XNYS:MCP Molycorp Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-34827
Molycorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware 
(State or other jurisdiction of
incorporation or organization)
27-2301797 
(I.R.S. Employer
Identification No.)
5619 Denver Tech Center Parkway, Suite 1000 
Greenwood Village, Colorado 
(Address of principal executive offices)
80111 
(Zip Code)
(303) 843-8040
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x


Accelerated filer ¨


Non-accelerated filer ¨
(Do not check if a 
smaller reporting company)
Smaller reporting company ¨


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of August 3, 2012, the registrant had 110,078,757 shares of common stock, par value $0.001 per share, outstanding.




MOLYCORP, INC.
INDEX
 
PAGE
 
 
 


2



MOLYCORP, INC.
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share and per share amounts)


June 30, 2012
 
December 31, 2011
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
369,262

 
$
418,855

Restricted cash
4,951

 

Trade accounts receivable, net (Note 4)
118,402

 
70,679

Inventory (Note 5)
319,872

 
111,943

Deferred charges (Note 15)
16,627

 
7,318

Deferred tax assets (Note 15)
9,179

 

Income tax receivable
28,648

 
10,514

Prepaid expenses and other current assets
46,038

 
19,735

Total current assets
912,979

 
639,044

Non-current assets:
 
 
 
Deposits (Note 6)
23,283

 
23,286

Property, plant and equipment, net (Note 7)
1,153,304

 
561,628

Inventory (Note 5)
10,445

 
4,362

Intangible assets, net (Note 9)
491,927

 
3,072

Investments (Note 10)
55,339

 
20,000

Deferred tax assets (Note 15)
1,704

 

Goodwill (Note 11)
505,003

 
3,432

Other non-current assets
5,244

 
301

Total non-current assets
2,246,249

 
616,081

Total assets    
$
3,159,228

 
$
1,255,125

 
 
 
 

3



June 30, 2012
 
December 31, 2011
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Trade accounts payable
$
287,928

 
$
161,587

Accrued expenses (Note 12)
56,605

 
12,898

Income tax payable
25,013

 

Deferred tax liabilities (Note 15)
692

 
1,356

Debt and capital lease obligations (Note 14)
263,569

 
1,516

Other current liabilities
3,807

 
1,266

Total current liabilities
637,614

 
178,623

Non-current liabilities:
 
 
 
Asset retirement obligation (Note 13)
20,162

 
15,145

Deferred tax liabilities (Note 15)
172,715

 
18,899

Debt and capital lease obligations (Note 14)
850,319

 
196,545

Derivative liability (Note 25)
9,148

 

Pension liabilities (Note 26)
2,835

 

Other non-current liabilities
3,404

 
683

Total non-current liabilities
1,058,583

 
231,272

Total liabilities    
$
1,696,197

 
$
409,895

Commitments and contingencies (Note 19)


 


Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; 350,000,000 shares authorized at June 30, 2012 (Note 16)
110

 
84

Preferred stock, $0.001 par value; 5,000,000 shares authorized at June 30, 2012 (Note 16)
2

 
2

Additional paid-in capital
1,518,347

 
838,547

Accumulated other comprehensive loss
(10,172
)
 
(8,481
)
(Deficit) retained earnings
(61,697
)
 
15,078

Total Molycorp stockholders’ equity
1,446,590

 
845,230

Noncontrolling interests
16,441

 

Total stockholders’ equity
1,463,031

 
845,230

Total liabilities and stockholders’ equity    
$
3,159,228

 
$
1,255,125



See accompanying notes to the condensed consolidated financial statements.

4


MOLYCORP, INC.
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
(In thousands, except share and per share amounts)
 
Three Months Ended
 
Six Months Ended

 
 
June 30
 
June 30
 
2012
 
2011
 
2012
 
2011
Sales
$
104,577

 
$
99,615

 
$
189,047

 
$
125,876

Costs of sales:
 
 
 
 
 
 
 
Costs excluding depreciation and amortization
(103,569
)
 
(40,348
)
 
(153,641
)
 
(55,069
)
Depreciation and amortization
(5,081
)
 
(2,575
)
 
(8,452
)
 
(4,531
)
Gross (loss) profit
(4,073
)
 
56,692

 
26,954

 
66,276

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
(23,070
)
 
(10,476
)
 
(47,253
)
 
