Commodities & Metals

Molycorp Draws S&P Downgrade

Molycorp Inc. (NYSE: MCP) was supposed to be fully funded and almost fully booked for its capacity.  You would never know it if you just looked at the tape.  Now we have some additional concerns being brought to light with a fresh Standard & Poor’s credit rating downgrade. Things have been tough here since its earnings report generated a loss rather than positive income (-$0.03 EPS versus $0.08 expected).

S&P said that the only commercially operation for rare earth metals and minerals in the U.S. was lowered down to ‘CCC+’ from ‘B’ and the credit ratings outlook was put on CreditWatch with developing implications.  The culprit is after the rare earth’s earnings telegraphed that cash flow from operations was going to be less than expected due to lower prices and ‘de-stocking’ activities from customers.  Perhaps the worst part of the downgrade is that S&P said that the company is exploring financial alternatives to ensure enough cash to fund its cap-ex, operations and financial obligations.

One issues that many investors do not take into consideration is a 5% convertible subordinated debt of $230 million of the recently purchased NeoMaterial Technologies Inc.  As issue is that holders can put the debt back to the company under a change of control procedure.  S&P believes that liquidity is inadequate to complete the Mountain Pass build out and to simultaneously deal with this debt issue if it is put back to the company.  One caveat on the negative here is that if Molycorp obtains sufficient additional funding then the rating could be affirmed or S&P could even take a positive rating action.

Molycorp shares are down over 4% at $12.35 on the day and the 52-week trading range is $11.22 to$60.84.

JON C. OGG