Mining and mineral processing company Molycorp Inc hopes to fill a growing need for scarce "rare earth" minerals and products, but its $450 million initial public offering, planned for next week, asks investors to take a big leap of faith.
It will take about two years and more than half a billion dollars for the company to upgrade its equipment in the Mojave desert in Southern California and ramp up production. Until then, the rare earth miner offers only a loss-making hole in the ground.
-- Plans to list on NYSE under symbol 'MCP'
-- Full mine production not expected until 2012
Rare earth oxides get buzz because they are used in electric vehicles such as Toyota Motor Corp's Prius, wind power turbines and hard disk drives, and demand for the silvery metals is increasing. China produces more than 95 percent of the world's rare earth oxides, but with fears of a supply shortfall due to rising export quotas and domestic use, Western companies such as Molycorp could find a market, even if their costs exceed China's.
But Molycorp - previously owned by oil major and eventual Chevron Corp take-over target Unocal - was shut down in 2002 after unsuccessfully struggling to compete with Chinese rivals on price and having problems with tailings disposal capacity and permit delays.
It restarted some processing in 2007 and was later sold to private investors, but its sales figures are tiny and its loss is widening. Molycorp's revenue grew 72 percent in the first quarter to $2.92 million from a year earlier, while its net loss widened 38.4 percent to $7.75 million. To be sure, Molycorp's total liabilities only amounted to only $23.86 million on a pro forma basis as of March 31 compared with total assets of $526.71 million.
Furthermore, the Greenwood Village, Colorado-based miner says it has one of the largest proven reserves of rare earth oxides outside of China. It estimates it will churn out 19,050 metric tons of rare earth oxides per year by 2012. That would work out to about 16 percent of global production, based on 2008 figures.
The Mountain Pass Mine has an estimated 88 million pounds of total proven reserves and a life span of 30 years. But it will be nearly two years before Molycorp gets up to speed and even the full IPO amount - before subtracting underwriting discounts, commissions and expenses - will fall short of the $511 million the company needs to gear up.
Research firm Independent International Investment Research Plc said in a report it only expects Molycorp to generate positive cash flow from fiscal year 2013 onward. The firm puts the company's fundamental value at $14.19 per share, 11.3 percent below the $16 midpoint of the range. A spokesman for Molycorp declined to comment, citing a US Securities and Exchange Commission "quiet period."
Still, there are signs of a pickup in global demand for rare earths. If investors are willing to wait, Molycorp could prove a major player in a fast-growing market. "They still have the same deposit under their control and they still have the mining equipment and they still have the technology for processing rare earths," said US Geological Survey mineral commodity specialist Dan Cordier, adding Molycorp used to be one of the biggest rare earth producers globally.
The price for neodymium, the main component of rare earth magnets, has tripled over the past 12 months, said Detroit-based rare metals market analyst Jack Lifton. But he warned there was no shortage and that the price gain may not be warranted. Lifton also warned that competition from other early stage companies in the United States, Canada and Australia could pick up. Molycorp plans to sell 28.13 million shares for $15 to $17 each. The shares are expected to trade on the New York Stock Exchange under the symbol "MCP."
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