(19,175
)
Corporate development
(14,925
)
 
(2,042
)
 
(18,305
)
 
(3,317
)
Depreciation, amortization and accretion
(2,279
)
 
(523
)
 
(2,637
)
 
(840
)
Research and development
(6,049
)
 
(1,753
)
 
(9,699
)
 
(3,017
)
Operating (loss) income
(50,396
)
 
41,898

 
(50,940
)
 
39,927

Other (expense) income:
 
 
 
 
 
 
 
Other (expense) income
(30,980
)
 
133

 
(37,558
)
 
(35
)
Foreign exchange (losses) gains, net
(2,789
)
 
42

 
(1,185
)
 
42

Interest (expense) income, net
(9,805
)
 
70

 
(9,720
)
 
210

 
(43,574
)
 
245

 
(48,463
)
 
217

(Loss) income before income taxes and equity earnings
(93,970
)
 
42,143

 
(99,403
)
 
40,144

Income tax benefit
27,303

 
6,612

 
29,485

 
6,413

Equity in results of affiliates
(257
)
 

 
(484
)
 

Net (loss) income
(66,924
)
 
48,755

 
(70,402
)
 
46,557

Net income attributable to noncontrolling interest
(680
)
 
(968
)
 
(680
)
 
(968
)
Net (loss) income attributable to Molycorp stockholders
$
(67,604
)
 
$
47,787

 
$
(71,082
)
 
$
45,589

 
 
 
 
 
 
 
 
Net (loss) income
$
(66,924
)
 
$
48,755

 
$
(70,402
)
 
$
46,557

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(4,221
)
 
1,324

 
(1,691
)
 
1,324

Comprehensive (loss) income
$
(71,145
)
 
$
50,079

 
$
(72,093
)
 
$
47,881

Comprehensive (loss) income attributable to:
 
 
 
 
 
 
 
Molycorp stockholders
(70,465
)
 
48,980

 
(71,413
)
 
46,782

Noncontrolling interest
(680
)
 
1,099

 
(680
)
 
1,099

 
$
(71,145
)
 
$
50,079

 
$
(72,093
)
 
$
47,881

Weighted average shares outstanding (Common shares)
 
 
 
 
 
 
 
Basic
99,175,285

 
83,847,119

 
93,090,872

 
83,054,811

Diluted
99,175,285

 
84,413,499

 
93,090,872

 
83,339,566

 (Loss) income per share of common stock (Note 17):
 
 
 
 
 
 
 
Basic
$
(0.71
)
 
$
0.54

 
$
(0.82
)
 
$
0.50

Diluted
$
(0.71
)
 
$
0.53

 
$
(0.82
)
 
$
0.50





See accompanying notes to the condensed consolidated financial statements.


5



MOLYCORP, INC.
Condensed Consolidated Statement of Stockholders’ Equity (Unaudited)
(In thousands, except share and per share amounts)
 
Common Stock
 
Series A
Mandatory
Convertible
Preferred
Stock
 
Additional
Paid-In Capital
 
Accumulated
Other
Comprehensive Loss
 
Retained Earnings
 
Total
Molycorp Stockholders' Equity
 
Non
controlling interests
 
Total Stockholders' Equity
 
Shares
 
$
 
Shares
 
$
 
 
 
 
 
 
Balance at December 31, 2011
83,896,043

 
$
84

 
2,070,000

 
$
2

 
$
838,547

 
$
(8,481
)
 
$
15,078

 
$
845,230

 
$

 
$
845,230

Stock-based compensation (Note 18)

 

 

 

 
2,484

 

 

 
2,484

 

 
2,484

Issuance of shares for investment from Molymet, net of stock issuance costs (Note 16)
12,500,000

 
12

 

 

 
390,081

 

 

 
390,093

 

 
390,093

Issuance of shares for interest in Molycorp Canada (Note 16)
13,545,426

 
14

 

 

 
284,130

 

 

 
284,144

 
15,761

 
299,905

Component of convertible debt (Note 14)

 

 

 

 
3,105

 

 

 
3,105

 

 
3,105

Net (loss) income

 

 

 

 

 

 
(71,082
)
 
(71,082
)
 
680

 
(70,402
)
Preferred dividends

 

 

 

 

 

 
(5,693
)
 
(5,693
)
 

 
(5,693
)
Other comprehensive loss

 

 

 

 

 
(1,691
)
 

 
(1,691
)
 

 
(1,691
)
Balance at June 30, 2012
109,941,469

 
$
110

 
2,070,000

 
$
2

 
$
1,518,347

 
$
(10,172
)
 
$
(61,697
)
 
$
1,446,590

 
$
16,441

 
$
1,463,031


See accompanying notes to the condensed consolidated financial statements.


