Mariana Ferro 152115220 - Joana Penida 152415011 - Rafael Belo 152415038

Index
1. About Molycorp / Project Phoenix
2. Industry and Backgrounds
3. Valuation
3.1. DCF Model
3.2. APV + Real Options Model
3.3. Multiples
4. Decisions
2

1. About Molycorp
Western Hemispheres only producer of rare earth minerals (REM);
Founded in 1949, with 2700 scientists and engineers;
Currently under a major capital expenditure program (Project Phoenix);
IPO in 2010.

1.1. Project Phoenix

Expansion Project
Mountain Pass mine had over 30 years of useful life remaining;
Probable reserves of 964,000 tons of rare earth oxides (REO);
Several acquisitions:
- 2 manufacturers of rare earth alloys for about $110 million in 2011;
- NEO Material Technologies for about $1.5 billion in June 2012.

In June 2012, Project Phoenix was still unfinished;

In order to continue additional funding was needed

1.2. SWOT Analysis

Strengths

Weaknesses

-Only producer in the Western Hemisphere

- Reduced labor costs
- Experienced Management
- Skilled workforce
- 50%-70% lower costs than competitors

- High debt level

Opportunities

Threats

- Growing Economy

- Price Volatility
- Increasing

2. Industry and Backgrounds

55 million in
China

13 million in
US

REM critical inputs to many emerging technologies

REOs are refined REMs that can be transformed into metals
Dramatic rise in demand in the past 60 years;
In 2010, China reduced its export quotas by 40%
As a result, prices increased by 20-40 times;
After peaking in 2011, REO prices fell precipitously

3.Valuation
3.1DCFmodel
Using the DCF model we calculate the value of the company as a whole
(extractionactivitytogetherwithproductionactivity)
The DCF model does not take into account the value of the flexibility
relatedtothemineexploration
Assumptions for Rates
g (Growht Rate)
Income Tax Rate (on average)
Risk Free Rate
Kd (CCC Rating)
Ke Levered
Ke Unlevered
L (equity)
Risk Premium (Rm-Rf)
u (equity)
Bankruptcy Costs

1,4%
35%
2,65%
10,92%
16,63%
10,16%
2,33
6,00%
1,252
20%
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3.Valuation
3.1DCFmodel
Cash Flow Forecast

Jul-Dec 2012

2013

2014

2015

2016

2017

Price / Cost ($/Kg)

REO Price ($/Kg)

$43,20

$20,60

$19,20

$19,50

$19,70

$20,00

$104,70

$58,10

$63,10

$63,90

$64,80

$65,70

REO Cost ($/Kg)

$26,10

$9,30

$6,00

$6,10

$6,20

$6,30

Metal/Alloy Cost ($/Kg)

$82,10

$34,40

$37,40

$37,90

$38,40

$38,90

Total Revenue (Metal/Alloys)

$394,00

$465,00

$883,00

$895,00

$908,00

$920,50

Total Cost of Sales (Metal/Alloys)

$309,00

$275,00

$523,00

$530,00

$538,00

$545,00

Total Gross Profit

$85,00

$190,00

$360,00

$365,00

$370,00

$375,50

SG&A

$57,00

$100,00

$100,00

$101,00

$103,00

$104,00

Other Expense

$17,00

$9,00

$10,00

$10,00

$10,00

$10,00

EBITDA

$11,00

$81,00

$250,00

$254,00

$257,00

$261,50

Depreciation

$25,00

$125,00

$125,00

$125,00

$125,00

$125,00

EBIT (1-t)

$-9,10

$-28,60

$81,25

$83,85

$85,80

$88,73

CAPEX

$334,00

$70,00

$45,00

$45,00

$45,00

$45,00

Increase in NWC

$202,10

$-43,00

$31,00

$4,00

$4,00

$4,00

$-520,20

$69,40

$130,25

$159,85

$161,80

$164,73

Metal/Alloy Price ($/Kg)

FCFF

3.Valuation
3.1DCFmodel
NPV:
NPV
WACC
FCFF Discounted

NPV of Molycorp Inc.

12%
-495,18

$1 711,11

Assumptions:
1)D/V@marketvalue:Weassumedthedatafromthecase.47%tillJune2015,afterNew
Debtweassumethattheratiowilltakethevalueof51%.Besidethat,itisgiventhatD/V@
marketvaluewouldstablishedon2030%tilllastyear(2020),wherethedebtiszero.
2)CapitalStructureischangingeveryyeartillthedebt=0.Inthiscase,WACC=Ke
Leveredfrom2020on.
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3.Valuation
3.2.APVandRealOptionsModel
In ordertovaluecorrectlyaminingcompanyonemustsumthevalueofthedeveloped
business(APVValuationforthefactory)andthevalueoftheundevelopedreserves
(RealoptionValuationforthemine);
TheValueofMolycorpInc.isthesumofthevaluesofbothpartsofthecompany,the
MiningOperationswiththeMetalsandMagnetsProductionOperations.

