental analyses and determinations and performance of
permitted activities. Accordingly, permits required for our operations, including the modernization
and expansion of the Mountain Pass facility, may not be issued, maintained or renewed in a timely
fashion or at all, or may be issued or renewed upon conditions that restrict our ability to conduct
our operations economically. Any such failure to obtain, maintain or renew permits, or other
permitting delays or conditions, including in connection with any environmental impact analyses,
could have a material adverse effect on our business, results of operations and financial
condition.
Our inability to acquire, maintain or renew financial assurances related to the reclamation and restoration of mining property could have a material adverse effect on our business and results of operations. |
We are generally obligated to restore property after it has been mined in accordance with
regulatory standards and our approved Reclamation Plan. We are required under federal, state and
local laws to maintain financial assurances, such as surety bonds, to secure such obligations. The
failure to acquire, maintain or renew such assurances, as required by federal, state and local
laws, could subject us to fines and penalties as well as the revocation of our operating permits.
Such failure could result from a variety of factors, including:
| the lack of availability, higher expense or unreasonable terms of such financial assurances; |
| the ability of current and future financial assurance counterparties to increase required collateral; and |
| the exercise by third-party financial assurance counterparties of any rights to refuse to renew the financial assurance instruments. |
Our inability to acquire or failure to maintain or renew such financial assurances could have
a material adverse effect on our business, financial condition and results of operations.
If the assumptions underlying our reclamation plan and mine closure obligations are inaccurate,
we could be required to expend materially greater amounts than anticipated to reclaim mined
property, which could materially and adversely affect our business, results of operations and
financial condition.
Federal, state and local laws and regulations establish reclamation and closure standards
applicable to our surface mining and other operations as well. Estimates of our total reclamation
and mine closing liabilities are based upon our closure and reclamation plans, third-party expert
reports, current applicable laws and regulations, certain permit terms and our engineering
expertise related to these requirements. Any change in the underlying assumptions or other
variation between the estimated liabilities and actual costs could materially and adversely affect
our business, results of operations and financial condition.
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Risks Related to Ownership of Our Common Stock
A trading market that will provide our stockholders with adequate liquidity may not develop. The
price of our common stock may fluctuate significantly, and stockholders could lose all or part of
their investment.
Our shares of common stock began trading on the New York Stock Exchange, or NYSE, in July
2010. An active trading market for our common stock may not be sustained, which could depress the
market price of our common stock and could affect your ability to sell your shares of common stock.
Limited trading volumes and liquidity may result in wide bid-ask spreads, contribute to significant
fluctuations in the market price of our common stock and limit the number of investors who are able
to buy our common stock.
The market price of our common stock is likely to be highly volatile and may be influenced by
many factors, some of which are beyond our control, including:
| our quarterly or annual earnings or those of other companies in our industry; |
| loss of a large customer; |
| changes in accounting standards, policies, guidance, interpretations or principles; |
| general economic conditions; |
| the failure of securities analysts to cover our stock or changes in financial estimates by analysts; |
| future sales of our common stock; and |
| other factors described in this Risk Factors section. |
Reports published by securities or industry analysts, including projections in those reports that
exceed our actual results, could adversely affect our stock price and trading volume.
We currently expect securities research analysts to establish and publish their own quarterly
projections regarding our operating results. These projections may vary widely from one another and
may not accurately predict the results we actually achieve. Our stock price may decline if we fail
to meet securities research analysts projections. Similarly, if one or more of the analysts who
covers us downgrades our stock or publishes inaccurate or unfavorable research about our business,
our stock price could decline. If one or more of these analysts ceases coverage of us or fails to
publish reports on us regularly, our stock price or trading volume could decline. Additionally,
while we expect securities research analyst coverage, if no securities or industry analysts
commence coverage of us, the trading price of our stock and the trading volume could decline.
Future sales of shares of common stock by stockholders could depress the market price of our
common stock.
Sales of a substantial number of shares of our common stock, or the perception that such sales
may occur, could depress the market price of our common stock. As of September 2, 2010, we had
82,253,700 shares of common stock outstanding. After the lock-up agreements with the underwriters
in our initial public offering expire, approximately 55,644,800 of our 82,253,700 outstanding
shares of common stock will be eligible for sale in the public market (including 2,500,000 shares
sold in our initial public offering to our previously existing
stockholders), 55,153,066 of which
are beneficially owned by directors, executive officers and other affiliates and will be subject to
volume limitations under Rule 144 under the Securities Act and various vesting agreements.