6


MOLYCORP, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
Six months ended
 
June 30,
2012
 
June 30,
2011
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(70,402
)
 
$
46,557

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation, amortization and accretion
11,188

 
5,895

Deferred income tax benefit
(12,131
)
 
(13,481
)
Inventory write-downs
26,106

 
1,585

Stock-based compensation expense
1,900

 
3,386

Foreign exchange losses, net
1,214

 

Allowance for doubtful accounts
2,500

 

Equity results of affiliates
484

 

Other operating adjustments and write-downs
(66
)
 
(113
)
Net change in operating assets and liabilities (Note 22)
(25,174
)
 
(12,471
)
Net cash (used in) provided by operating activities
(64,381
)
 
31,358

Cash flows from investing activities:
 
 
 
Cash paid in connection with acquisitions, net of cash acquired
(591,011
)
 
(20,021
)
Investment in joint venture
(14,805
)
 

Deposits
(488
)
 
10,700

Capital expenditures
(403,932
)
 
(79,291
)
Other investing activities
2

 
(33
)
Net cash used in investing activities
(1,010,234
)
 
(88,645
)
Cash flows provided by financing activities:
 
 
 
Capital contributions
390,225

 

Repayments of short-term borrowings—related party

 
(1,688
)
Repayments of debt
(2,188
)
 
(2,958
)
Net proceeds from sale of preferred stock

 
199,642

Net proceeds from sale of Senior Notes
635,373

 

Net proceeds from sale of Convertible Notes

 
223,100

Payments of preferred dividends
(5,693
)
 
(3,320
)
Proceeds from debt
9,745

 
6,288

Other financing activities
(2,394
)
 
(22
)
Net cash provided by financing activities
1,025,068

 
421,042

Effect of exchange rate changes on cash
(46
)
 
97

Net change in cash and cash equivalents
(49,593
)
 
363,852

Cash and cash equivalents at beginning of the period
418,855

 
316,430

Cash and cash equivalents at end of period
$
369,262

 
$
680,282


See accompanying notes to the condensed consolidated financial statements.

7


MOLYCORP, INC.
Notes to Condensed Consolidated Financial Statements
June 30, 2012
(Unaudited)
(1)
Basis of Presentation
Molycorp, Inc. (“Molycorp” or the “Company”) is one of the world's leading rare earth products and rare metals companies. Molycorp owns: a world-class rare earth mine and processing facilities at Mountain Pass, California (the "Molycorp Mountain Pass facility"); Molycorp Silmet, one of the largest rare earth oxide ("REO") and rare metal producers in Europe; and the only producer of rare earth alloys in the United States. Following the acquisition of Neo Material Technologies, Inc. (formerly referred to as “Neo” and now “Molycorp Canada”) on June 11, 2012, Molycorp is currently a leading global producer of neodymium-iron-boron (“NdFeB”) magnetic powders (“Neo Powders”), which are used to manufacture bonded NdFeB permanent rare earth magnets, and a leading global manufacturer and distributor of rare earths and zirconium-based engineered materials and applications, and other rare metals and their compounds.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and Regulation S-X promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”). While the December 31, 2011 balance sheet information was derived from the Company’s audited financial statements, for interim periods, GAAP and Regulation S-X do not require all information and related disclosures that are required in the annual financial statements, and all disclosures required by GAAP for annual financial statements have not been included. Therefore, the accompanying unaudited condensed consolidated financial statements should be read in conjunction with Molycorp’s consolidated financial statements and related notes for the year ended December 31, 2011, included in Molycorp’s Form 10-K for the fiscal year ended December 31, 2011 filed on February 28, 2012.
The accompanying unaudited condensed consolidated financial statements reflect all adjustments, which are normal and recurring in nature, and which, in the opinion of management, are necessary for the fair presentation of Molycorp’s financial position, results of operations and cash flows at June 30, 2012, and for all periods presented. The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
The preparation of the financial statements, in accordance with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on the Company’s historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ significantly from these estimates under different assumptions and conditions. Significant estimates made by management in the accompanying financial statements include the collectability of accounts receivable, the recoverability of inventory, the useful lives and recoverability of long-lived assets such as property, plant and equipment, intangible assets and investments, capital leases, uncertain tax positions, the fair values of assets acquired and liabilities assumed, including business combinations, and the adequacy of the Company’s asset retirement obligations.
As a result of restarting mining operations at the Molycorp Mountain Pass facility in early 2012, and the substantial increase in revenue through the acquisition of Molycorp Canada in June 2012, Molycorp exited development stage status in the second quarter of 2012.
Certain prior period amounts have been reclassified to conform to the current period presentation.  Such reclassifications did not affect results of operations.
(2)
Capital Requirements
Capital expenditures for the engineering, procurement and construction portion ("EPC") of the Company’s modernization and expansion efforts, including achieving an annual production capacity of 19,050 mt at the Molycorp Mountain Pass facility (“Project Phoenix Phase 1”), and the Company’s second phase capacity expansion plan (“Project Phoenix Phase 2”), currently are expected to total approximately $895.0 million. Capital expenditures for other current and planned 2012 capital projects related to operations at the Molycorp Mountain Pass facility, including post-EPC, start-up, commissioning and other costs, are expected to total approximately $138.0 million.

