Molycorp's Painful Dilution (MCP, REMX, REE, AVL)

Molycorp, Inc. (NYSE: MCP) is finally bringing this secondary offering of common stock for holders and is selling some mandatory convertible preferred shares.  The terms of the deal may be surprising to some, and many will consider that this is a blessing for the company and its shareholders.  This share sale from the U.S.’s only producer of rare earth oxides has been highly anticipated.

The company has priced a $180 million offering of 5.50% mandatory convertible preferred stock being sold by the company with those proceeds going to the company.  The mandatory convertible preferred stock offering consists of 1,800,000 shares of preferred stock with a liquidation preference of $100 per share, and underwriters were given a 30-day option to purchase up to an additional 270,000 shares of preferred stock to cover over-allotments.  Unless converted earlier at the holder’s option, the mandatory convertible preferred stock will convert automatically into a variable number of shares of Molycorp common stock on March 1, 2014.

What investors have been waiting for more than the shares being sold by the company is the insider selling of shares.  Molycorp priced its highly anticipated secondary offering of 13,500,000 shares of common stock at a price per share of $50.00, and the holders have granted the underwriters a 30-day overallotment option to buy another 2,025,000 shares.  This $50.00 price compares to to a close of $51.15 on Thursday and is at close to a 10% discount of the highs seen this week above $55.00.  Our technical analysis affiliate INO recently gave a technical analysis outlook on Molycorp (along with silver versus gold).  We thought it was odd that the chart analysis included no mention of the upcoming offering, but true technical analysis is not supposed to look at planned news.  The chart is supposed to be the chart… We’ll see.

As a reminder, Market Vectors Rare Earth/Strategic Metals ETF (NYSE: REMX) has Molycorp weighted in its ETF with a 6.4% weighting, and that figure may actually be higher yet at the next rebalancing.  We’s also note that both Rare Element Resources Ltd. (NYSE/AMEX: REE) and even Avalon Rare Metals, Inc. (NYSE/AMEX: AVL) are the secondary and tertiary movers that have been the beneficiaries of the same rare earth trends now that China is playing hardball in limiting exports of rare earth elements, rare earth oxides, and rare earth materials.

Molycorp expects to use the net proceeds from the mandatory convertible preferred stock offering to fund its original Phase 1 production capacity plan as well as its Phase 2 expansion plan that is expected to give Molycorp the ability to produce at an annual rate of up to approximately 40,000 metric tons of rare earth oxide (REO) per year at its Mountain Pass, California Rare Earth Facility by the end of 2013. The Company will not receive any proceeds from the sale of common stock in the secondary offering.

J.P. Morgan and Morgan Stanley are leading the offering, but the large list of co-managers in the deal includes CIBC, Dahlman Rose, BMO Capital, Knight, Stifel Nicolaus Weisel, Piper Jaffray, and RBS. The underwriters may also purchase up to an additional 2,025,000 shares of common stock to cover over-allotments.

Before getting too worked up over the motivation by the company and the shareholders, it is important to recall that Molycorp came public with just over 28.1 million shares at $14.00 in July-2010, it priced under the expected range and then it fell.   That was nearly $400 million raised at the IPO.

UPDATE AT 3:45 PM EST: Shares were down 7% at $47.51 on some 15.6 million shares.

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JON C. OGG