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If our previously existing stockholders sell, or indicate an intent to sell, substantial
amounts of our common stock in the public market after the 180-day contractual lock-up period and
other legal restrictions on resale lapse, the trading price of our common stock could decline
significantly. Morgan Stanley & Co. Incorporated and J.P. Morgan Securities Inc. may, in their sole
discretion, permit our executive officers, directors, employees and current stockholders to sell
shares prior to the expiration of the lock-up agreements.
In addition, the shares reserved for future issuance under our new stock incentive plan will
become eligible for sale in the public market in the future, subject to certain legal and
contractual limitations. If these additional shares are sold, or if it is perceived that they will
be sold, in the public market, the trading price of our common stock could decline substantially.
The availability of shares of our common stock for sale in the future could reduce the market
price of our common stock.
In the future, we may issue additional securities to raise capital. We may also acquire
interests in other companies by using a combination of cash and our common stock or just our common
stock. We may also issue securities convertible into our common stock. Any of these events may
dilute your ownership interest in our company and have an adverse impact on the price of our common
stock. In addition, sales of a substantial amount of our common stock in the public market, or the
perception that these sales may occur, could reduce the market price of our common stock. This
could also impair our ability to raise additional capital through the sale of our securities.
We do not intend to pay dividends in the foreseeable future.
For the foreseeable future, we intend to retain any earnings to finance the development of our
business, and we do not anticipate paying any cash dividends on our common stock. Any future
determination to pay dividends will be at the discretion of our board of directors and will be
dependent upon then-existing conditions, including our operating results and financial condition,
capital requirements, contractual restrictions, business prospects and other factors that our board
of directors considers relevant. Accordingly, investors must rely on sales of their common stock
after price appreciation, which may never occur, as the only way to realize a return on their
investment.
Anti-takeover provisions contained in our certificate of incorporation and bylaws after the
corporate reorganization, as well as provisions of Delaware law, could impair a takeover attempt.
Our certificate of incorporation and bylaws provisions may have the effect of delaying,
deferring or discouraging a prospective acquirer from making a tender offer for our shares or
otherwise attempting to obtain control of us. To the extent that these provisions discourage
takeover attempts, they could deprive stockholders of opportunities to realize takeover premiums
for their shares. Moreover, these provisions could discourage accumulations of large blocks of
common stock, thus depriving stockholders of any advantages which large accumulations of stock
might provide.
As a Delaware corporation, we will also be subject to provisions of Delaware law, including
Section 203 of the General Corporation Law of the State of Delaware. Section 203 prevents some
stockholders holding more than 15% of our outstanding common stock from engaging in certain
business combinations unless the business combination was approved in advance by our board of
directors, results in the stockholder holding more than 85% of our outstanding common stock or is
approved by the holders of at least 66 2/3% of our outstanding common stock not held by the
stockholder engaging in the transaction.
Any provision of our certificate of incorporation or our bylaws or Delaware law that has the
effect of delaying or deterring a change in control could limit the opportunity for our
stockholders to receive a premium for their shares of our common stock and could also affect the
price that some investors are willing to pay for our common stock.
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Our board of directors can issue, without stockholder approval, preferred stock with voting and
conversion rights that could adversely affect the voting power of the holders of common stock.
Our board of directors can issue, without stockholder approval, preferred stock with voting
and conversion rights that could adversely affect the voting power of the holders of common stock
and reduce the likelihood that such holders will receive dividend payments or payments upon
liquidation. Such issuance could have the effect of decreasing the market price of the common
stock. The issuance of preferred stock or even the ability to issue preferred stock could also have
the effect of delaying, deterring or preventing a change of control or other corporate action.
We identified a material weakness in our internal control over financial reporting which, if not
satisfactorily remediated, could result in material misstatements in our consolidated financial
statements in future periods.
