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Molycorp Files for Bankruptcy Protection

June 25, 2015
Chemical Value Chain
Molycorp Inc. filed for bankruptcy protection Thursday, as the long-struggling rare-earths miner turned a page on one of the most dramatic commodities busts in recent years.
 
The only U.S. miner and producer of rare-earth elements—15 elements used as niche ingredients in magnets, batteries, catalytic converters and other high-tech products—said it had secured an agreement with creditors to restructure its $1.7 billion in debt. The deal also provides $225 million in new financing to continue operations.
 
Molycorp and 20 subsidiaries filed chapter 11 petitions in the U.S. Bankruptcy Court in Wilmington, Del. The company said it expects to exit chapter 11 before the end of 2015.
 
The filing was expected. Fueled by restrictions on exports of rare earths by China, the world’s dominant supplier, Molycorp’s market value rocketed up to over $6 billion five years ago. But China then relaxed its rules, and battery and magnet makers found alternatives to rare earths. Molycorp went into a long slide. It hasn’t turned a profit since 2011.
 
The company’s facilities in the U.S. and around the world, including its flagship Mountain Pass mine in the California desert, “will continue operating as usual,” said Chief Executive Officer Geoff Bedford. “Our operations in Europe and Asia are not a part of today’s filings, and these businesses are cash-flow positive and play a vital role in many key industries world-wide.”
 
Rare-earth elements are considered a strategic resource because they are used in military electronics. The U.S. government, however, has a large stockpile, and currently isn’t planning to bail out Molycorp, a U.S. Department of Defense official has said.
 
In 2010, Molycorp—formerly a unit of Chevron Corp. bought by private-equity firms in 2008 for $80 million—raised $394 million in a public offering. Then, as prices and its stock-market value soared, Molycorp overextended and took on debt. It committed to an expansion at the California mine, which after overruns cost $1.5 billion, and bought Neo Material Technologies Inc., a Toronto-based rare-earths processing firm, for $1.3 billion.
 
Demand dried up as customers found alternatives, and prices collapsed. Japanese companies invested over $1 billion during the 2011 shortage to come up with alternatives to rare earths. Ford Motor Corp., for example, cut in half its use of Dysprosium, which as an alloy can increase the heat resistance of a magnet.
 
Molycorp says oversupply has been exacerbated by illegal mining in China. Chinese officials have made no secret of the fact that the industry has long been plagued by illegal production and trade.
 
Because rare earths are used in tiny quantities, it doesn’t take much movement in supply or demand for prices to swing wildly. A market once worth $17 billion is now worth only around $1 billion.
 
Molycorp has suffered three straight years of quarterly losses. As of Dec. 31, 2014, Molycorp reported negative cash flow from operations of $222.2 million. And despite a recent order from Siemens for rare earths to make magnets in its wind turbines, demand is sluggish.
 
The popping of the rare-earths bubble also burned hundreds of other companies, big and small. Australia’s Lynas Corp., the other big rare-earths producer outside China, has struggled to turn a profit.
 
Mr. Bedford, who took over as Molycorp’s chief executive in 2013, insisted in a recent interview that “we have a very good deposit” but says the problem is with the processing facilities. It had aimed to produce 20,000 metric tons a year at Mountain Pass. Instead, it has been able to generate only slightly more than half that amount. The company warned investors earlier this year that if prices and profits don’t improve, it will have to “cease operations as a going concern.”
 
Employees are working their usual schedules and purchasing of goods and services will continue, the company added.
 
Molycorp’s workers in California are represented by the United Steelworkers union. The workers are aware of the company’s troubles and have been preparing for “possible layoffs,” said a union official.
 
Molycorp expects the New York Stock Exchange to delist its shares within nine days. The shares will then be traded on an over-the-counter exchange. The company said it would postpone its annual shareholders meeting until the second half of 2015.
 
According to court papers, Molycorp is down to its last $74 million in cash, and only $21 million of that is available to operations in the U.S. that filed for bankruptcy.
 
Assets are carried on the books at a value of $2.5 billion.
 
The top-ranking debt is in the hands of Oaktree Capital Management, L.P. and affiliates. Bondholders are owed $650 million, as well as $32.5 million for an interest payment that was skipped June 1, amid restructuring talks. In court papers, Molycorp estimated it owes “tens of millions” of dollars to suppliers of raw materials and other goods and services.
 
Molycorp is being advised by the investment banking firm of Miller Buckfire & Co. and is receiving financial advice from AlixPartners, LLP. Jones Day and Young Conaway, Stargatt & Taylor LLP are providing legal advice.
 
By John W. Miller 
 

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