Value

APV
Valuation

Real Option
Valuation

10

3.Valuation
3.2.APV
Assumptions related with APV:
1.4% Growth rate;
Equipment replacement/maintenance 2x during the mine exploration period;
FCFF totally allocated for payment of Debt and Interest;
Fixed Gross Margin already taking into account 50-70% lower REO production costs,
against its competitors.

Unlevered Enterprise Value

$1170,8

Total Net Debt End

$779,8

NPV Tax Shields

$167,3

Probability of Bankruptcy Cost

PV Bankruptcy Cost
Enterprise Value

20%
$109,1
$843,05

US Treasury Yields
Maturity
1 month
6 months
1 year
3 years
5 years
10 years
30 years

Yield
0,03%
0,08%
0,16%
0,33%
0,67%
1,60%
2,65%

Credit Rating
AAA

2,35%

AA

2,45%

2,65%

BBB

3,60%

BB
B

6,10%
7,35%

CCC

10,92%

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3.Valuation
3.2.RealOptionsModel
Regardingthecalculationofrealoptionsweusedtheblackscholesmodel,andassumed
thatallREOproducedissoldatmarketprices.
Wealsoassumedtheminewillbeoperatingatitsmaximumcapacity.

BSmodelinputs:
1. Valueoftheunderlyingasset:8226,8
2. Exerciseprice:4849,3
3. Volatilityoftheunderlyingasset:0.2
4. Timeofexpiration:24years
5. DividendRate:4.2%

Value of the call option at June

30:
$5164,2

6.AdjustedRate:8,65%
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3.Valuation
ValueoftheCompany:

APV+RealOptions
EnterpriseValue

$589,13

OptionValue

$5164,18

Valueofthecompany
(US$million)

$5753,31

Vs.

DCFModel
NPVofMolycorpINC.

$1711,77

DCF valuation undervalues mining companies, since it ignores the value of the option.

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3.Valuation
3.3.Multiples

3.3.1. Peer group

Company Name
Turquoise Hill Resources Ltd
BHP Billiton PLC
Hi Crush Partners LP
Nevsun Resources Ltd
HudBay Minerals Inc

Price/Earnings
Company Name
Turquoise Hill Resources Ltd
BHP Billiton PLC
Hi Crush Partners LP
Nevsun Resources Ltd
HudBay Minerals Inc

P/E
16,9
25,2
2,5
8,9
44,3

P/E
peer mean

19,56

peer median

16,9

peer high

44,3

peer low

2,5

These values are too distant and

therefore are not useful

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3.Valuation
3.3.Multiples
EV/EBITDA
Molycorp 2014 EBITDA (year when
expansion project is completed)
peer mean
peer median
peer high
peer low

Enterprise Value/EBITDA Aug 3, 2012

peer mean
4,99
peer low
1,06
peer high
11,1
peer median
4,66

2959,07
2763,38
6582,3
628,58

Enterprise Value / EBITDA

1000

2000

3000

4000

5000

6000

7000

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SensitivityAnalysis
Weanalyzedonepossiblescenarioofhighercosts.
Wedidntchoosetoanalyzepricebecausepricefluctuationsarealreadyincorporated
inrealoptionsvolatility

Scenario2:decreaseinMetal/AlloysCostof55%in2013(basescenariodecreaseof
60%)andadecreaseinREOcostof70%(basescenariodecreaseof77%)

EnterpriseValue

$27,68

OptionValue

$5126,20

Valueofthecompany(US$million) $5153,89

Even if the company reaches lower gross margins due to higher costs, the value of the
company will not change significantly.
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4.DecisionsaboutMolycorp
Whichsourcesoffundingshouldtheyuse?
First we calculated the amount of debt necessary for the projects continuation
75 M (necessary for daily operations) + 359 M (CAPEX) + 263.2M (current portion
of LTD) - 369.3 M(Cash available at June 2012)

Financing Options:
1. Common stock: from $100M to $300M
2. Convertible Debt: up to $350M
3. Straight Debt: up to $350M
Convertiblebondsvs.Straightbonds
Face Value
Annual Coupon Rate
Years to Maturity
Payment Frequency
Value of Bond
Yield To Maturity

Convertible Bond
1000
0,06
5
2
1206,68296
1,67%

Straight Bond
1000
0,1
5
2
975,7774532
10,64%
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Questions and Answers ?

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