During the preparation of our consolidated financial statements as of December 31, 2009 and
2008 and for the year ended December 31, 2009, the period from June 12, 2008 (Inception) through
December 31, 2008, and cumulatively for the period from June 12, 2008 (Inception) through December
31, 2009, we identified deficiencies in our internal control over financial reporting which, when
considered in the aggregate, represent a material weakness. If not remediated, this material
weakness could result in material misstatements in our consolidated financial statements in future
periods. Specifically, we did not maintain a sufficient complement of personnel with an appropriate
level of accounting and financial reporting knowledge, experience and training in the application
of U.S. generally accepted accounting principles, or U.S. GAAP. We also did not maintain an
adequate system of processes and internal controls sufficient to support our financial reporting
requirements and to produce timely and accurate consolidated financial statements in accordance
with U.S. GAAP.
A material weakness is a deficiency, or combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material misstatement of
our financial statements will not be prevented or detected on a timely basis. A deficiency in
internal control over financial reporting exists when the design or operation of a control does not
allow management or employees, in the normal course of performing their assigned functions, to
prevent or detect misstatements on a timely basis.
In late 2009, we commenced remediation actions which included hiring several individuals with
significant accounting, auditing and financial reporting experience and devoting significant
resources to improving our system of processes and internal controls. Specifically, we hired a
chief financial officer, a corporate controller and a director of financial reporting, and in early
2010, we hired an accounting manager for the Mountain Pass facility, all of whom are Certified
Public Accountants. We also installed additional functionality and increased the integration of our
information technology systems to increase automation and accuracy within our processes. If our
actions are not effective in correcting the material weakness and we continue to experience
material weaknesses, investors could lose confidence in our financial reporting, particularly if
such weaknesses result in a restatement of our financial results, and our stock price could
decline.
We will be required by Section 404 of the Sarbanes-Oxley Act to evaluate the effectiveness of our
internal controls. If we are unable to achieve and maintain effective internal controls,
particularly in a period of anticipated rapid growth, our operating results and financial
condition could be harmed.
We will be required to comply with Section 404 of the Sarbanes-Oxley Act beginning with the
year ending December 31, 2011. Section 404 requires that we evaluate our internal control over
financial reporting to enable management to report on the effectiveness of those controls.
Management is responsible for establishing and maintaining adequate internal control over financial
reporting. Our internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of our
consolidated financial statements in accordance with U.S. GAAP. While we have begun the
comprehensive process of evaluating our internal controls, we are in the early phases of our review
and we cannot predict the outcome of our review at this time. During the course of the review, we
may identify additional control deficiencies of varying degrees of severity, in addition to the
material weakness discussed above.
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We have taken steps to improve our internal control over financial reporting, including
identification of deficiencies in the knowledge and expertise of personnel required in the
accounting and finance functions of a public company. We have incurred
significant costs to remediate our material weakness and deficiencies and improve our internal
controls, and will incur additional expense as we undertake the modernization and expansion of the
Mountain Pass facility. As we implement this modernization and expansion, the resulting growth in
our business will require us to implement additional internal controls. To comply with
Sarbanes-Oxley requirements, especially during this period of anticipated rapid growth, we will
need to further upgrade our systems, including information technology, implement additional
financial and management controls, reporting systems and procedures and hire additional accounting,
finance and legal staff. If we are unable to upgrade our systems and procedures or hire the
necessary additional personnel in a timely and effective fashion, we may not be able to comply with
our financial reporting requirements and other rules that apply to public companies.
As a public company, we are required to report internal control deficiencies that constitute
material weaknesses in our internal control over financial reporting. If we qualify as an
accelerated filer or a large accelerated filer under Rule 12b-2 of the Exchange Act, we will be
required to obtain an audit report from our independent registered public accounting firm beginning
in 2011 regarding the effectiveness of our internal controls over financial reporting. If we fail
to implement the requirements of Section 404 in a timely manner, if we or, to the extent
applicable, our independent registered public accounting firm, are unable to conclude that our
internal control over financial reporting are effective, or if we fail to comply with our financial
reporting requirements, investors may lose confidence in the accuracy and completeness of our
financial reports.
We will incur increased costs as a result of being a publicly traded corporation.
