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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
OR
¨
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
(Registrant’s 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 x No ¨
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
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 ¨


Accelerated filer x


Non-accelerated filer ¨
(Do not check if a
smaller reporting company)
Smaller reporting company ¨


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of May 5, 2015, the registrant had 277,979,529 shares of common stock, par value $0.001 per share, outstanding.



 


TABLE OF CONTENTS

 
PAGE
 
 
 
 
 
 
 
 
 





DEFINITIONS
The following table includes acronyms and abbreviations used in this report as well as definitions of certain rare earths, rare metals and mining terms often used in our public filings. Unless the context requires otherwise, references in this report to “Molycorp,” “we,” “our” or “us” refer to Molycorp, Inc. and its consolidated subsidiaries.
ARO
Asset Retirement Obligation.
ASC
Accounting Standards Codification.
ASP
Average Selling Price.
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.
ASU
Accounting Standards Update.
Bastnasite
Bastnasite is a mixed-lanthanide fluoro-carbonate mineral (Ln F CO3) that currently provides the bulk of the world's supply of the light REEs. Bastnasite and monazite are the two most common sources of REEs. Bastnasite is found in carbonatites, igneous carbonate rocks that melt at unusually low temperatures.
Board
Molycorp's Board of Directors.
Bonded magnet
Bonded neodymium-magnets are prepared by melt spinning a thin ribbon of the NdFeB alloy. The ribbon contains randomly oriented Nd2Fe14B nano-scale grains. This ribbon is then pulverized into particles, mixed with a polymer and either compression or injection molded into bonded magnets. Bonded magnets offer less flux than sintered magnets, but can be net-shape formed into intricately shaped parts and do not suffer significant eddy current losses.
Cerium
Cerium (Ce) is a soft, silvery, ductile metal which easily oxidizes in air. Cerium is the most abundant of the REEs, and is found in a number of minerals, including monazite and bastnasite. Cerium has two relatively stable oxidation states, enabling both the storage of oxygen and its widespread use in catalytic converters. Cerium is widely used in the glass polish industry and in many other applications.
CHP
Combined Heat and Power.
Concentrate
Concentrate is a mineral processing product that generally describes the material that is produced after crushing and grinding ore, effecting significant separation of gangue (waste) minerals from the desired metal and/or metal minerals, and discarding the waste minerals. The resulting “concentrate” of minerals typically has an order of magnitude higher content of minerals than the beginning ore material.
Cut-off grade
Cut-off grade is the lowest grade of mineralized material that qualifies as ore in a given deposit. The grade above which minerals are considered economically mineable considering the following parameters: estimates over the relevant period of mining costs, ore treatment costs, general and administrative costs, refining costs, royalty expenses, by-product credits, process and refining recovery rates and price.
Didymium
Didymium is a natural and unseparated combination of neodymium and praseodymium, which is approximately 75% neodymium and 25% praseodymium, depending on the ore.
Dysprosium
Dysprosium (Dy) is a REE with a metallic silver lust. A few percent of Dy is often added to high-power NdFeB magnets to increase their resistance to demagnetization. A minor use of dysprosium is in the magnetostrictive alloy, based on DyTbFe, called terfenol-D.
EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortization.
Europium
Europium (Eu) is a REE with luminescent properties. Excitation of the europium atom, by absorption of energy, results in a visible emission. Almost all practical uses of europium utilize this luminescent behavior.
Exchange Act
Securities Exchange Act of 1934, as amended.
FASB
Financial Accounting Standards Board.
FCC
Fluid Catalytic Cracking.
GAAP
Accounting principles generally accepted in the United States.
Gadolinium
Gadolinium (Gd) is a REE that absorbs neutrons and therefore is used for shielding and controlling neutron radiography and in nuclear reactors. Because of its paramagnetic properties, solutions of organic gadolinium complexes and gadolinium compounds are popular intravenous contrast enhancing agents for medical Magnetic Resonance Imaging (MRI). Gadolinium is sometimes added to samarium cobalt magnets to make their magnetic properties less temperature dependent.
Gallium
Gallium is a rare metal not found in nature, but it is easily obtained by smelting. Very pure gallium metal has a brilliant silvery color and its solid metal fractures conchoidally like glass. Almost all gallium is used for microelectronics.
Grade
The average REE content, as determined by assay of a metric ton of ore.

3


HREE
Heavy rare earth element.
Indium
Indium is a rare, very soft, malleable and easily fusible post-transition metal that is chemically similar to gallium and thallium, and shows intermediate properties between these two. Indium's current primary application is to form transparent electrodes from indium tin oxide (ITO) in liquid crystal displays and touchscreens, and this use largely determines its global mining production. It is widely used in thin-films to form lubricated layers. It is also used for making particularly low melting point alloys, and is a component in some lead-free solders.
Lanthanum
Lanthanum (La) is the first member of the Lanthanide series of REEs. Lanthanum is a strategically important REE due to its use in FCCs, which are used in the production of transportation and aircraft fuel. Lanthanum is also used in fuel cells, batteries, and many other products.
LED
Light-emitting diode.
LREC
Light rare earth concentrate (purified and unseparated).
LREE
Light rare earth element.
MD&A
Management's Discussion and Analysis of Financial Condition and Results of Operations.
Mill
A processing plant that produces a concentrate of the valuable minerals contained in an ore.
Mineralization
The process or processes by which a mineral or minerals are introduced into a rock, resulting in a valuable or potentially valuable deposit.
Molycorp Canada
Molycorp Minerals Canada ULC (formerly Neo Material Technologies Inc.).
Mountain Pass
The Molycorp Minerals, LLC rare earth minerals mining and processing facility located in Mountain Pass, California.
Monazite
Monazite is a reddish-brown phosphate mineral. Monazite minerals are typically accompanied by concentrations of uranium and thorium. This has historically limited the processing of monazite, however this mineral is becoming more attractive because it typically has slightly elevated concentrations of mid-to heavy rare earths as compared to rare earth-containing minerals such as bastnasite.
mt
Metric Ton = 2,205 pounds.
Niobium
Niobium is a rare, soft, grey, ductile transition metal found in the mineral pyrochlore, the main commercial source for niobium, and columbite. Niobium is used mostly in alloys, the largest part in special steel such as that used in gas pipelines. Although alloys contain only a maximum of 0.1% of niobium, that small percentage improves the strength of the steel. The temperature stability of niobium-containing superalloys is important for its use in jet and rocket engines. Niobium is also used in various superconducting materials, among other applications.
NdFeB
Neodymium-iron-boron alloy.
NdPr
Neodymium/Praseodymium.
Nd2O3
Neodymium(III) oxide or neodymium sesquioxide is the chemical compound composed of neodymium and oxygen.
Neodymium
Neodymium (Nd) is a REE used in a wide variety of applications, particularly as a key constituent of NdFeB permanent magnets and as an additive to capacitor dielectrics. NdFeB magnets have a relatively
high power/weight ratio, and are used in a large variety of motors, generators, sensors and computer hard disk drives. Capacitors containing neodymium are found in cellular telephones, computers and nearly all other electronic devices. A minor application of neodymium is in lasers.
Neo PowdersTM
NdFeB magnet powders.
Ore
That part of a mineral deposit which could be economically and legally extracted or produced at the time of reserve determination.
Overburden
In surface mining, overburden is the material that overlays an ore deposit. Overburden is removed prior to mining.
Praseodymium
Praseodymium (Pr) is a REE that generally comprises about 4% of the lanthanide content of bastnasite and is used in several applications, including in NdFeB magnetic materials and as a coloring pigment in photographic filters, airport signal lenses, and welder's glasses.
Probable reserves
Reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.
Proven reserves
Reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling; and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well established.

4


REE
Rare earth element.
Recovery
The percentage of contained metal actually extracted from ore in the course of processing such ore.
REO
Rare earth oxide.
Reserves
That part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. Same definition as 'ore'.
Rhenium
Rhenium is a silvery-white, heavy, third-row transition metal. With an estimated average concentration of 1 part per billion (ppb), rhenium is one of the rarest elements in the Earth's crust. The free element has the third-highest melting point and highest boiling point of any element. Rhenium resembles manganese chemically and is obtained as a by-product of molybdenum and copper ore's extraction and refinement. Nickel-based superalloys of rhenium are used in the combustion chambers, turbine blades, and exhaust nozzles of jet engines. These alloys contain up to 6% rhenium, making jet engine construction the largest single use for the element, with the chemical industry's catalytic uses being next-most important.
Samarium
Samarium (Sm) is a REE predominantly used to produce samarium-cobalt magnets. Although these magnets are slightly less powerful than NdFeB magnets at room temperature, samarium cobalt magnets can be used over a wider range of temperatures and are less susceptible to corrosion.
SEC
Securities and Exchange Commission.
SEG
Samarium, europium, gadolinium.
Sintered magnet
Sintered NdFeB-magnets are prepared by the raw materials being melted in a furnace, cast into a mold and cooled to form ingots. The ingots are pulverized and milled to tiny particles, which then undergo a process of liquid-phase sintering whereby the powder is magnetically aligned into dense blocks which are then heat-treated, cut to shape, surface treated and magnetized.
Tantalum
Tantalum is a rare, hard, blue-gray, lustrous transition metal that is highly corrosion resistant. It is part of the refractory metals group, which are widely used as minor component in alloys. The chemical inertness of tantalum makes it a valuable substance for laboratory equipment and a substitute for platinum, but its main use today is in tantalum capacitors in electronic equipment such as mobile phones, DVD players, video game systems and computers.
Terbium
Terbium (Tb) is a REE used primarily as a phosphor, either in fluorescent lamps or x-ray screens. It can replace dysprosium in NdFeB magnets but usually does not because of its cost. A minor use of terbium is in the magnetostrictive alloy, based on DyTbFe, called terfenol-D.
Ton
2,000 pounds.
Yttrium
Yttrium (Y), although not a lanthanide series element, is often considered to be a REE and its behavior is similar to heavy REEs. It is predominantly utilized in lighting applications and ceramics. Other uses include resonators, lasers, microwave communication devices and other electronic devices.
Zirconium oxide
Zirconium oxide is a white amorphous powder that is insoluble in water and highly refractory, used as a pigment for paints, a catalyst, and an abrasive.



