Molycorp Inc Financial Collapse : The Fall of Rare Earth Industry

Molycorp went public in 2010, a period when prices for rare earth metals like dysprosium and neodymium were sky high.

Jacob Kepler/Bloomberg Molycorp went public in 2010, a period when prices for rare earth metals like dysprosium and neodymium were sky high.

North America’s flagship rare earth mining company is at risk of collapse, a symbol of how far the entire industry has fallen from its highs a few years ago.

Molycorp Inc. warned on Monday night that it may not be able to continue as a going concern if it can’t fix its balance sheet. The Colorado-based company has US$1.7 billion of debt, including US$206.5 million of convertible notes that mature in June of 2016. It is bleeding cash from operations and is not in a position to meet its future obligations. Its cash position was down to US$212 million at the end of December.

“We are focused on this issue and have retained financial and other advisers to assist us in strengthening our current financial position,” chief financial officer Michael Doolan said on a conference call.

The stock plunged 35% on Tuesday to close at just US48¢, giving Molycorp a market value of US$117 million. It is a stunning fall for a company that was worth almost US$80 a share at its peak in 2011, and acquired Canadian firm Neo Material Technologies Inc. for US$1.3 billion.

Molycorp went public in 2010, a period when prices for rare earth metals like dysprosium and neodymium were sky high. China, which controlled nearly all rare earth production, slapped massive export quotas on the metals that year and created supply disruptions worldwide. Rare earths have a number of important uses in sectors such as automobiles, green energy and consumer electronics, and limiting supply gave Chinese firms a potential advantage.

However, the jump in prices was short-lived. China removed the export quotas — which never worked particularly well — after the World Trade Organization deemed them illegal, and production from China and other parts of the world has expanded over the last few years.

Demand has also been soft for some rare earth products, and prices have dropped well over 50% for many of the metals.

Molycorp’s Mountain Pass mine, located in California, is the biggest rare earth project outside of China. However, it has not lived up to expectations thus far. The company has faced operational problems and has struggled to ramp up production, despite some recent improvements.

Those issues, combined with plunging prices, have put Molycorp in a tenuous financial position. The company lost US$329.8 million in the fourth quarter of 2014, which includes US$231.7 million of impairment charges. Its cash position dropped 33% year-over-year.

“We have incurred and will continue to incur operating losses due to continuing softness in product pricing, inconsistent or depressed demand for our products, and the delayed ramp-up of operations at our Mountain Pass facility,” Mr. Doolan said.

Molycorp continues to face significant capital spending requirements and interest payments on its debt, which put additional pressure on the balance sheet. The company said it does not believe it has breached any debt covenants, but noted that some covenants are “subject to interpretation.”

Additionally, Molycorp said it is not meeting listing requirements of the New York Stock Exchange and may be delisted. The company is considering a share consolidation to meet minimum share price requirements on the exchange.

Like Molycorp, Canadian rare earth companies have shed nearly all of their value in the last few years. Shares of Avalon Rare Metals Inc. are down 97% from their 2011 high, while Quest Rare Minerals Ltd.’s shares have dropped 98%.

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