We have no history operating as a publicly traded corporation. As a publicly traded
corporation, we will incur additional legal, accounting and other expenses that we did not incur as
a private company. This increase will be due to the increased accounting support services, filing
annual and quarterly reports with the Securities and Exchange Commission, or SEC, increased audit
fees, investor relations, directors fees, directors and officers insurance, legal fees, stock
exchange listing fees and registrar and transfer agent fees. In addition, we expect that complying
with the rules and regulations implemented by the SEC and NYSE will increase our legal and
financial compliance costs and make activities more time-consuming and costly. For example, as a
result of becoming a publicly traded corporation, we are required to have a board containing a
majority of independent directors, create additional board committees and adopt policies regarding
internal controls and disclosure controls and procedures, including the preparation of reports on
internal control over financial reporting. In addition, we will incur additional costs associated
with our publicly traded corporation reporting requirements.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
(a) Recent Sales of Unregistered Securities
On April 15, 2010, the members of Molycorp, LLC contributed either (a) all of their member
interests in Molycorp, LLC or (b) all of their equity interests in entities that hold member
interests in Molycorp, LLC to Molycorp, Inc. in exchange for 1,261,149.24 shares of Class A common
stock of Molycorp, Inc. Additionally on April 15, 2010, all of the holders of profits interests in
Molycorp Minerals contributed all of their profits interests to Molycorp, Inc. in exchange for
78,788.33 shares of Class B common stock of Molycorp, Inc.
On May 28, 2010, the holders of Class A common stock of Molycorp, Inc. contributed an
aggregate of $5,000,000 to Molycorp, Inc. in exchange for 49,519.69 shares of Class A common stock
of Molycorp, Inc.
Each share of Class A common stock and Class B common stock of Molycorp, Inc. automatically
converted into shares of common stock of Molycorp, Inc. immediately prior to the consummation of
Molycorp, Inc.s initial public offering of common stock at a conversion ratio dependent on the
return that holders of shares of Class A common stock received. This return was determined on the
value of the outstanding equity of Molycorp, Inc. immediately prior to the initial public offering
based on the price of the common stock in the initial public offering as compared to the amount of
total capital contributed by the holders of shares of Class A common stock plus a compounded annual
rate of return of 10%.
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(b) Use of Proceeds
Our initial public offering of common stock, par value $0.001 per share, was effected through
a Registration Statement on Form S-1 (Registration No. 333-166129) that was declared effective by
the Securities and Exchange Commission on July 29, 2010. On August 3, 2010, Molycorp, Inc.
completed its initial public offering of common stock. In connection with its initial public
offering, Molycorp, Inc. issued 29,128,700 shares of common stock at $14.00 per share (including
1,003,700 shares of common stock issued in connection with the underwriters option to purchase
additional shares). Total net proceeds of the offering were approximately $379.2 million
(including net offering proceeds of $13.1 million for shares purchased by the underwriters upon
their partial exercise of their overallotment option) after deducting
$28.3 million in underwriting
discounts and commissions and offering expenses payable by Molycorp, Inc. No offering costs were
paid directly or indirectly to any of our directors or officers (or their associates) or persons
owning ten percent or more of any class of our equity securities or to any other affiliates. The
managing underwriters of the offering were Morgan Stanley & Co. Incorporated and J.P. Morgan
Securities Inc.
We intend to use our net proceeds from the initial public offering to fund a portion of our
modernization and expansion of the Mountain Pass facility and to fund all of our cash collateral
requirements. Through September 2, 2010, we have used
approximately $3.0 million and $1.3 million of the net
proceeds from the initial public offering for capital expenditures
including, construction and refurbishment of Mountain Pass facilities, and working capital, respectively. Pending application of the remaining net proceeds as described above,
through September 2, 2010, we have invested $374.9 million in net proceeds from the offering in
money market funds. There has been no material change in the planned use of proceeds from our
initial public offering from that described in the final prospectus dated July 29, 2010 filed by us
with the SEC pursuant to Rule 424(b).
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None.
ITEM 4. | [REMOVED AND RESERVED]. |
ITEM 5. | OTHER INFORMATION. |
Mine Safety Practices
Our operations at the Mountain Pass facility are subject to the Mine Act and the regulations
adopted by the California Occupational Safety and Health Administration, which impose stringent
health and safety standards on numerous aspects of mineral extraction and processing operations,
including the training of personnel, operating procedures, operating equipment and other matters.