5


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOLYCORP, INC.
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except shares and per share amounts)
 
March 31, 2015
 
December 31, 2014
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
133,599

 
$
211,685

Trade accounts receivable, net
47,697

 
44,575

Inventory (Note 4)
180,810

 
169,323

Prepaid expenses and other current assets
36,013

 
29,332

Total current assets
398,119

 
454,915

Non-current assets:
 
 
 
Deposits
31,213

 
31,078

Property, plant and equipment, net (Note 5)
1,691,051

 
1,707,970

Inventory (Note 4)
24,724

 
25,127

Intangible assets, net
211,726

 
215,871

Investments
7,793

 
8,801

Goodwill
102,808

 
102,808

Other non-current assets
27,350

 
29,416

Total non-current assets
2,096,665

 
2,121,071

Total assets
$
2,494,784

 
$
2,575,986

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Trade accounts payable
$
35,102

 
$
40,842

Accrued expenses
30,718

 
33,666

Interest payable
28,184

 
18,300

Debt and capital lease obligations (Note 6)
13,953

 
12,560

Other current liabilities
5,691

 
4,686

Total current liabilities
113,648

 
110,054

Non-current liabilities:
 
 
 
Asset retirement obligation
17,876

 
17,799

Deferred tax liabilities
63,731

 
63,802

Debt and capital lease obligations (Note 6)
1,570,801

 
1,559,781

Other non-current liabilities
20,140

 
20,247

Total non-current liabilities
1,672,548

 
1,661,629

Total liabilities     
$
1,786,196

 
$
1,771,683

Commitments and contingencies (Note 10)


 


Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; 700,000,000 shares authorized at March 31, 2015 and December 31, 2014
278

 
260

Additional paid-in capital
2,247,199

 
2,245,478

Accumulated other comprehensive income (loss)
1,466

 
(3,323
)
Accumulated deficit
(1,547,742
)
 
(1,445,408
)
Total Molycorp stockholders’ equity
701,201

 
797,007

Noncontrolling interests
7,387

 
7,296

Total stockholders’ equity
708,588

 
804,303

Total liabilities and stockholders’ equity
$
2,494,784

 
$
2,575,986


See accompanying notes to the condensed consolidated financial statements.

6


MOLYCORP, INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
(In thousands, except shares and per share amounts)
 
Three Months Ended March 31,
 
2015
 
2014
Revenues
$
106,424

 
$
118,526

Costs of sales:
 
 
 
Costs excluding depreciation and amortization
(105,874
)
 
(125,473
)
Depreciation and amortization
(25,280
)
 
(16,147
)
Gross loss
(24,730
)
 
(23,094
)
Operating expenses:
 
 
 
Selling, general and administrative
(21,457
)
 
(17,956
)
Depreciation, amortization and accretion
(5,573
)
 
(7,201
)
Research and development
(3,141
)
 
(2,766
)
Operating loss
(54,901
)
 
(51,017
)

 
 
 
Other income
2,123

 
474

Interest expense
(46,300
)
 
(35,639
)
Loss before income taxes and equity earnings
(99,078
)
 
(86,182
)
Income tax (expense) benefit
(2,968
)
 
1,907

Equity in loss of affiliates
(224
)
 
(1,723
)
Net loss
(102,270
)
 
(85,998
)
Net income attributable to noncontrolling interests
(64
)
 
(63
)
Net loss attributable to Molycorp stockholders
$
(102,334
)
 
$
(86,061
)
 
 
 
 
Net loss
$
(102,270
)
 
$
(85,998
)
Other comprehensive (loss) income:
 
 
 
Foreign currency translation adjustments
4,789

 
(852
)
Comprehensive loss
$
(97,481
)
 
$
(86,850
)
Comprehensive loss attributable to:
 
 
 
Molycorp stockholders
(97,545
)
 
(86,913
)
Noncontrolling interest
64

 
63

 
$
(97,481
)
 
$
(86,850
)
 Loss per share of common stock (Note 9):
 
 
 
Net loss attributable to Molycorp stockholders
$
(102,334
)
 
$
(86,061
)
Dividends on Convertible Preferred Stock

 
(2,846
)
Loss attributable to common stockholders
$
(102,334
)
 
$
(88,907
)
 
 
 
 
Weighted average common shares outstanding—basic
245,808,011

 
221,374,589

Basic loss per share:
$
(0.42
)
 
$
(0.40
)
 
 
 
 
Weighted average common shares outstanding—diluted
245,808,011

 
221,374,589

Diluted loss per share:
$
(0.42
)
 
$
(0.40
)

See accompanying notes to the condensed consolidated financial statements.

7



MOLYCORP, INC.
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
(In thousands, except shares and per share amounts)

 
Common Stock
Additional
Paid-In Capital
Accumulated
Other
Comprehensive Loss
Accumulated deficit
Total
Molycorp Stockholders' Equity
Non
controlling interests
Total Stockholders' Equity
 
Shares
$
Balance at December 31, 2014
259,831,422

$
260

$
2,245,478

$
(3,323
)
$
(1,445,408
)
$
797,007

$
7,296

$
804,303

Stock-based compensation
73,672


1,777



1,777


1,777

Conversion of Exchangeable Shares
123








Issuance of shares for conversion of Debentures
2,924


1



1


1

Warrants exercise (Note 8)
18,071,175

18

(18
)





Net (loss) income




(102,334
)
(102,334
)
64

(102,270
)
Distribution to noncontrolling interests






(40
)
(40
)
Other comprehensive loss



4,789


4,789


4,789

Other


(39
)


(39
)
67

28

Balance at March 31, 2015
277,979,316

$
278

$
2,247,199

$
1,466

$
(1,547,742
)
$
701,201

$
7,387

$
708,588


 
Common Stock
Series A
Mandatory
Convertible
Preferred
Stock
Additional
Paid-In Capital
Accumulated
Other
Comprehensive Loss
Accumulated deficit
Total
Molycorp Stockholders' Equity
Non
controlling interests
Total Stockholders' Equity
 
Shares
$
Shares
$
Balance at December 31, 2013
240,380,094

$
241

2,070,000

$
2

$
2,194,405

$
(6,451
)
$
(840,474
)
$
1,347,723

$
29,339

$
1,377,062

Stock-based compensation
177,491




103



103


103

Conversion of Series A Mandatory Convertible Preferred Stock
4,140,000

4

(2,070,000
)
(2
)
(2
)





Conversion of Exchangeable Shares
392










Issuance of shares for conversion of Debentures
1,281




7



7


7

Net (loss) income






(86,061
)
(86,061
)
63

(85,998
)
Preferred dividends




(2,846
)


(2,846
)

(2,846
)
Distribution to noncontrolling interests








(435
)
(435
)
Other comprehensive loss





(852
)

(852
)

(852
)
Other




(263
)


(263
)
19

(244
)
Balance at March 31, 2014
244,699,258

$
245


$

$
2,191,404

$
(7,303
)
$
(926,535
)
$
1,257,811

$
28,986

$
1,286,797



See accompanying notes to the condensed consolidated financial statements.

8


MOLYCORP, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
Three Months Ended March 31,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net loss
$
(102,270
)
 
$
(85,998
)
Adjustments to reconcile net loss to net cash from operating activities:
 
 
 
Depreciation, amortization and accretion
30,853

 
23,348

Deferred income tax (benefit) expense
231

 
(6,097
)
Inventory write-downs
28,868

 
17,371

Stock-based compensation
1,503

 
822

Equity in results of affiliates
224

 
1,723

PIK interest
3,106

 

Other operating adjustments
3,963

 
831

Net change in operating assets and liabilities (Note 13)
(39,363
)
 
2,215

Net cash used in operating activities
(72,885
)
 
(45,785
)
Cash flows from investing activities:
 
 
 
Capital expenditures
(6,333
)
 
(29,752
)
Other investing activities
947

 
493

Net cash used in investing activities
(5,386
)
 
(29,259
)
Cash flows from financing activities:
 
 
 
Repayments of debt
979

 
(489
)
Payments of preferred dividends

 
(2,846
)
Dividend paid to noncontrolling interests
(40
)
 
(435
)
Other financing activities
(781
)
 
1,323

Net cash used in financing activities
158

 
(2,447
)
Effect of exchange rate changes on cash
27

 
(776
)
Net change in cash and cash equivalents
(78,086
)
 
(78,267
)
Cash and cash equivalents at beginning of the period
211,685

 
314,317

Cash and cash equivalents at end of period
$
133,599

 
$
236,050





See accompanying notes to the condensed consolidated financial statements.