8


These estimates do not include certain other capitalizable costs such as preliminary engineering, insurance, permitting, contracting and other legal costs, post-construction and plant commissioning costs and capitalized interest. The Company is also incurring other administrative expenses related to the construction of Project Phoenix Phase 1 and Project Phoenix Phase 2, which are expected to total approximately $10.0 million to $15.0 million in the second half of 2012.
All amounts for future capital spending are estimates that are subject to change as the projects are further developed. Capital spending for the Molycorp Mountain Pass facility plant modernization and expansion project, including Project Phoenix Phase 1, Project Phoenix Phase 2 and the other capital projects, is expected to be approximately $289.0 million for the remainder of 2012, and approximately $25.0 million in 2013, each on an accrual basis. The Company is encountering cost pressures on its projects and has initiated measures to mitigate certain adverse cost trends. The Company may incur additional costs, which may be material, if its mitigation measures are not successful.
Anticipated capital expenditures at all other operating facilities of the Company are expected to be approximately $15.0 million for the remainder of 2012. See Note 7.
Other cash requirements may include payments in August 2012 to certain holders of Molycorp Canada's $230.0 million 5% subordinated unsecured convertible debentures due December 2017 (the “Debentures”), in connection with the exercise of certain buyout and conversion rights triggered by the change of control provisions contained in the underlying indenture. The change of control provisions in the underlying indenture allow the holders of Debentures to elect to (a) have their Debentures purchased by Molycorp Canada at a price equal to 100% of the principal amount thereof plus accrued but unpaid interest up to, but not including, the purchase date, or (b) convert their Debentures into common shares of Molycorp Canada's predecessor company, including a number of additional “make-whole” shares. Holders of Debentures who elect to convert their Debentures will, in lieu of receiving shares of Molycorp Canada's predecessor company, have the right to make the same per share election for cash or share consideration that was offered to the shareholders of Molycorp Canada's predecessor company pursuant to the Arrangement Agreement as if such holders had converted their Debentures immediately prior to the closing under the Arrangement Agreement, all subject to the same proration mechanisms  found therein. Such holders will also be entitled to receive accrued but unpaid interest through the date of conversion. Holders who fail to make either of the above elections may retain their Debentures. The Company currently estimates that cash payments resulting from the exercise of buyout and conversion rights may total approximately $192.0 million to $230.0 million plus accrued interest from June 30, 2012.
Additionally, Molycorp will contribute, upon achievement of certain milestones and subject to the approval of Molycorp’s Board of Directors, Japanese Yen (JPY) 2.5 billion in cash (or approximately $31.4 million based on the JPY/ U.S. dollar exchange rate at June 30, 2012), in exchange for ordinary shares of Intermetallics Japan ("IMJ") over a period of twelve months. The actual remittance amounts will vary depending on the future exchange rate between the U.S. dollar and the Japanese Yen, and the achievement of certain milestones by the joint venture. The Company contributed $14.8 million to IMJ through June 30, 2012. See Note 10.
Molycorp expects to fund the remaining capital expenditures under Project Phoenix Phase 1, Project Phoenix Phase 2 and other capital expenditures related to operations at the Molycorp Mountain Pass and all other operating facilities, as well as working capital and other cash requirements, with its available cash balances of $369.3 million at June 30, 2012, anticipated future cash flow from operations and proceeds from other financing arrangements. The Company will need to secure additional financing for a substantial portion of its cash requirements for the remainder of 2012 and the first six months of 2013, including capital expenditures at its Mountain Pass facility and other capital projects, as well as other cash requirements, such as cash payments for the Debentures. The Company is in negotiations with various third-parties with respect to potential equipment leasing arrangements, asset-based revolving credit facilities and other financing arrangements, and is considering the issuance of equity and/or debt. The Company is also in negotiations with certain related persons for commercial transactions that would be provided at market terms and generate significant cash proceeds.
If the Company is unable to raise sufficient capital through the issuance of equity and/or debt, or other alternative sources of financing, management has the ability to exercise discretion over certain capital expenditures, which the Company estimates to total at least $75.0 million for the remainder of 2012. Such discretionary measures can be implemented without any material impact to the Company's current operations or production capacity under Project Phoenix Phase 1 or Phase 2.
There can be no assurance that the Company will be successful in raising additional capital in the future on commercially acceptable terms, or at all.