The Mountain Pass facility maintains a rigorous safety program. Our employees and contractors
are required to complete 24 hours of initial safety training, as well as an 8 hour annual refresher
sessions, which cover all of the potential hazards that may be present at the facility. During the
training, our commitment to a safe work environment is reinforced through our Stop Work Authority
program, which allows any employee or contractor at the facility to stop work that they deem to be
unsafe. As a direct result of this commitment to safety, the Mountain Pass facility has an
exceptional safety record, which as of September 2, 2010, stood at 1,878 days worked without a
lost-time or restricted work accident. Lost-time incidence rate is an industry standard used to
describe occupational injuries that result in loss of one or more days from an employees scheduled
work. Our lost-time incidence rate for all operations for the three months ended June 30, 2010 was
zero as compared to the national average of 1.32 for all surface metal mines during the respective
period as reported by the MSHA. Since July 2005, the Mountain Pass facility has not had a
lost-time accident and has received the coveted Sentinels of Safety award from the MSHA for three
of the last four years. Within the last six years, the Mountain Pass facility has received
numerous awards for safety, including: the MSHA Sentinels of Safety Award (2008, 2006 and 2004);
the National Safety Council Awards Perfect Record (2008, 2007, 2006, 2004); and the National
Safety Council Awards Occupational Excellence achievement award (2009, 2007 and 2004).
Section 1503 of Dodd-Frank Wall Street Reform and Consumer Protection Act: Reporting Requirements
regarding Coal or Other Mine Safety.
Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was
enacted on July 21, 2010, requires that mine operators provide certain safety information in their
periodic reports filed with the SEC.
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Below is information regarding the safety of our sole rare earth mine located at Mountain
Pass, California for the three months ended June 30, 2010:
(A) Total number of violations of mandatory health or safety standards that could significantly
and
substantially contribute to the cause and effect of a mine safety or health hazard under Section
104 of the Mine Act for which we received a citation from the MSHA |
0 | |||
(B) Total number of orders issued under Section 104(b) of the Mine Act |
0 | |||
(C) Total number of citations and orders for unwarrantable failure by us to comply with
mandatory health or safety standards under Section 104(d) of the Mine Act |
0 | |||
(D) Total number of flagrant violations under Section 110(b)(2) of the Mine Act |
0 | |||
(E) Total number of imminent danger orders issued under Section 107(a) of the Mine Act |
0 | |||
(F) Total dollar value of proposed assessments from the MSHA under the Mine Act |
$ | 1,620 | (1) | |
(G) Total number of mining-related fatalities |
0 |
(1) | In May 2010, we paid $1,620 for assessments from the MSHA for citations that were issued during routine inspections in March 2010. We have not yet received proposed assessments for the MSHA for citations that were issued during routine inspections in July 2010. |
We have not received written notice from the MSHA of (i) a pattern of violations of mandatory
health or safety standards that are of such nature as could have significantly and substantially
contributed to the cause and effect of mine health or safety hazards under Section 104(e) of the
Mine Act, or (ii) the potential to have such a pattern with respect to our sole rare earth mine
located at Mountain Pass, California.
We have one pending legal action before the Federal Mine Safety and Health Review Commission as of
June 30, 2010 involving our sole rare earth mine at Mountain Pass, California. On June 24, 2010,
we filed a Notice to Contest Citation with the Federal Mine Safety and Health Review Commission
pursuant to Section 105(d) of the Mine Act to contest a modification to a citation that was issued
after we had paid the penalty assessment due on such citation.