9


MOLYCORP, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 


(1)
Going Concern
As a result of continuing softness in the prices for our products, as well as inconsistent or depressed demand for certain of our products and the delayed ramp-up of operations at our Mountain Pass facility, we have incurred, and continue to incur, operating losses. While certain of our business units currently generate positive cash flow from operations, we have not yet achieved break-even cash flow from operations (excluding interest) on a consolidated basis as we continue the ramp-up and optimize production at our Mountain Pass facility.
As of March 31, 2015, the total principal balance of our outstanding debt is approximately $1.7 billion, including approximately $206.5 million of our 3.25% Convertible Notes that matures on June 15, 2016. Based on our current cash forecast, we may not have sufficient funds available to repay those convertible notes at maturity, in part because the delayed draw proceeds under the 2014 Financings (defined below) would not be available in the event we do not achieve certain earnings and production targets specified in the 2014 Financings. Additionally, the agreements governing the 2014 Financings contain springing maturity obligations if we do not repay, or provide for the repayment of, certain of our 3.25% Convertible Notes by April 2016. Certain of our debt obligations contain covenants that are subject to interpretation. Although we do not believe we are in breach of any such covenants as at March 31, 2015, if a creditor under any such debt obligations decides to declare a breach of any such covenant, then such creditor could exercise its rights under the applicable debt obligations, which will trigger cross-defaults in other debt obligations. Such actions by creditors could require repayment of our debt before maturity, and we cannot assure you that we will be able to meet such repayment obligations. See more information on our convertible notes and other debt obligations at Note 6.
In addition, on December 30, 2014, we received notice that we are not in compliance with the continued listing standards of the New York Stock Exchange ("NYSE") because the current trading price for our common stock is below the minimum listing requirements. We are taking actions to meet the compliance standards for continued listing on the NYSE, and are seeking approval from our stockholders for a reverse stock split as an alternative means of regaining compliance with the minimum share price requirement. However, we cannot guarantee that we will be able to meet the necessary requirements for continued listing, and, therefore, we cannot guarantee that our common stock will remain listed for trading on the NYSE. If we fail to meet the necessary requirements for our common stock to remain listed on the NYSE or other similar markets, then we will be obligated to offer to repurchase all of our outstanding convertible notes at a price equal to 100% of the aggregate principal amount plus accrued and unpaid interest. Our failure to make such an offer or repurchase any tendered convertible notes will result in an event of default under the indentures governing our convertible notes. Any such event of default will trigger a cross-default on our other debt obligations, including the 2014 Financings. Our inability to cure any such defaults, including the prepayment of our debt obligations, would have a material adverse effect on our financial position and results of operations.
Capital expenditures for our Mountain Pass facility have decreased significantly and are expected to total approximately $35 million for the remainder of 2015 and $20 million in 2016. Additionally, we expect to spend approximately $17 million for the remainder of 2015 and $20 million in 2016 on maintenance and expansion capital expenditures across all other operating segments. Our annual cash interest payments on all debt (excluding capital leases), including unused commitment fees, currently total approximately $124 million. This amount excludes other associated fees and expenses that may become payable by us under our credit agreements. The amount of our cash requirements continues to be dependent on (i) the accuracy of our cost estimates for capital expenditures, (ii) our ability to operate and maintain our Mountain Pass facility and our other operations within our current estimates, (iii) our ability to ramp-up run rates at our Mountain Pass facility pursuant to our expectations without further delays, and to achieve lower cash costs of production as a result of further optimization of operations at our Mountain Pass facility, (iv) stable or improved market conditions, (v) our ability to sell our production of rare earths to external customers and our downstream facilities (including our ability to sell our Cerium through market acceptance of SorbX® or otherwise), (vi) our ability to repatriate cash generated from our global operations, and (vii) the absence of payments on current and future contingent liabilities.
Our cash balances of $133.6 million as of March 31, 2015 represent our primary source of liquidity to fund our capital expenditures, debt service and net operating cash requirements. As part of our plan to achieve positive cash flows from operations, we have implemented initiatives to reduce our operating and administrative costs and we will continue to pursue other cost efficiencies. Despite these efforts, due to, as discussed above, the continuing softness in the prices for our products, inconsistent or depressed demand for certain of our products and the delayed ramp-up of operations at our Mountain Pass facility, we will need additional financing in 2015 to meet our business plan and our obligations as they come due.
In August 2014, we and certain of our subsidiaries entered into a commitment letter with Oaktree Capital Management, L.P. (collectively with certain of its affiliates and funds under its management, "Oaktree") pursuant to which Oaktree agreed to provide

10


MOLYCORP, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

to us and certain of our subsidiaries up to approximately $400.0 million in secured financing through credit facilities and the sale and leaseback of certain equipment at our Mountain Pass facility (the "2014 Financings") for corporate, operating and capital expenditures purposes. On September 11, 2014, we executed agreements governing the 2014 Financings and received initial gross proceeds totaling $250.0 million from Oaktree, with the remaining $149.8 million available to be drawn until April 30, 2016, $134.8 million of which is available only if we achieve certain financial and operational performance targets. For more information, see Note 6 below. Additionally, availability of the other $15.0 million may be limited by certain outstanding balances under our foreign subsidiary credit facilities.
We regularly evaluate opportunities to reduce our debt and/or related interest costs. In November 2014, we exchanged $11.0 million of the aggregate principal amount of our 5.50% Convertible Notes, and $27.0 million of the aggregate principal amount of our 6.00% Convertible Notes for a total of approximately 15,056,603 shares of our common stock, plus payments in cash of accrued but unpaid interest. Additionally, we may from time to time seek to repurchase other outstanding debt securities with cash and/or exchanges for common stock or securities convertible into common stock or other debt securities.
In December 2014, our Board of Directors approved the engagement of an independent investment bank and advisory firm to advise us in pursuing various financing alternatives to secure a more sustainable capital structure. While we are evaluating a number of alternatives, we will seek to convert a significant portion of our outstanding debt to equity, including the exchange of debt for shares of our common stock. In addition, we may seek to reduce our cash interest cost and/or extend debt maturity dates by negotiating the exchange of outstanding debt for new debt with modified terms. Although we have been successful in raising funds to date, there can be no assurance that adequate or sufficient funding will be available in the future, or available under terms acceptable to us.
These circumstances indicate the existence of a material uncertainty that casts substantial doubt as to our ability to meet our business plan and our obligations as they come due and, accordingly, the appropriateness of the use of the accounting principles applicable to a going concern. The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis that assumes we will be able to continue to realize our assets and discharge our liabilities in the normal course of business, and do not reflect the adjustments to the carrying amount of assets and liabilities that would be necessary if we were unable to obtain adequate financing or restructure our debt. If we are unable to execute our business plan and restructure our debt, we may not be able to continue as a going concern.
(2)
Basis of Presentation    
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and Regulation S-X promulgated under the Exchange Act, and reflect all adjustments that are normal and recurring in nature, which, in the opinion of management, are necessary for the fair presentation of our financial position, results of operations and cash flows at March 31, 2015, and for all periods presented. While the December 31, 2014 balance sheet information was derived from our audited financial statements, for interim periods, GAAP and Regulation S-X do not require all information and related disclosures that are required in the annual financial statements and, as a result, all disclosures required by GAAP and Regulation S-X for annual financial statements have not been included in this report. Therefore, the accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 2014 included in our Annual Report on Form 10-K filed with the SEC on March 16, 2015.
The unaudited condensed consolidated financial statements include our accounts and the accounts of our wholly-owned and majority-owned subsidiaries. Intercompany balances and transactions have been eliminated on consolidation. Investments in joint ventures where we do not exert control, but have the ability to exercise significant influence over the operating and financial policies of the investee, are accounted for under the equity method. All other investments are accounted for at cost. Certain comparative figures have been reclassified to conform to the presentation adopted in the current period.

Use of Estimates

The preparation of the financial statements, in accordance with GAAP, requires us 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. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ significantly from these estimates under different assumptions and conditions. Significant estimates we made in the accompanying financial statements include the collectability of accounts receivable, the recoverability of inventory, the useful

11


MOLYCORP, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

lives and recoverability of long-lived assets such as property, plant and equipment, intangible assets, goodwill and investments, capital leases, uncertain tax positions, the realizability of deferred tax assets, and the adequacy of the asset retirement obligation.

Significant Accounting Policies

A summary of our significant accounting policies can be found in Item 8, Note 3 of the audited consolidated financial statements for the year ended December 31, 2014 included in our Annual Report on Form 10-K filed with the SEC on March 16, 2015.

Prior to January 1, 2015, the functional currency of certain entities within our Magnetic Materials and Alloys segment was the U.S. dollar. We changed the functional currency of these entities to the Chinese Renminbi effective January 1, 2015 following a significant shift from U.S. dollar to Chinese Renminbi denominated sales that occurred as a result of the patent expiration relating to the sales of Neo Powders™. The change in functional currency was applied prospectively from January 1, 2015. The accounting basis of the assets and liabilities affected by the change in functional currency were adjusted to reflect the exchange rate on the date of the change in functional currency. As a result of this change, we recorded a $4.5 million cumulative translation gain in other comprehensive loss on January 1, 2015.

Recent Accounting Pronouncements

In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The guidance in the new standard is limited to the presentation of debt issuance costs. The standard does not affect the recognition and measurement of debt issuance costs. Prior to the issuance of the standard, debt issuance costs were required to be presented in the balance sheet as a deferred charge (i.e., an asset). For public entities, the standard is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The new guidance will be applied on a retrospective basis.

We intend to adopt ASU 2015-03 in our financial statements for the annual period beginning on January 1, 2016. As of March 31, 2015, our other non-current assets included deferred charges related to debt issuance costs of approximately $15.1 million. The retrospective adoption of this new standard will have the effect of presenting the deferred charges balance as of December 31, 2016 and 2015 as a contra liability to our debt and capital lease obligations, rather than a non-current asset. The adoption of this new standard will have no impact to our statements of operations and comprehensive income or loss in all periods presented.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of this new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:

Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
    
The new guidance also specifies the accounting for some costs to obtain or fulfill a contract with a customer. An entity will be required to disclose sufficient qualitative and quantitative information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. For calendar-year public entities, the new guidance is effective starting in 2017, and interim periods within that year. Early adoption is not permitted. An entity should apply the amendments in this update using one of the following two methods:

1.
Retrospectively to each prior reporting period presented.

12


MOLYCORP, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

2.
Retrospectively with the cumulative effect of initially applying this update recognized at the date of initial application. If an entity elects this transition method, it also should provide the additional disclosures in reporting periods that include the date of initial application of:
i.
The amount by which each financial statement line item is affected in the current reporting period by the application of this update as compared to the guidance that was in effect before the change.
ii.
An explanation of the reasons for significant changes.