9


(3)
Segment Information
As a result of the Molycorp Canada acquisition on June 11, 2012, management has temporarily organized the Company into four operating segments: Molycorp Mountain Pass; Molycorp Silmet; Molycorp Metals and Alloys (“MMA”); and Molycorp Canada. As the Company further integrates Molycorp Canada operations, management anticipates organizing the Company into different reportable segments in future periods.
Molycorp Mountain Pass owns and operates the Molycorp Mountain Pass facility. Molycorp Silmet, which was acquired on April 1, 2011, produces REO and rare metals at the Company's manufacturing facility located in Sillamäe, Estonia. MMA, which was acquired on April 15, 2011, manufactures neodymium and samarium magnet alloy and other specialty alloy products at the Company's facility in Tolleson, Arizona. Molycorp Canada manufactures Neo Powders, which are used to make bonded magnets for a variety of electronic and mechanical products such as micro motors, precision motors, sensors and other applications requiring high levels of magnetic strength, flexibility, small size and reduced weight. Molycorp Canada produces Neo Powders through its wholly owned manufacturing facilities in Tianjin, China and Korat, Thailand. Molycorp Canada also manufactures and distributes rare earths and zirconium-based engineered products, as well as other rare metals and their compounds. The rare earths and zirconium-based engineered products are primarily supplied to the automotive catalyst, electronics, ceramic and glass industries. Rare metals from the Molycorp Canada segment are primarily used in the wireless, light-emitting diode, flat panel display, turbine, solar and catalyst industries. Molycorp Canada produces rare earths and zirconium-based engineered products, and other rare metals and their compounds, through its joint ventures and at its majority owned manufacturing facilities in Jiangsu Province, China; Shandong Province, China; Stade, Germany; Sagard, Germany and Quapaw, Oklahoma, and its wholly owned manufacturing facilities in Peterborough, Ontario; Napanee, Ontario; Blanding, Utah and the Hyeongok Industrial Zone in South Korea.
The following tables provide operating and financial information of the four operating segments for the three months ended and at June 30, 2012, and for the six months ended June 30, 2012 (the information for Molycorp Canada is for the period from June 12, 2012 through June 30, 2012):


10


Three months ended and at June 30, 2012 (In thousands)

Molycorp Mountain Pass

Molycorp Silmet

MMA

Molycorp Canada

Eliminations(a)

Corporate and other(b)

Total Molycorp, Inc.
Sales:

 
 
 
 
 
 
 
 
 
 
 
 
 
External

$
16,533

 
$
31,541

 
$
12,870

 
$
43,633

 
$

 
$


$
104,577

Intersegment

400

 
712

 

 
14

 
(1,126
)
 



Total sales

16,933


32,253


12,870


43,647


(1,126
)



104,577

Cost of sales:

 
 
 
 
 
 
 
 
 
 
 
 