ITEM 6. | EXHIBITS |
Except as otherwise noted, the following exhibits are furnished with this Quarterly Report on
Form 10-Q:
Exhibit | ||||
Number | Description | |||
3.1 | Amended and Restated Certificate of Incorporation of Molycorp, Inc., dated as of August 3, 2010 |
|||
3.2 | Bylaws of Molycorp, Inc., amended as of August 3, 2010 |
|||
10.1 | Letter Agreement, dated April 16, 2010, between Molycorp Minerals, LLC and Traxys North America, LLC |
|||
10.2 | Contribution Agreement, dated April 15, 2010, by and among Molycorp, Inc., Molycorp, LLC,
Molycorp Minerals, LLC and the parties listed therein |
|||
10.3 | Stockholders Agreement, dated April 15, 2010, by and among Molycorp, Inc. and the parties listed therein |
|||
10.4 | Registration Rights Agreement, dated April 15, 2010, by and among Molycorp, Inc. and the parties listed therein |
|||
10.5 | Form of Restricted Stock Agreement |
|||
10.6 | Termination and Mutual Release Agreement, dated June 16, 2010, between Molycorp Minerals, LLC
and Traxys North America, LLC |
|||
10.7 | Sales/Buy-Back Agreement, dated June 1, 2010, between Molycorp Minerals, LLC and Traxys North America, LLC |
|||
10.8 | Executive Employment Agreement, dated May 21, 2010, between Molycorp, Inc. and Mark A. Smith |
|||
10.9 | Executive Employment Agreement, dated May 21, 2010, between Molycorp, Inc. and James S. Allen |
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Exhibit | ||||
Number | Description | |||
10.10 | Executive Employment Agreement, dated May 21, 2010, between Molycorp, Inc. and John F. Ashburn, Jr. |
|||
10.11 | Executive Employment Agreement, dated May 21, 2010, between Molycorp, Inc. and John L. Burba |
|||
10.12 | Molycorp, Inc. 2010 Equity and Performance Incentive Plan |
|||
10.13 | Letter Agreement, dated April 15, 2010, among Resource Capital Fund IV, L.P., Resource
Capital Fund V, L.P., PP IV Mountain Pass II, LLC, PP IV MP AIV 1, LLC, PP IV MP AIV 2, LLC,
PP IV MP AIV 3, LLC, TNA Moly Group, LLC, MP Rare Company, LLC and KMSmith, LLC |
|||
10.14 | Form of Director and Officer Indemnification Agreement |
|||
31.1 | * | Certification of Chief Executive Officer pursuant to Section 302 of the SarbanesOxley Act of 2002 |
||
31.2 | * | Certification of Chief Financial Officer pursuant to Section 302 of the SarbanesOxley Act of 2002 |
||
32.1 | Certification pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the SarbanesOxley Act of 2002 |
* | Filed with this Quarterly Report on Form 10-Q. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
MOLYCORP, INC. |
||||||||
September 3, 2010 | By: | /s/ Mark A. Smith | ||||||
Mark A. Smith | ||||||||
President and Chief Executive Officer (Authorized Officer) |
||||||||
September 3, 2010 | By: | /s/ James S. Allen | ||||||
James S. Allen | ||||||||
Chief Financial Officer and Treasurer (Principal Financial Officer) |
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EXHIBIT INDEX
Exhibit | ||||
Number | Description | |||
3.1 | Amended and Restated Certificate of Incorporation of Molycorp, Inc., dated as of August 3,
2010 (filed as Exhibit 3.1 to Molycorp, Inc.s Current Report on Form 8-K filed on August 6,
2010 and incorporated herein by reference) |
|||
3.2 | Bylaws of Molycorp, Inc., amended as of August 3, 2010 (filed as Exhibit 3.2 to Molycorp,
Inc.s Current Report on Form 8-K filed on August 6, 2010 and incorporated herein by
reference) |
|||
10.1 | Letter Agreement, dated April 16, 2010, between Molycorp Minerals, LLC and Traxys North
America, LLC (filed as Exhibit 10.2 to Molycorp, Inc.s Pre-Effective Amendment No. 1 to
Registration Statement on Form S-1 (File No. 333-166129) filed on May 25, 2010 and
incorporated herein by reference) |
|||
10.2 | Contribution Agreement, dated April 15, 2010, by and among Molycorp, Inc., Molycorp, LLC,
Molycorp Minerals, LLC and the parties listed therein (filed as Exhibit 10.4 to Molycorp,
Inc.s Pre-Effective Amendment No. 1 to Registration Statement on Form S-1 (File No.
333-166129) filed on May 25, 2010 and incorporated herein by reference) |
|||
10.3 | Stockholders Agreement, dated April 15, 2010, by and among Molycorp, Inc. and the parties
listed therein (filed as Exhibit 10.5 to Molycorp, Inc.s Pre-Effective Amendment No. 1 to
Registration Statement on Form S-1 (File No. 333-166129) filed on May 25, 2010 and
incorporated herein by reference) |
|||
10.4 | Registration Rights Agreement, dated April 15, 2010, by and among Molycorp, Inc. and the
parties listed therein (filed as Exhibit 10.6 to Molycorp, Inc.s Pre-Effective Amendment No.