We intend to adopt ASU 2014-09 in our financial statements for the annual period beginning on January 1, 2017. The extent of the impact of adoption of the standard has not yet been determined.

(3)
Segment Information
Our operations are organized into four reportable segments, each reflecting a unique combination of product lines and technologies: Resources, Chemicals and Oxides, Magnetic Materials and Alloys, and Rare Metals.
The Resources segment includes our operations at the Mountain Pass facility, where we perform rare earth minerals extraction to produce LREC; separated rare earth oxides, including Lanthanum, Cerium, and Neodymium-Praseodymium; heavy rare earth concentrates, which include Samarium, Europium, Gadolinium, Terbium, Dysprosium, and others; and a line of proprietary rare earth-based water treatment products, including SorbX® and PhosFIX®.
The Chemicals and Oxides segment includes the following productions: rare earths from our Molycorp Silmet AS, or Molycorp Silmet, facility in Sillamäe, Estonia; separated heavy rare earth oxides and other custom engineered materials from our majority-owned Jiangyin Jia Hua Advanced Material Resources Co., Ltd. , or Molycorp Jiangyin, facility in Jiangyin, Jiangsu Province, China; and rare earths, salts of REEs, zirconium-based engineered materials, and mixed rare earth/zirconium oxides from our majority-owned Zibo Jia Hua Advanced Material Resources Co., Ltd., or Molycorp Zibo, facility in Zibo, Shandong Province, China. At our Chemicals and Oxides segment, we develop and sell rare-earth based oxides for all the major emission catalysts manufacturers. Several factors are driving an increasing demand for emission catalysts, including the following: the accelerating shift of vehicle production to the BRIC countries (Brazil, India, Russia and China); the continuous development of new emission catalytic solutions; and an overall tightening of environmental regulations around the world. Other applications that utilize rare earths and zirconium-based materials we produce at our Chemicals and Oxides segment include computers, television display panels, optical lenses, mobile phones, electronic chips, and many others.
The Magnetic Materials and Alloys segment includes the production of Neo Powders™ through our wholly-owned manufacturing facilities in Tianjin, China, and Korat, Thailand, under the Molycorp Magnequench brand. This operating segment also includes manufacturing of Neodymium and Samarium magnet alloys and other specialty alloy products and rare earth metals at our Molycorp Metals and Alloys, Inc., or MMA, facility in Tolleson, Arizona. Neo Powders™ are used in the production of high performance, bonded NdFeB permanent magnets, which are found in micro motors, precision motors, sensors, and other applications requiring high levels of magnetic strength, flexibility, small size, reduced weight, and energy efficient performance.
The Rare Metals segment produces, reclaims, refines, and markets high value niche metals and their compounds that include Gallium, Indium, Rhenium, Tantalum, and Niobium. Operations in this segment are distributed in several locations: Quapaw, Oklahoma; Blanding, Utah; Peterborough, Ontario, Canada; Sagard, Germany; Hyeongok Industrial Zone in South Korea; and Sillamäe, Estonia. Applications from products made in this segment include wireless technologies, LED, flat panel display, turbine, solar, catalyst, steel additive, electronics applications, and others. The growing adoption of LED applications, which require the use of Gallium trichloride, is allowing the Rare Metals segment to benefit from the decline in certain rare earth phosphor applications.
The accounting polices used in the preparation of our reportable segment financial information are the same as those used in the preparation of our consolidated financial statements. The primary metric we use to measure the financial performance of each reportable segment is OIBDA (Operating income before depreciation, amortization and accretion), which provides a better indication of the base-line performance of our core business operations.

13


MOLYCORP, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

Three months ended March 31, 2015
Resources
 
Chemicals and Oxides
 
Magnetic Materials and Alloys
 
Rare Metals
 
Corporate and other (a)
 
Eliminations(b)
 
Total Molycorp, Inc.
 
(In thousands)
Revenues:
 
External
$
2,514

 
$
37,288

 
$
50,508

 
$
16,114

 
 
 
$

 
$
106,424

Inter-segment
8,315

 
5,508

 
1,616

 
15

 
 
 
(15,454
)
 

Total revenues
$
10,829

 
$
42,796

 
$
52,124

 
$
16,129

 
 
 
$
(15,454
)
 
$
106,424

OIBDA
$
(34,848
)
 
$
5,737

 
$
12,247

 
$
1,594

 
 
 
 
 
 
Depreciation, amortization and accretion
(21,954
)
 
(2,283
)
 
(4,156
)
 
(2,405
)
 
 
 
 
 


Operating (loss) income
$
(56,802
)
 
$
3,454

 
$
8,091

 
$
(811
)
 
$
(12,079
)
 
$
3,246

 
$
(54,901
)
Other expense
 
 
 
 
 
 
 
 
 
 
 
 
2,123

Interest expense
 
 
 
 
 
 
 
 
 
 
 
 
(46,300
)
Loss before income taxes and equity earnings
 
 
 
 
 
 
 
 
 
 
 
 
$
(99,078
)

Three months ended March 31, 2014
Resources
 
Chemicals and Oxides
 
Magnetic Materials and Alloys
 
Rare Metals
 
Corporate and other (a)
 
Eliminations(b)
 
Total Molycorp, Inc.
 
(In thousands)
Revenues:
 
External
$
3,111

 
$
40,271

 
$
54,720

 
$
20,424

 
 
 
$

 
$
118,526

Inter-segment
12,453

 
6,285

 
1,218

 

 
 
 
(19,956
)
 

Total revenues
$
15,564

 
$
46,556

 
$
55,938

 
$
20,424

 
 
 
$
(19,956
)
 
$
118,526

OIBDA
$
(36,445
)
 
$
3,299

 
$
13,676

 
$
(70
)
 
 
 
 
 
 
Depreciation, amortization and accretion
(13,091
)
 
(3,872
)
 
(4,237
)
 
(2,093
)
 

 

 


Operating (loss) income
$
(49,536
)
 
$
(573
)
 
$
9,439

 
$
(2,163
)
 
$
(7,109
)
 
$
(1,075
)
 
$
(51,017
)
Other expense
 
 
 
 
 
 
 
 
 
 
 
 
474

Interest expense
 
 
 
 
 
 
 
 
 
 
 
 
(35,639
)
Loss before income taxes and equity earnings


 


 


 
 
 


 


 
$
(86,182
)

a.
Includes business development costs, personnel costs, stock-based compensation, accounting and legal fees, occupancy expense, information technology costs and interest expense.
b.
Consists of inter-segment sales and gross profits eliminations as well as eliminations of lower of cost or market adjustments related to inter-segment inventory.


14


MOLYCORP, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

(4)
Inventory
At March 31, 2015 and December 31, 2014, our inventory consisted of the following:
 
March 31,
2015
 
December 31,
2014
 
(In thousands)
Current:
 
 
 
Raw materials
$
54,648

 
$
47,796

Work in process
26,205

 
24,901

Finished goods
71,312

 
67,795

Materials and supplies
28,645

 
28,831

Total current
$
180,810

 
$
169,323

Long-term:
 
 
 
Raw materials
$
24,724

 
$
25,127

Total long-term
$
24,724

 
$
25,127


The following table presents charges to costs of sales related to our assessment of normal production levels and write-downs of inventory:
 
Three Months Ended March 31,
 
2015
 
2014
 
(In thousands)
Abnormal production costs expensed in the period (a)
$
28,501

 
$
24,985

Write-down to the lower of cost or market (b)
28,868

 
16,161

Write-downs of stockpile inventory (c)

 
1,210

Total
$
57,369

 
$
42,356


(a)
Relates to production costs that would have been inventoriable had we been operating at normal production levels. In all periods presented, the majority of these production costs related to the Resources segment.
(b)
Due to the decline in some rare earths prices and low inventory turnover.
(c)
Adjustments of the estimated REO content in the stockpile at the Resources segment.


15


MOLYCORP, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

(5)
Property, Plant and Equipment, net
We capitalized expenditures of $3.5 million and $12.3 million for the three months ended March 31, 2015 and 2014, respectively. The majority of these capital expenditures related to capital projects performed at our Mountain Pass facility (Resources segment). At March 31, 2015 and December 31, 2014, our property, plant and equipment consisted of the following:
 
March 31,
2015
 
December 31,
2014
 
(In thousands)
Land
$
13,507

 
$
13,121

Land improvements
305,119

 
305,119

Buildings and improvements
815,756

 
811,418

Plant and equipment
707,579

 
623,453

Vehicles
3,056

 
2,884

Computer software
12,507

 
12,268

Furniture and fixtures
1,040

 
1,039

Construction in progress (a)
16,129

 
80,699

Natural gas delivery facility under capital lease
15,658

 
15,658

Mining equipment under capital lease
10,982

 
10,982

Mineral properties
24,539

 
23,669

Property, plant and equipment at cost
1,925,872

 
1,900,310

Less accumulated depreciation
(234,821
)
 
(192,340
)
Property, plant and equipment, net
$
1,691,051

 
$
1,707,970

(a)
Primarily related to expenditures at the Mountain Pass facility.

