"The downgrade and CreditWatch listing reflects our view that weaker market conditions, spending to complete the Mountain Pass project and the potential need to fund" $230 million in convertible notes "are likely to stress the company's liquidity in the near term," said S&P Credit Analyst Marie A. Schmark.
On August 2, Molycorp reported a loss of $67.6 million or 71-cents per share for the second quarter and a net loss of $71.02 million or 82 cents per share. Molycorp CEO, Mark Smith, told analysts that although the company expected to fund all of its capital needs from available cash balances, cash flow from operations and other financing, "we are proactively pursuing alternative financing to ensure these capital expenses and other cash requirements are funded regardless of market conditions."
Molycorp had already offered up to $650 million in debt earlier this year to help fund its $1.3 billion cash-and-stock takeover of Neo Materials.
"With the recent drop in the company's share price, the convertible notes are now out of money, and in our view, holders are more likely to put the notes back to the company rather than convert them as we had originally anticipated," S&P warned. "At June 30, 2012. The company had some $370 million of cash. Capital spending to complete Mountain Pass is estimated to be $289 million, some of which could be deferred."
"Moreover, if all the convertible bonds are put back to the company, it would have to redeem the entire $230 million plus accrued interest," S&P advised. "With lower than expected operating performance, we do not expect the company to generate sufficient cash from operations during the remainder of 2012 to fund the shortfall, and we believe that it will have to seek funding alternatives or slow its capital spending."
"In resolving this credit watch listing, we will monitor the company's funding requirements, actions being taken to improve liquidity, and spending related to the completion of the Mountain Pass mining operation," said S&P.
"Key factors in our analysis will be the company's ability to raise cash to fund the convertible notes, its funding needs to bring its mine up in a reasonable time frame and generate sufficient cash flow to support operational and spending needs, as well as its ability to obtain additional financing if needed," the credit ratings agency concluded.