1 to Registration Statement on Form S-1 (File No. 333-166129) filed on May 25, 2010 and
incorporated herein by reference) |
|||
10.5 | | Form of Restricted Stock Agreement (filed as Exhibit 10.7 to Molycorp, Inc.s Pre-Effective
Amendment No. 1 to Registration Statement on Form S-1 (File No. 333-166129) filed on May 25,
2010 and incorporated herein by reference) |
||
10.6 | Termination and Mutual Release Agreement, dated June 16, 2010, between Molycorp Minerals, LLC
and Traxys North America, LLC (filed as Exhibit 10.9 to Molycorp, Inc.s Pre-Effective
Amendment No. 2 to Registration Statement on Form S-1 (File No. 333-166129) filed on June 21,
2010 and incorporated herein by reference) |
|||
10.7 | Sales/Buy-Back Agreement, dated June 1, 2010, between Molycorp Minerals, LLC and Traxys North
America, LLC (filed as Exhibit 10.10 to Molycorp, Inc.s Pre-Effective Amendment No. 2 to
Registration Statement on Form S-1 (File No. 333-166129) filed on June 21, 2010 and
incorporated herein by reference) |
|||
10.8 | | Executive Employment Agreement, dated May 21, 2010, between Molycorp, Inc. and Mark A. Smith
(filed as Exhibit 10.11 to Molycorp, Inc.s Pre-Effective Amendment No. 2 to Registration
Statement on Form S-1 (File No. 333-166129) filed on June 21, 2010 and incorporated herein by
reference) |
||
10.9 | | Executive Employment Agreement, dated May 21, 2010, between Molycorp, Inc. and James S.
Allen (filed as Exhibit 10.12 to Molycorp, Inc.s Pre-Effective Amendment No. 2 to
Registration Statement on Form S-1 (File No. 333-166129) filed on June 21, 2010 and
incorporated herein by reference) |
||
10.10 | | Executive Employment Agreement, dated May 21, 2010, between Molycorp, Inc. and John F.
Ashburn, Jr. (filed as Exhibit 10.13 to Molycorp, Inc.s Pre-Effective Amendment No. 2 to
Registration Statement on Form S-1 (File No. 333-166129) filed on June 21, 2010 and
incorporated herein by reference) |
||
10.11 | | Executive Employment Agreement, dated May 21, 2010, between Molycorp, Inc. and John L. Burba
(filed as Exhibit 10.14 to Molycorp, Inc.s Pre-Effective Amendment No. 2 to Registration
Statement on Form S-1 (File No. 333-166129) filed on June 21, 2010 and incorporated herein by
reference) |
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Exhibit | ||||
Number | Description | |||
10.12 | | Molycorp, Inc. 2010 Equity and Performance Incentive Plan (filed as Exhibit 10.15 to
Molycorp, Inc.s Pre-Effective Amendment No. 2 to Registration Statement on Form S-1 (File No.
333-166129) filed on June 21, 2010 and incorporated herein by reference) |
||
10.13 | Letter Agreement, dated April 15, 2010, among Resource Capital Fund IV, L.P., Resource
Capital Fund V, L.P., PP IV Mountain Pass II, LLC, PP IV MP AIV 1, LLC, PP IV MP AIV 2, LLC,
PP IV MP AIV 3, LLC, TNA Moly Group, LLC, MP Rare Company, LLC and KMSmith, LLC (filed as
Exhibit 10.16 to Molycorp, Inc.s Pre-Effective Amendment No. 2 to Registration Statement on
Form S-1 (File No. 333-166129) filed on June 21, 2010 and incorporated herein by reference) |
|||
10.14 | Form of Director and Officer Indemnification Agreement (filed as Exhibit 10.18 to Molycorp,
Inc.s Pre-Effective Amendment No. 3 to Registration Statement on Form S-1 (File No.
333-166129) filed on July 13, 2010 and incorporated herein by reference) |
|||
31.1 | * | Certification of Chief Executive Officer pursuant to Section 302 of the SarbanesOxley Act of 2002 |
||
31.2 | * | Certification of Chief Financial Officer pursuant to Section 302 of the SarbanesOxley Act of 2002 |
||
32.1 | ** | Certification pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the SarbanesOxley Act of 2002 |
* | Filed with this Quarterly Report on Form 10-Q. | |
** | Furnished with this Quarterly Report on Form 10-Q. | |
| Exhibit constitutes a management contract or compensatory plan or agreement. |
51