Mineral properties and development costs, which are referred to collectively as mineral properties, include acquisition costs, drilling costs, and the cost of other development work associated with our Mountain Pass facility, all of which are capitalized.         
(6)
Debt and Capital Lease Obligations
The following table provides a summary of the current and non-current portions of our debt outstanding and capital lease obligations at March 31, 2015 and December 31, 2014:
 
March 31, 2015
 
December 31, 2014
 
Current
 
Non-Current
 
Current
 
Non-Current
 
(In thousands)
Bank loans due November 2015 - June 2017
$
10,637

 
$
90

 
$
9,326

 
$
91

3.25% Convertible Notes, net of discount, due June 2016

 
195,421

 

 
193,549

6.00% Convertible Notes, net of discount, due September 2017

 
339,858

 

 
335,969

5.00% Debentures, net of discount, due December 2017

 
1,745

 

 
2,075

5.50% Convertible Notes, net of discount, due February 2018

 
144,777

 

 
143,581

12.00% Term Loans, due September 2019

 
101,168

 

 
98,812

12.00% Equipment Financing, due September 2019

 
130,103

 

 
127,594

10% Senior Notes, net of discount, due June 2020

 
639,291

 

 
638,899

Total debt
10,637

 
1,552,453

 
9,326

 
1,540,570

 
 
 
 
 
 
 
 
Capital lease obligations
3,316

 
18,348

 
3,234

 
19,211

Total debt and capital lease obligations
$
13,953

 
$
1,570,801

 
$
12,560

 
$
1,559,781


16


MOLYCORP, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

Weighted average interest rate on the bank loans was 3.90% and 4.1% at March 31, 2015 and December 31, 2014, respectively. Scheduled minimum debt repayments, excluding capital lease obligations, were as follows at March 31, 2015:
Debt maturities, excluding capital leases
(In thousands)
Remainder of 2015
$
7,028

2016
210,154

2017
384,772

2018
161,500

2019
321,154

Thereafter
650,000

Total
$
1,734,608

As of March 31, 2015, we were in compliance with all applicable covenants related to our indebtedness. However, as disclosed in Note 1, certain financial and operational conditions indicate the existence of a material uncertainty that casts substantial doubt on our ability to meet our obligations as they come due.
2014 Financings
The 2014 Financings consist of two term loans and one equipment financing, as follows:
a.
A term loan facility of $185.0 million (the “Parent Term Loan”), $50.2 million of which was advanced on the closing date and $134.8 million is available to be drawn in the minimum amount of $50.0 million at any time until April 30, 2016, subject to the satisfaction of certain conditions, including (i) consolidated adjusted EBITDA of no less than $20.0 million for each of two consecutive fiscal quarters, and (ii) evidence that production at our Mountain Pass facility is equal to or greater than 4,000 mt for each of two consecutive fiscal quarters, in each case prior to, but including, the fiscal quarter ending on March 31, 2016. Proceeds from the Parent Term Loan have been and will be used for capital expenditures, interest expense and general corporate purposes, including the repurchase of certain of our convertible notes owned by Oaktree, and the payment of transaction expenses related to the 2014 Financings.
b.
A term loan facility of $75.0 million (the “Magnequench Term Loan”), $60.0 million of which was advanced on the closing date and $15.0 million of delayed draw term loans to be advanced, subject to the satisfaction of certain conditions, in minimum amounts of $5.0 million after the closing date and until April 30, 2016. Proceeds from the Magnequench Term Loan will be used to satisfy certain intercompany obligations of Magnequench, Inc. and to make certain intercompany loans.
Interest rates on the Parent Term Loan and the Magnequench Term Loan (collectively, the “Term Loans”) are: (i) from the closing date through June 14, 2016, 7.00% per year payable in cash and 5.00% per year payable in kind (“PIK interest”) and (ii) from June 15, 2016, and thereafter, 12.00% per year payable in cash, unless our 3.25% Convertible Notes have been repaid in full with the proceeds of the sale of our common equity or by the exchange of such convertible notes for our common equity, or any combination thereof (the “2016 Notes Equity Refinancing”), in which case, interest will accrue as indicated in (i) above. The daily average unused amount of the delayed draw Term Loans commitment for the Term Loans is subject to an unused commitment enhancement payment of 1.00% per year.
The Term Loans mature on September 11, 2019, with springing maturity dates at (i) April 30, 2016, if we have not repaid, escrowed or extended an amount of cash sufficient to repay when due and payable the 3.25% Convertible Notes down to $40.0 million in the aggregate and (ii) March 31, 2017, if we have not repaid or escrowed an amount of cash sufficient to repay when due and payable (a) our 6.00% Convertible Notes down to $80.0 million in the aggregate and (b) our 5.50% Convertible Notes down to $40.0 million in the aggregate.
We cannot make any voluntary prepayments on the Term Loans prior to the fourth anniversary of the closing date. In addition, any prepayment of the loans and any repayment (or other satisfaction) of the loans after acceleration, but prior to September 11, 2019, will be subject to an early payment premium of (i) 43.8% of the principal amount so prepaid if paid prior to the first anniversary of the closing date, (ii) 33.7% of the principal amount so prepaid if paid on or after the first anniversary of the closing date but prior to the second anniversary of the closing date, (iii) 23.0% of the principal amount so prepaid if paid on or after the second anniversary of the closing date but prior to the third anniversary of the closing date, (iv) 11.5% of the principal amount so prepaid if paid on or after the third anniversary

17


MOLYCORP, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

of the closing date but prior to the fourth anniversary of the closing date, and (vi) 3.0% of the principal amount so prepaid if paid on or after the fourth anniversary of the closing date. Any mandatory prepayment of the loans resulting from an asset sale will be subject to an early payment premium of 3.0% of the principal amount so prepaid.
The springing maturity dates, in combination with the early payment premiums applicable to any prepayment of the loans described above, meet the definition of a derivative that is required to be bifurcated from its host debt instrument. Because this derivative is to be classified as a liability, we recognized a discount on the Term Loans as of the closing date of approximately $1.7 million, in the aggregate, which will be amortized to interest expense over the duration of the Term Loans. See Note 14 for more information on this derivative.
c.
A Purchase and Sale Agreement pursuant to which we sold certain equipment including, but not limited to, parts of our natural gas powered co-generation power plant, the Chlor-Alkali facility and the water treatment plant (collectively, the “Equipment”), located at our Mountain Pass facility. In exchange for the sale of the Equipment, we received proceeds of $139.8 million that have been and will be used for the development and improvement of the Equipment and other assets at our Mountain Pass facility, and may be used, to the extent permitted under our 10% Senior Notes indenture and the Parent Term Loan, for interest payments and other general corporate purposes.
Concurrently with entering into the Purchase and Sale Agreement, we and Oaktree entered into an Equipment Lease Agreement, which we refer to as the "Equipment Financing", whereby we leased back all of the Equipment. The Equipment Financing has a five-year term with the following approximate annual rent payments (due quarterly in arrears): $10.1 million in the first year, $10.7 million in the second year, $11.2 million in the third year, $11.8 million in the fourth year and $12.4 million in the fifth year with an additional payment of approximately $179.9 million on the fifth anniversary of the lease commencement date (“Base Rent Payments”); provided, that unless the 2016 Notes Equity Refinancing, as defined above, has occurred by June 15, 2016, the rent will be adjusted to require annual payments of $18.0 million for years two through five and a payment of approximately $147.0 million on the fifth anniversary of the lease commencement date. Base Rent Payments on the Equipment Financing are based on a 7% annual rate applied to the unpaid principal balance plus accrued, but unpaid interest calculated at an annual rate of 5%.
The following table presents a reconciliation of the principal amount to the net carrying value of the Term Loans and the Equipment Financing at March 31, 2015:
 
12.00% Term Loans
 
12.00% Equipment Financing
 
March 31,
2015
December 31,
2014
 
March 31,
2015
December 31,
2014
 
(In thousands)
Principal amount 
$
113,268

$
111,858

 
$
143,689

$
141,993

Unamortized debt discount
(12,100
)
(13,046
)
 
(13,586
)
(14,399
)
Net carrying amount
$
101,168

$
98,812

 
$
130,103

$
127,594

 
 
 
 
 
 
Interest costs on the Term Loans and the Equipment Financing were as follows during the three months ended March 31, 2015:
 
12.00% Term Loans
 
12.00% Equipment Financing
 
(In thousands)
Cash interest
$
2,332

 
$
2,484

PIK interest
1,410

 
1,696

Accretion of discount and amortization of issuance costs
1,246

 
1,429

Total interest cost
$
4,988

 
$
5,609

Obligations under the 2014 Financings are guaranteed by us and certain of our subsidiaries (the “Pari Passu Guarantors”) that also guarantee the obligations under our 10% Senior Notes. Our obligations and those of the Pari Passu Guarantors under the 2014 Financings are secured by a pari passu lien on substantially all of our assets and the assets of the Pari Passu Guarantors (the “Pari Passu Collateral”) on an equal and ratable basis with the obligations under the 10% Senior Notes. The maximum

18


MOLYCORP, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

principal amount of debt under the 2014 Financings secured by the Pari Passu Collateral shall not exceed $300.0 million in the aggregate at any time or such higher amount permitted by the Pari Passu Indenture. In addition, the obligations under the 2014 Financings are guaranteed by certain of our other subsidiaries (the “First Priority Guarantors”). The obligations of the First Priority Guarantors under the 2014 Financings are secured by a first priority lien on certain equity interests owned by the First Priority Guarantors, including equity interests of certain foreign subsidiaries. In addition, the Magnequench Term Loan is secured by a first priority lien on substantially all of the assets of Magnequench, Inc.
Convertible Notes and Senior Secured Obligations
The following table presents a reconciliation of the principal amount to the net carrying value for each of our Convertible Notes and our 10% Senior Notes at March 31, 2015 and December 31, 2014, and provides the interest cost of each instrument for the quarters ended March 31, 2015 and 2014:
 
 
 
 
 
 
 
 
 
 
 
 
 
3.25% Convertible Notes
 
6.00% Convertible Notes
 
5.50% Convertible Notes
 
10% Senior Notes
 
March 31,
2015
December 31,
2014
 
March 31,
2015
December 31,
2014
 
March 31,
2015
December 31,
2014
 
March 31,
2015
December 31,
2014
 
(In thousands)
Principal amount
$
206,505

$
206,505

 
$
383,000

$
383,000

 
$
161,500

$
161,500

 
$
650,000

$
650,000

Unamortized debt discount
(11,084
)
(12,956
)
 
(43,142
)
(47,031
)
 
(16,723
)
(17,919
)
 
(10,709
)
(11,101
)
Net carrying amount
$
195,421

$
193,549

 
$
339,858

$
335,969

 
$
144,777

$
143,581

 
$
639,291

$
638,899

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31,
 
2015
2014
 
2015
2014
 
2015
2014
 
2015
2014
Cash interest
$
1,678

$
1,869

 
$
5,745

$
6,210

 
$
2,221

$
2,372

 
$
16,250

$
16,250

Accretion of discount and amortization of issuance costs
1,879

2,189

 
3,943

3,940

 
1,211

1,287

 
498

389

Total interest cost
$
3,557

$
4,058

 
$
9,688

$
10,150

 
$
3,432

3,659

 
$
16,748

$
16,639

 
 
 
 
 
 
 
 
 
 
 
 
The interest costs listed immediately above include the accretion of the initial equity component of the convertible notes (3.25% - $36,227; 6.00% - $68,695; and 5.50% - $21,815).

