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Oaktree Gives Molycorp’s Mine More Time: Distressed Debt

Oaktree Capital Co-Founder Howard Marks
Oaktree Capital Management LP, founded by Howard Marks, also owned as much as $5 million of Molycorp’s 3.25 percent convertibles at the end of March, Bloomberg data show. Photographer: Scott Eells/Bloomberg

Oaktree Capital Management LP is throwing Molycorp Inc. a lifeline with $400 million of loans that gives the company cash to operate until the first quarter of 2016 as its Mojave Desert mine moves toward full production.

The financing didn’t come cheap: Molycorp will pay an interest rate of 12 percent, the highest on a loan made in the U.S. this year, according to data compiled by Bloomberg. Not only that, Oaktree gets warrants to buy 10 percent of the miner of rare-earth minerals, which are used in electronic devices from Apple Inc.’s iPads to Raytheon Co.’s Tomahawk missiles.

Molycorp may see that as a small price to pay. It has been unprofitable for the past 10 quarters and would have run out of cash around the start of next year, before it could bring its Mountain Pass mine to full production, Bloomberg data show. The company’s crown jewel, plagued by development setbacks that have soaked up $1.5 billion of investments, has the potential at full output to generate enough cash to end the crunch, according to Kevin Starke, an analyst at CRT Capital Group Inc. in Stamford, Connecticut.

“It’s like you move the ball closer to the goal line, but the kicker has a sprained ankle,” Starke, who specializes in distressed investments, said by telephone.

Burn Rate

At the current rate of cash burn, factoring in the interest expense from the new debt, Greenwood Village, Colorado-based Molycorp is likely to run out of cash in the first quarter of 2016 if Mountain Pass doesn’t go fully online and rare-earths prices don’t improve, said Starke.

While the new financing matures in five years, that would be accelerated if the company doesn’t repay $230 million of 3.25 percent convertible bonds maturing in June 2016, Chief Financial Officer Michael Doolan said on an Aug. 7 conference call to discuss second-quarter earnings with analysts and investors. The loan has a payment-in-kind feature that allows 5 percentage points to be paid in additional debt, he said.

Oaktree will disburse $110 million as a loan and $140 million as part of a sale-and-leaseback transaction for some of Molycorp’s equipment when the financing closes, Doolan said. That’s expected “in the next several weeks,” President and Chief Executive Officer Geoffrey Bedford said on the call.

The remaining $150 million will depend on whether the company achieves two specific targets, which Doolan didn’t disclose. He said the company was “comfortable” with its ability to achieve them.

Alyssa Linn, a spokeswoman for Oaktree at Sard Verbinnen, didn’t reply to an e-mail seeking comment. Jim Sims, a spokesman at Molycorp, declined to comment.

Cash Level

The new capital would boost the company’s cash position to $406 million, adding to the $156 million in cash it reported for June 30, Bloomberg data show.

Free-cash flow, or the amount the company makes from operating activities less capital expenditures, was negative $533.7 million last year. The miner would have $1.72 billion in total debt after the $250 million of loans are in place and would have about $104 million in interest expense, Starke said.

“Putting a new first-lien loan in says Oaktree has some confidence in the industry turnaround,” Starke said. On the other hand, were Molycorp to restructure, a lender would try to position itself to control the company. “Oaktree’s move into the senior debt is a perfect expression of that strategy,” Starke said.

First-lien debt has the senior claim on assets pledged to secure it. Oaktree thus vaults to the top position among Molycorp’s creditors by making the loans.

Convertible Bonds

Oaktree, founded by Howard Marks, also owned as much as $5 million of Molycorp’s 3.25 percent convertibles at the end of March, Bloomberg data show. The bonds, which would convert to common stock once Molycorp’s shares surpass $71.40, traded at 73.5 cents on the dollar to yield 21.4 percent on Aug. 5, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The shares fell 1.69 percent yesterday to $2.32, leaving them down 59 percent for the year. The Bloomberg Rare Earth Mineral Index, 11 percent of which is accounted for by Molycorp, is down 34 percent this year.

Molycorp’s $650 million of 10 percent first-lien notes maturing June 2020 fell 0.8 cent to 86.5 cents on the dollar for a 13.4 percent yield yesterday. That’s more than 11 percentage points higher than comparably dated Treasuries, above the 10 percent threshold considered distressed. Those notes traded at 88 cents for a yield of 12.99 percent on Aug. 4.

‘Interesting Bet’

The deal with Oaktree didn’t “immediately” affect Molycorp’s credit standing at Moody’s Investors Service, which said in an Aug. 8 statement that there were “uncertainties over the eventual execution and the precise terms of the arrangement.

Moody’s rates Molycorp Caa2, the middle of its category of debt with ‘‘very high credit risk,’’ and Standard & Poor’s grades it an equivalent CCC, Bloomberg data show.

The miner has been plagued by cost overruns and delays in its Mountain Pass facility, which boasts the largest rare-earth metals deposit outside of China, helping erode the $3.8 billion the company raised in 10 bond and equity offerings since 2010, Bloomberg data show.

The 17 rare-earth elements are used in electronic devices. Prices have plunged in the past three years with representative rare earths such as lanthanum oxide falling 89 percent from its June 2011 high and neodymium oxide and dysprosium oxide each down 80 percent.

Bedford said on the call that management intends to ‘‘complete this production ramp as quickly as possible’’ and is confident current demand will match the company’s target output of 23,000 metric tons a year. The mine has been producing at an annual rate of 12,000 tons to 13,000 tons, JPMorgan analysts led by Michael Gambardella, said in a May 9 report.

Molycorp reported last week second-quarter revenue of $116.9 million, compared with analyst estimates of $131 million, Bloomberg data show. It posted a $86.1 million loss before interest, taxes, depreciation and amortization.

‘‘For Oaktree, it’s an interesting bet on a turn in the industry and the runway is pretty short and narrow,” Starke said.

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