Molycorp Deal Seen as Rare-Earth Play at Value: Real M&A
The owner of the biggest U.S. deposit of metals that go into everything from smartphones to solar panels and hybrid cars handed investors losses of 61 percent in 2012 amid a slump in rare-earth prices, cost overruns at its California mine, a regulatory probe and the departure of its chief executive officer. Even after the shares rebounded from a record low in November, Molycorp is trading at a 19 percent discount to its book value, according to data compiled by Bloomberg.
Molycorp’s low valuation and the chance to lock in rare- earth resources could spur manufacturers from Nissan Motor Co. (7201) to Siemens AG (SIE) to make a bid, according to Byron Capital Markets Ltd. After expanding its refining and processing operations with last year’s purchase of Neo Material Technologies Inc., the $1.3 billion company may even appeal to private-equity firms, Robert W. Baird & Co. said. Goldman Sachs Group Inc. projects that Molycorp could fetch $15 a share in a takeover, a 59 percent premium to its Dec. 31 close.
“At this point, Molycorp is definitely in play,” Luisa Moreno, an analyst at Euro Pacific Capital Inc. in Toronto, said in a telephone interview. “It would be a very good target for companies that are interested in being in this space if they recognize the rare-earth space is important and they have the cash to take Molycorp and make it a real producing company.”
Molycorp owns the biggest U.S. deposit of rare earths, 17 chemically similar elements including cerium and lanthanum that are used in a range of products including Apple Inc.’s iPads and Tomahawk cruise missiles made by Raytheon Co. It paid C$1.1 billion ($1.1 billion) last year to acquire Toronto-based Neo Material, adding plants that process rare-earth ores into magnet powders and alloys, and is set to finish work on a refining plant at its Mountain Pass mine in California’s Mojave Desert.
Since the deal closed June 14, Molycorp shareholders have lost more than $600 million amid a decline in rare-earth prices, as some buyers began using substitute materials. The stock, which peaked at $77.54 in May 2011, ended at $9.44 on Dec. 31, the last trading session.
Today, Molycorp shares gained 10 percent to $10.39, the biggest advance in the Russell 1000 Index.
The shares first tumbled below Molycorp’s book value, or assets minus liabilities, in August after it posted a surprise second-quarter loss and said it needed to pursue financing for a “substantial portion” of its remaining 2012 capital expenditures.
On Nov. 15, six days after Molycorp said it was being investigated by the U.S. Securities and Exchange Commission over the accuracy of its public disclosures, the stock closed at almost half the value of its net assets, its lowest valuation on record, data compiled by Bloomberg show. The company took more than two months to disclose the probe, which began in August.
Molycorp asked Mark Smith to step down as CEO last month, and said the departure wasn’t related to the SEC investigation.
“That was the nail in the coffin as far as the last CEO was concerned,” Ben Kallo, a Baird analyst in San Francisco, said in a phone interview. “They lost a lot of credibility under” Smith, he said.
While Molycorp has had its issues in the past year, it’s still an attractive takeover candidate for a variety of suitors, according to Kallo. If anything, it’s now cheaper, he said.
Molycorp shares still valued the company at 0.81 times the company’s book value on Dec. 31, data compiled by Bloomberg show. That compares with Lynas Corp., the Sydney-based developer of a rare-earth mine in Malaysia, which trades at a price-book multiple of about 1.8 times.
“Definitely you’d have people looking at it as an acquisition target at these levels,” he said. “There could be a range of buyers -- anyone from private equity to specialty chemical companies to mining companies. There is value.”
An automaker is “an obvious candidate” to be a Molycorp acquirer, said Jonathan Hykawy, an analyst at Byron Capital Markets in Toronto. Japan’s Nissan or South Korea’s Hyundai Motor Co. (005380), for instance, could pursue a Molycorp takeover to ensure access to materials used in magnets that help make lighter, more efficient electric motors.
China, the world’s biggest supplier of rare earths, has curbed output and exports in recent years, in part to conserve material for its own industry.
“I’ve heard from so many critical materials buyers at larger corporations that they want security of supply,” Hykawy said. “And security of supply to them includes avoiding Chinese supply at all costs because they got fooled once, they don’t want to get fooled again.”
The same logic might prompt a manufacturer of electricity- generating wind turbines such as Siemens to purse Molycorp, he said. Rare earths are used in wind-turbine motors.
David Reuter, a spokesman for Nissan’s North American unit, said he’s “not aware of any plan” involving Molycorp, while Frank Ahrens, a spokesman for Seoul-based Hyundai, declined to comment. Guenter Gaugler, a spokesman for Munich-based Siemens, said the company doesn’t comment on speculation.
Japanese or Korean electronics manufacturers that use rare- earths also may be interested, said Euro Pacific’s Moreno.
“Folks in Asia have a better understanding of the rare- earths space in general, especially the Japanese and Korean groups,” Moreno said. “They are also significant consumers” of the materials.
A mining company would be best positioned to finish developing Molycorp’s Mountain Pass mine, Moreno said. Chile’s Molibdenos y Metales SA (MOLYMET), known as Molymet, the world’s biggest processor of the steel-hardening element molybdenum and Molycorp’s largest shareholder, could even seek to increase its holding, Moreno said. Nicolas Donoso, a spokesman for Santiago- based Molymet, didn’t respond to an e-mail seeking comment.
Still, while the Mountain Pass mine is Molycorp’s main asset, mining companies may not be as eager to pursue Molycorp, now that it has expanded into processing and refining rare earths, Baird’s Kallo said.
Any potential acquirer may hold off on a purchase of Molycorp because the company’s new plant at Mountain Pass is employing a refining technique that differs from most mining companies, said Michael Gambardella, a New York-based analyst at JPMorgan Chase & Co.
“The likelihood of a sale in my opinion is very remote,” Gambardella said in a phone interview. “Given the timing, is someone really going to want to come in, in the midst of a startup, using a processing technology that’s never been commercially introduced?”
What’s more, even as Molycorp and Lynas (LYC) both plan to increase rare-earth production, growth in demand for the metals outside of China is expected to be “flat,” Gambardella said, a further deterrent to a buyer.
Still, Goldman Sachs in a Dec. 16 report initiating coverage of Molycorp said the company “could have strategic appeal given its ownership of a large-scale and commercially viable rare-earths resource outside of China.” The New York- based firm said there’s a 15 percent to 30 percent probability of a takeover.
With Molycorp’s free cash flow projected by at least one analyst to turn positive by next year, and with rare-earth materials still in demand by an array of manufacturers, Laurence Balter of Oracle Investment Research says pursuing the company at its current low valuation may be just the right strategy for a private-equity firm or other buyer. The stock is one of his “best picks” for 2013.
“If Molycorp was ever going to be taken out, it would have to be right now and not when the stock price is three times higher than it is now and the outlook is rosy,” Balter, who helps manage $100 million, including Molycorp shares, said in a phone interview from Fox Island, Washington. “A buyer would have to act when the stock is weak, value has been destroyed, management is in a shuffle and they are about to turn a corner. It is the time for someone to come write a big check.”