The 10% Senior Notes are our senior secured obligations and are guaranteed by certain of our domestic subsidiaries ("Guarantors"). The Senior Notes are secured by a first-priority security interest on substantially all of our property and assets and those of the Guarantors, subject to some exceptions for certain "Excluded Assets," such as:
Leasehold interests in real property;
Certain capital leases that constitute permitted liens;
Certain motor vehicles;
Assets owned by foreign subsidiaries or, subject to certain limitations, MMA;
Assets with a fair market value of less than $15.0 million as to which the board of directors determine in good faith (and certify to the collateral agent) that the costs of obtaining or perfecting such security interest are excessive in relation to the practical benefit to the holder of the Notes of the security afforded thereby (based on the value of such asset);
Cash collateral for letters of credit or hedging obligations (up to 105% of the underlying obligations);
Certain deposit accounts;
The equity interests of immaterial subsidiaries and, subject to certain limitations, MMA;
Voting stock of foreign subsidiaries in excess of 65.0% of the voting stock; and
Other pledges of stock of a guarantor to the extent that Rule 3-16 of Regulation S-X under the Securities Act would require the filing of separate financial statements of such guarantor.


19


MOLYCORP, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

Capital Leases    

We lease certain mining and other equipment under agreements with various durations that have been determined to be capital leases. Those agreements contain purchase options at the end of the lease term and are generally at market interest rates. At March 31, 2015, total future minimum payments on our capital leases were as follows:
Capital Leases
(In thousands)
Remainder of 2015
$
6,209

2016
8,279

2017
7,161

2018
5,772

2019
5,490

Thereafter
12,706

Total
$
45,617


(7)
Income Taxes
Our effective income tax rate can vary significantly quarter-to-quarter for various reasons, including the mix and volume of business in lower tax jurisdictions, in jurisdictions with tax holidays and tax incentives, and in jurisdictions for which no deferred tax assets have been recognized because management believed it was not more likely than not that future taxable profit would be available against which tax losses and deductible temporary differences could be utilized. Our effective income tax rate can also vary due to the impact of foreign exchange fluctuations, operating losses, changes in our provisions related to tax uncertainties, and changes in our assertion relating to indefinitely reinvesting undistributed earnings of certain foreign subsidiaries.
For the three months ended March 31, 2015 and 2014, our effective tax rates were (3.0)% and 2.2%, respectively. The March 31, 2015 effective tax rate was impacted primarily by a valuation allowance required in the U.S. as a result of tax losses generated during the quarter.
(8)
Stockholders’ Equity
As of March 31, 2015 and December 31, 2014, we had 278,032,526 and 259,921,868 shares of common stock issued and outstanding, respectively. As of these dates, we had 5,000,000 shares of preferred stock authorized to be issued at a par value of $0.001 per share, and no outstanding shares of preferred stock.
Warrants
On September 11, 2014, as part of the 2014 Financings, we issued warrants to Oaktree to purchase up to an aggregate of 18,358,019 shares of our common stock (the “Penny Warrants”) with an exercise price of $0.01 per share, and warrants to purchase up to an aggregate of 6,119,340 shares of our common stock with an exercise price of $2.04 per share.
In February 2015, Oaktree exercised the Penny Warrants. As a result, based on the formula indicated below relative to the cashless exercise, which is applicable to both the Penny Warrants and the Strike Warrants, we issued a total of 18,071,175 shares of our common stock.
The Strike Warrants may be exercised at any time until September 11, 2019 by Oaktree or any registered holder of the Strike Warrants on either a cash basis (i.e., physical exercise) or on a “cashless basis” by surrendering such warrants for a net number of shares of our common stock. With respect to the exercise of the Strike Warrants on a “cashless basis”, the number of shares of our common stock to be surrendered is equal to the quotient obtained by dividing (x) the product of the number of shares of our common stock underlying such Strike Warrants or any portion thereof being exercised (at the election of the registered holder), multiplied by the difference between the Fair Market Value and the warrant price by (y) the Fair Market Value. Fair Market Value means the average last sale price of a share of our common stock for the ten trading days ending on the third trading day prior to the date on which notice of exercise of such the Strike Warrants is sent to Computershare Inc. and Computershare Trust Company, N.A. The exercise price and the number of shares of our common stock issuable upon exercise of the Strike Warrants are subject to customary anti-dilution adjustments for stock splits, stock dividends and recapitalizations

20


MOLYCORP, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

of our common stock. Subject to certain exceptions, including the issuance of shares of our common stock or other equity awards pursuant to our equity compensation plans, if we issue common stock (or common stock equivalents) at a purchase price less than the then-current exercise price of the Strike Warrants, the exercise price of the Strike Warrants will be subject to (i) full-ratchet anti-dilution protection for the first two-year period of the Strike Warrants and (ii) weighted-average anti-dilution protection for the remaining three-year period of the Strike Warrants.
The Penny Warrants met the criteria for the equity classification and were recorded, at issuance, at a fair value of approximately $24.7 million, net of issuance costs, in "Additional paid-in capital" in the condensed consolidated statements of stockholders' equity. The Strike Warrants, instead, were classified as a derivative liability because the exercise price may be adjusted for the issuance of additional shares of our common stock under certain circumstances. See Note 14 for more information on the Strike Warrants.
Conversion of Preferred Stock
On March 1, 2014, each share of our Convertible Preferred Stock automatically converted into two shares of our common stock based on the “maximum conversion rate”, as defined in our Amended and Restated Certificate of Incorporation. As a result, we issued 4,140,000 shares of our common stock in connection with the automatic conversion of the 2,070,000 shares of the Convertible Preferred Stock. Also on March 1, 2014, we paid the final $2.8 million of the aggregate preferred dividends on the Convertible Preferred Stock to holders of record at the close of business on February 15, 2014.
Share-lending arrangements
In August 2012, in order to facilitate the offering of our 6.00% Convertible Notes due September 2017, we entered into a share-lending arrangement with Morgan Stanley Capital Services LLC (“MSCS”), an affiliate of Morgan Stanley & Co. LLC, under which we agreed to loan 13,800,000 shares of our common stock to MSCS (the “2012 Borrowed Shares”). In January 2013, in order to facilitate the offering of our 5.50% Convertible Notes due February 2018, we entered into another share-lending arrangement with MSCS, under which we agreed to loan 6,666,666 shares of our common stock (the “2013 Borrowed Shares”, and collectively with the 2012 Borrowed Shares, the “Borrowed Shares”). We received no proceeds and no collateral for the Borrowed Shares, but a nominal lending fee from MSCS for the use of these loaned shares. Given the aggregate lending fees, no further consideration was given to the accounting treatment of the share-lending arrangements. For corporate law purposes, the Borrowed Shares are issued and outstanding. However, based on certain contractual undertakings of MSCS in the share-lending arrangements that have the effect of substantially eliminating the economic dilution that otherwise would result from the issuance of the Borrowed Shares, these loaned shares are not considered outstanding for the purpose of computing and reporting our earnings per share. The Borrowed Shares are to be returned to Molycorp concurrently with the maturity of the related convertible notes. The methodology to fair value our share-lending arrangements consists of an option pricing model used to determine a synthetic cost for borrowing our common stock adjusted for an estimate of the counterparty credit risk. Inputs used in this approach include a combination of Level 2 and Level 3 inputs of the fair value hierarchy.
As of March 31, 2015, all of the Borrowed Shares we originally agreed to loan to MSCS are still outstanding, and the related unamortized issuance cost was included in "Other non-current assets" in the condensed consolidated balance sheet. The following table provides certain other information on our share-lending arrangements as of March 31, 2015:
 
2012 Borrowed Shares
 
2013 Borrowed Shares
 
Total
 
(In thousands)
Fair value
$
1,752

 
$
1,005

 
$
2,757

Unamortized issuance cost
8,766

 
3,846

 
12,612

The amount of non-cash interest cost recognized from the amortization of the issuance cost associated with the combined share-lending arrangements was $1.2 million during the first quarter of 2015. In response to a comment letter the SEC issued to us with respect to our Annual Report on Form 10-K for the year ended December 31, 2013, in the second quarter of 2014, we recorded an out-of-period adjustment to recognize the fair value of our share-lending arrangements as costs associated with the issuance of the convertible notes described above, with an offset to additional paid-in capital.

