Molycorp, Where Debt & Leverage Is Favorable (MCP)

Molycorp, Inc. (NYSE: MCP) is one of 2010’s top performing initial public offerings.  Usually, newly-IPO companies issuing debt or even selling shares after a recent successful IPO is a sign that the shares may be ahead of the news or fundamentals.  Molycorp is raising capital, but the shares are responding positively because of its unique situation.

The company is a rare earth oxide (REO) producer, and it claims to be the only American company that can produce large amounts of REO for critical U.S. infrastructure, energy, tech, and defense firms that need to be able to rely on a  REO supplier that is not located in China.

REOs are not exactly ‘rare,’ but what is rare is finding concentrations that are concentrated enough for commercial mining in a manner that is cost-effective and viable for the expense of mining operations.

Last night came the release that Molycorp has contracted with BNP Paribas for the bank to arrange a debt facility that would go up to $150 million so that the company can more easily finance its rare earth products supply chain project.

The credit facility will add to its approximately $379 million IPO proceeds.  The company has projected that the cost to modernize its Mountain Pass, California facility and to expand its production of REO alloys will be north of $500 million.

Usually companies sell off when they take on debt or add leverage, and that is particularly the case for a company where the story does not really come into a full-operations position until the end of 2011.  The belief here is that the funds will only help it reach its target launch sooner than it has projected for full-capacity.

Molycorp shares are up 4.5% at $32.38 and shares hit a new all-time high on a post-IPO basis of $32.50 per share.

JON C. OGG