21


MOLYCORP, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

Accumulated other comprehensive income
The following table provides the changes in accumulated other comprehensive income (loss) (“AOCI”) for the three-month periods ended March 31, 2014 and 2014:
 
Foreign currency translation adjustments
 
Postretirement benefit liability
 
Accumulated other comprehensive loss
 
(In thousands)
Balance at December 31, 2014
$
(2,339
)
 
$
(984
)
 
$
(3,323
)
Change in other comprehensive loss before reclassifications
4,789

 

 
4,789

Net income (loss) reclassified from AOCI

 

 

Balance at March 31, 2015
$
2,450

 
$
(984
)
 
$
1,466

 
Foreign currency translation adjustments
 
Postretirement benefit liability
 
Accumulated other comprehensive loss
 
(In thousands)
Balance at December 31, 2013
$
(6,610
)
 
$
159

 
$
(6,451
)
Change in other comprehensive loss before reclassifications
(852
)
 

 
(852
)
Net income (loss) reclassified from AOCI

 

 

Balance at March 31, 2014
$
(7,462
)
 
$
159

 
$
(7,303
)

There were no items reclassified from AOCI during the interim periods presented above.
(9)
Loss per Share
For the three months ended March 31, 2014, the dividends on the Convertible Preferred Stock were subtracted from net loss attributable to Molycorp stockholders for the purpose of computing the basic and diluted earnings per share.
Diluted earnings per share reflect the dilutive impact of potential common stock and unvested restricted shares of 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. Under the treasury stock method, assumed proceeds upon the exercise of stock options are considered to be used to purchase common stock at the average market price of the shares during the period. Also under the treasury stock method, fixed awards and non-vested shares, such as restricted stock units, are deemed options for purposes of computing diluted earnings per share. At March 31, 2015 and 2014, all potential common stock under the treasury stock method were antidilutive in nature; consequently, we did not have any adjustments between earnings per share and diluted earnings per share related to stock options and restricted stock units.
In applying the if-converted method, conversion is not assumed for purposes of computing diluted earnings per share if the effect would be antidilutive. Under the if-converted method, convertible debt is antidilutive whenever its interest per common share obtainable on conversion, including any deemed interest from a beneficial conversion feature and nondiscretionary adjustments, net of tax, exceeds basic earnings per share. At March 31, 2015 and 2014, our convertible notes were all antidilutive.    

22


MOLYCORP, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

(10)
Commitments and Contingencies
(a)
Future Operating Lease Commitments
We lease certain office space, trailers and equipment pursuant to lease agreements that have been determined to be operating leases. Remaining annual minimum payments under these leases at March 31, 2015 were as follows:
 
Total
 
Less Than
1 Year
 
1 - 3 Years
 
4 - 5 Years
 
More Than
5 Years
 
(In thousands)
Operating lease obligations
$
7,340

 
$
2,299

 
$
3,637

 
$
695

 
$
709

(b)
Purchase Commitments
We entered into contractual commitments for the purchase of materials and services from various vendors, primarily in connection with capital projects performed at our Mountain Pass facility. Future payments for all purchase commitments at March 31, 2015 were as follows:
 
Total
 
Less Than
1 Year
 
1 - 3 Years
 
4 - 5 Years
 
More Than
5 Years
 
(In thousands)
Purchase obligations and other commitments
$
10,060

 
$
10,060

 
$

 
$

 
$

(c)
Purported Class Action and Derivative Lawsuits
In February 2012, a purported class action lawsuit was filed in the Colorado Federal District Court against us and certain of our current and former executive officers alleging violations of the federal securities laws. A Consolidated Class Action Complaint filed on July 31, 2012 also named most of our Board members and some of our stockholders as defendants, along with other persons and entities. On March 31, 2015, the Colorado Federal District Court granted our motion to dismiss that Complaint without prejudice. The plaintiffs have until May 29, 2015 to amend their Complaint. We believe that this lawsuit is without merit, and we intend to vigorously defend ourselves against these claims.
Certain of our shareholders filed a consolidated stockholder derivative lawsuit purportedly on our behalf against us (as nominal defendant) and certain of our current and former directors, executive officers and shareholders in the Delaware Court of Chancery. A Consolidated Amended Stockholder Derivative Complaint was filed in August 2012. Pursuant to an order dated May 15, 2013, the Delaware Chancery Court stayed this derivative lawsuit pending the outcome of the Colorado class action lawsuit. On October 9, 2013, certain plaintiffs, purportedly on our behalf, filed a Motion to Lift the Stay and for Leave to File an Amended Complaint. Pursuant to a letter opinion dated May 12, 2014, the Delaware Chancery Court granted plaintiffs’ motion to file a second consolidated amended derivative complaint. In addition, the Delaware Chancery Court lifted the stay of the action. The plaintiffs filed their Second Consolidated Amended Complaint on May 15, 2014, alleging breaches of fiduciary duty and unjust enrichment, but dropping claims for material misstatements and for trading on material, non-public information. The defendants filed a Motion to Dismiss the Second Consolidated Amended Complaint on July 14, 2014, and oral arguments on the Motion to Dismiss were heard on January 16, 2015. The Delaware Chancery Court's decision on the Motion to Dismiss is pending.
Two additional shareholder derivative lawsuits were filed purportedly on our behalf against us (as nominal defendant) and certain of our current and former directors, executive officers and shareholders, in the Colorado Federal District Court. These lawsuits allege claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment based on events in 2011 and 2012. The Colorado Federal District Court dismissed these lawsuits. The plaintiffs filed an appeal of that ruling to the U.S. Court of Appeals for the Tenth Circuit, and the Tenth Circuit remanded these cases back to the Colorado Federal District Court. Subsequently, a different shareholder, purportedly on our behalf, filed a new shareholder derivative lawsuit in the Colorado Federal District Court alleging claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment based on events during 2011 through 2013. The Colorado Federal District Court sua sponte consolidated this lawsuit with the remanded

23


MOLYCORP, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

lawsuits. The plaintiff in the new derivative lawsuit filed a Motion to Vacate the consolidation order. On July 15, 2014, the Colorado Federal District Court ruled that, based on the Second Consolidated Amended Derivative Complaint filed in Delaware Chancery Court, the issues raised in the Colorado derivative cases were sufficiently distinct from the issues set forth in the Delaware derivative lawsuit, and reversed its original order dismissing the lawsuits. In its order, the Colorado Federal District Court left open the opportunity for the defendants to file a motion to stay the Colorado derivative lawsuits pending the resolution of the Colorado class action lawsuit. The motion to stay was filed and fully briefed. The Colorado Federal District Court granted the defendants' Motion to Stay all of the Colorado derivative lawsuits pending resolution of the purported Colorado class action lawsuit, and further stayed the new Colorado derivative lawsuit pending resolution of the purported New York class action lawsuit. The Colorado Federal District Court subsequently administratively closed all of the Colorado derivative lawsuits.
In August 2013, two purported class action lawsuits were filed in the U.S. District Court for the Southern District of New York against us and certain of our current and former executive officers, alleging violations of the federal securities laws. A Consolidated Amended Class Action Complaint, filed on May 19, 2014, also named us and certain of our current and former executive officers. On March 12, 2015, the Federal Court for the Southern District of New York issued an order dismissing the lawsuit with prejudice. On April 1, 2015, the plaintiffs filed a motion for reconsideration of certain portions of the dismissal order. Our response to the reconsideration motion is due May 13, 2015. We believe that this lawsuit is without merit, and we intend to continue to vigorously defend ourselves against these claims.
The class action and derivative lawsuits described above have not progressed to a point where a reasonably possible range of losses associated with their ultimate outcome can be estimated at this time. If the final resolution of any such litigation or proceedings is unfavorable, our financial condition, operating results and cash flows could be materially affected.    
(d)
Labor Contract
At March 31, 2015, 282 employees, or approximately 60% of the workforce at our Mountain Pass facility were covered by a collective bargaining agreement with the United Steelworkers of America. Our contract with the United Steelworkers of America was ratified in March 2015.
(11)
Concentrations
Resources Segment
There were no significant sales by customer or by product at the Resources segment for the three months ended March 31, 2015 and 2014.
Chemicals and Oxides Segment
Sales of cerium products within the Chemicals and Oxides segment accounted for 14% and 10% of consolidated revenues in the first quarter of 2015 and 2014, respectively. There were no significant sales by customer in this segment in the same interim periods.
Magnetic Materials and Alloys Segment
Sales of Neo Powders™ within the Magnetic Materials and Alloys segment, relative to consolidated revenues, were 46% and 45% for the three months ended March 31, 2015 and 2014, respectively.
Rare Metals Segment
There were no significant sales by product or by customer at the Rare Metals segment for the three months ended March 31, 2015 and 2014.

24


MOLYCORP, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

(12)
Related-Party Transactions
We supply Neo Powders™ to Toda Magnequench Magnetic Materials Co. Ltd. (“TMT”), an equity method investee of ours involved in the production of rare earth magnetic compounds. We also purchase magnetic compounds back from TMT in the normal course of business. Two other equity method investees, with whom we regularly buy and sell products, include Ganzhou Keli Rare Earth New Material Co., Ltd. (“Keli”), which processes rare earth oxides into metals for inclusion in our Neo Powders™. In addition, we provide rare metal recycling services to Plansee Holding AG, a privately held Austrian company that is wholly-owned by an Austrian trust, of which one of our Board's directors and other members of his family are beneficiaries.

For the three months ended March 31, 2015 and 2014, we purchased metals and received services from Keli for a total of $12.9 million and $16.9 million, respectively, and, as of March 31, 2015, we had a balance payable to Keli of $6.9 million. Transactions with all other related parties were nominal in these periods.

(13)
Net Change in Operating Assets and Liabilities
Net change in operating assets and liabilities, net of the effects of acquisitions and dispositions, consisted of the following for the three months ended March 31, 2015 and 2014:
 
Three Months Ended March 31,
 
2015
 
2014
 
(In thousands)
Decrease (increase) in operating assets:
 
 
 
Trade accounts receivable
$
(3,123
)
 
$
10,171

Inventory
(40,013
)
 
(12,157
)
Prepaid expenses and other current assets
(7,046
)
 
(6,968
)
Increase (decrease) in operating liabilities:
 
 
 
Trade accounts payable
(4,649
)
 
(2,065
)
Income tax payable
988

 
(52
)
Interest payable
17,312

 
17,233

Asset retirement obligation
(168
)
 
(1,125
)
Accrued expenses
(2,664
)
 
(2,822
)
 
$
(39,363
)
 
$
2,215

(14)
Fair Value of Financial Instruments
For assets and liabilities that are required under GAAP to be measured at fair value on a recurring or nonrecurring basis, we refer to a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into the following three broad levels:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 - Observable inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data by correlation or other means.

Level 3 - Prices or valuation techniques requiring inputs that are both significant to the fair value measurement and unobservable.
Our assets and liabilities measured at fair value on a recurring basis were as follows at March 31, 2015 and December 31, 2014:

25


MOLYCORP, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

 
March 31, 2015
 
Quoted Prices in Active Markets for Identical Assets/Liabilities
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(In thousands)
Assets:
 
 
 
 
 
Cash equivalents
$
22,613

 

 

Liabilities:
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
Springing Maturity on Term Loans

 

 
$
8,008

Strike Warrants

 

 
552

Share Purchase Agreement

 

 
6,495

 
December 31, 2014
 
Quoted Prices in Active Markets for Identical Assets/Liabilities
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(In thousands)
Assets:
 
 
 
 
 
Cash equivalents
$
57,309

 

 

Liabilities:
 
 
 
 
 
Springing Maturity on Term Loans

 

 
$
7,292

Strike Warrants

 

 
1,769

Share Purchase Agreement

 

 
6,165

Our financial assets classified in Level 1 consist of money market funds valued based on quoted prices for identical assets in active markets. The fair value of our derivative liabilities is recorded in "Other long-term liabilities" in the balance sheets as of March 31, 2015 and December 31, 2014.
The Springing Maturity on Term Loans is a derivative liability bifurcated from the Term Loans issued on September 11, 2014 in conjunction with the 2014 Financings. The technique used to fair value the Springing Maturity on Term Loans is the income approach based on a discounted cash flow model using, among others inputs, a probability factor of 10% representing the likelihood that the springing maturity dates would be triggered. The change in fair value of the Springing Maturity on Term Loans for the first quarter of 2015 resulted in a loss of approximately $0.7 million, which we recorded as interest expense in our condensed consolidated statement of operations and comprehensive loss.
The Strike Warrants were issued in conjunction with the 2014 Financings. The change in fair value of the Strike Warrants resulted in a gain of approximately $1.2 million for the three months ended March 31, 2015, which we recorded as interest expense in our condensed consolidated statement of operations and comprehensive loss. The technique used to fair value the Strike Warrants is the income approach based on a discounted cash flow model using, among others inputs, a 10% "Volatility Haircut" representing a discount to the full observed historical or implied volatility for an option on the stock.
The share purchase agreement (“SPA”) relates to a contract between NMT Holding GmbH, our wholly-owned German subsidiary, and the shareholders of Buss & Buss, a majority-owned subsidiary of ours. The SPA includes a call and a put option on shares of the remaining shareholder and his legal successors. If the call option is exercised by us, a premium is added to the consideration to purchase the underlying shares in Buss & Buss. If the put option is exercised by the remaining shareholder of Buss & Buss or his legal successors, a discount will reduce the cost basis of the securities sold to us. We account for the put option at fair value with changes in fair value recognized currently in earnings. The change in fair value of the put option

26


MOLYCORP, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

resulted in a nominal unrealized loss and gain for the three months ended March 31, 2015 and 2014, respectively, which were recorded as interest expense in the condensed consolidated statements of operations and comprehensive income. The technique used to fair value the SPA is the income approach based on a discounted cash flow model using significant unobservable inputs. Changes to these inputs based on reasonably possible alternative assumptions would not significantly change amounts we recognized in our balance sheets and condensed consolidated statements of operations and comprehensive loss.
The following table presents the fair value of publicly traded financial liabilities we report at their carrying amount:
 
March 31, 2015
 
December 31, 2014
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(In thousands)
 
 
 
 
 
 
 
 
3.25% Convertible Notes due June 2016
$
195,421

 
$
20,392

 
$
193,549

 
$
88,281

6.00% Convertible Notes due September 2017
339,858

 
36,864

 
335,969

 
107,240

5.50% Convertible Notes due February 2018
144,777

 
14,031

 
143,581

 
46,028

10% Senior Notes due June 2020
639,291

 
330,850

 
638,899

 
357,500

Total long-term debt
$
1,319,347

 
$
402,137

 
$
1,311,998

 
$
599,049

The carrying amount of the financial liabilities listed above is comprised of the principal amount reduced by the unamortized underwriting discount. In addition, for each of our convertible notes the principal amount is further reduced by the unamortized discount representing the value of the respective equity components at issuance. The fair value of the financial liabilities listed above, which are all classified in Level 1, is based on the last available market trade of each reporting period. Our Debentures, Term Loans and Equipment Financings are not actively traded, and the difference between their carrying amount and fair value is impractical to estimate. The carrying amount of certain other financial instruments, such as trade accounts receivables, trade accounts payable, accrued expenses, bank loans and capital lease obligations approximate fair value and, therefore, have been excluded from the table above.
(15)
Subsidiary Guarantor Financial Information
The Senior Notes are fully, unconditionally and jointly and severally guaranteed by all of our 100% owned existing and future domestic material subsidiaries, as defined in the indenture governing the Senior Notes. The Senior Notes guarantee of a guarantor will automatically terminate, and the obligations of such guarantor under the Senior Notes guarantee will be unconditionally released and discharged, upon (all terms as defined in the indenture governing the Senior Notes):
(1)
any sale, exchange, transfer or other disposition of a majority of the capital stock of (including by way of consolidation or merger) such guarantor by us or any restricted subsidiary to any person or persons, as a result of which such guarantor is no longer a direct or indirect subsidiary of ours;
(2)
any sale, exchange, transfer or other disposition of all or substantially all assets of such guarantor that results in such guarantor having no assets;
(3)
the designation by us of such guarantor as an unrestricted subsidiary; or
(4)
defeasance or discharge of the Senior Notes;
provided that any such event occurs in accordance with all other applicable provisions of the indenture.
Presented below are the condensed consolidating financial statements of the Parent ("Molycorp, Inc.") as issuer, its combined guarantor subsidiaries and its combined non-guarantor subsidiaries, which are presented as an alternative to providing separate financial statements for the guarantors. The accounts of the Parent, the guarantor and non-guarantor subsidiaries are presented using the equity method of accounting for investments in subsidiaries for purposes of these condensed consolidating financial statements only. Certain of the prior periods separate financial information has been reclassified to conform to the presentation of the most recent period herein disclosed.

27


MOLYCORP, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

 
March 31, 2015
 
(In thousands)
Condensed Consolidating Balance Sheets
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Molycorp, Inc. consolidated
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
21,500

 
$
6,399

 
$
105,700

 
$

 
$
133,599

Trade accounts receivable, net

 
2,588

 
45,109

 

 
47,697

Inventory

 
41,057

 
139,753

 

 
180,810

Prepaid expenses and other current assets
1,000

 
10,644

 
24,369

 

 
36,013

Total current assets
22,500

 
60,688

 
314,931

 

 
398,119

Non-current assets:
 
 
 
 
 
 
 
 
 
Deposits
1,756

 
29,457

 

 

 
31,213

Property, plant and equipment, net

 
1,557,738

 
133,313

 

 
1,691,051

Inventory

 
24,724

 

 

 
24,724

Intangible assets, net

 
360

 
211,366

 

 
211,726

Investments

 

 
7,793

 

 
7,793

Goodwill

 

 
102,808

 

 
102,808

Investments in consolidated subsidiaries

 
90,398

 

 
(90,398
)
 

Intercompany accounts receivable
2,065,509

 

 

 
(2,065,509
)
 

Other non-current assets
14,981

 
7,284

 
5,085

 

 
27,350

Total non-current assets
2,082,246

 
1,709,961

 
460,365

 
(2,155,907
)
 
2,096,665

Total assets    
$
2,104,746

 
$
1,770,649

 
$
775,296

 
$
(2,155,907
)
 
$
2,494,784

Current liabilities:
 
 
 
 
 
 
 
 
 
Trade accounts payable
$

 
$
11,932

 
$
23,170

 
$

 
$
35,102

Accrued expenses
2,078

 
13,312

 
15,328

 

 
30,718

Interest payable
27,490

 
446

 
248

 

 
28,184

Debt and capital lease obligations

 
3,315

 
10,638

 

 
13,953

Other current liabilities

 
315

 
5,376

 

 
5,691

Total current liabilities
29,568

 
29,320

 
54,760

 

 
113,648

Non-current liabilities:
 
 
 
 
 
 
 
 
 
Asset retirement obligation

 
17,876

 

 

 
17,876

Deferred tax liabilities

 

 
63,731

 

 
63,731

Debt and capital lease obligations
1,365,417

 
148,451

 
56,933

 

 
1,570,801

Intercompany accounts payable

 
2,189,473

 
639,135

 
(2,828,608
)
 

Other non-current liabilities
8,560

 
1,424

 
10,156

 

 
20,140

Total non-current liabilities
1,373,977

 
2,357,224

 
769,955

 
(2,828,608
)
 
1,672,548

Total liabilities    
$
1,403,545

 
$
2,386,544

 
$
824,715

 
$
(2,828,608
)
 
$
1,786,196

Stockholders’ equity:
 
 
 
 
 
 
 
 
 
Common stock
278

 

 

 

 
278

Additional paid-in capital
2,247,199

 
132,335

 
534,440