 
Costs excluding depreciation and amortization
 
(22,277
)
 
(37,947
)
 
(17,112
)
 
(37,703
)
 
11,470

 

 
(103,569
)
Depreciation and amortization
 
(2,229
)
 
(1,526
)
 
(79
)
 
(1,247
)
 

 

 
(5,081
)
Gross (loss) profit
 
(7,573
)
 
(7,220
)
 
(4,321
)
 
4,697

 
10,344

 

 
(4,073
)
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative

(9,041
)

(1,510
)

(116
)

(1,737
)



(10,666
)

(23,070
)
Corporate development
 

 

 

 

 

 
(14,925
)
 
(14,925
)
Depreciation, amortization and accretion

(365
)

(77
)



(1,813
)



(24
)

(2,279
)
Research and development

(2,006
)

(359
)



(1,175
)



(2,509
)

(6,049
)
Operating (loss) income

(18,985
)

(9,166
)

(4,437
)

(28
)

10,344


(28,124
)

(50,396
)
Interest expense



(177
)

(175
)

(828
)



(8,625
)

(9,805
)
Other income (expense)

21


(2,385
)

8


(478
)



(30,935
)

(33,769
)
(Loss) income before income taxes and equity earnings (loss)

$
(18,964
)

$
(11,728
)

$
(4,604
)

$
(1,334
)

$
10,344


$
(67,684
)

$
(93,970
)
Equity (loss) earnings in results of affiliates

$
(15,754
)

$


$


$
309


$
15,754


$
(566
)

$
(257
)
Total assets

$
433,808


$
79,185


$
20,174


$
1,746,876


$
(80,988
)

$
960,173


$
3,159,228

Investment in equity method affiliates

$
14,011


$

 
$


$
19,053


$

 
$


$
33,064

Capital expenditures (c)

$
228,787


$
5,254


$


$
832


$


$


$
234,873



11


Six months ended June 30, 2012 (In thousands)

Molycorp Mountain Pass

Molycorp Silmet

MMA

Molycorp Canada

Eliminations(a)

Corporate and other(b)

Total Molycorp, Inc.
Sales:

 
 
 
 
 
 
 
 
 
 
 
 
 
External

$
61,011

 
$
52,577

 
$
31,826

 
$
43,633

 
$

 
$


$
189,047

Intersegment

2,232

 
3,922

 

 
14

 
(6,168
)
 



Total sales

63,243


56,499


31,826


43,647


(6,168
)



189,047

Cost of sales:

 
 
 
 
 
 
 
 
 
 
 
 
 
Costs excluding depreciation and amortization
 
(39,344
)
 
(71,205
)
 
(35,668
)
 
(37,703
)
 
30,279

 

 
(153,641
)
Depreciation and amortization
 
(4,008
)
 
(3,042
)
 
(155
)
 
(1,247
)
 

 

 
(8,452
)
Gross profit (loss)
 
19,891

 
(17,748
)
 
(3,997
)
 
4,697

 
24,111

 

 
26,954

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative

(18,464
)
 
(3,048
)
 
(295
)
 
(1,737
)
 


(23,709
)

(47,253
)
Corporate development
 

 

 

 

 

 
(18,305
)
 
(18,305
)
Depreciation, amortization and accretion

(699
)
 
(77
)
 

 
(1,813
)
 


(48
)

(2,637
)
Research and development

(4,091
)
 
(438
)
 

 
(1,175
)
 


(3,995
)

(9,699
)
Operating (loss) income

(3,363
)

(21,311
)

(4,292
)

(28
)

24,111


(46,057
)

(50,940
)
Interest expense


 
(318
)
 
(452
)
 
(828
)
 

 
(8,122
)

(9,720
)
Other income (expense)

89


(762
)

5

 
(478
)
 

 
(37,597
)

(38,743
)
(Loss) income before income taxes and equity earnings (loss)

$
(3,274
)

$
(22,391
)

$
(4,739
)

$
(1,334
)

$
24,111


$
(91,776
)

$
(99,403
)
Equity (loss) earnings in results of affiliates

$
(26,898
)
 
$

 
$

 
$
309

 
$
26,898

 
$
(793
)

$
(484
)
Capital expenditures (c)

$
488,225


$
7,755


$
100


$
832


$


$


$
496,912

________________________
(a)
The $80,988 of total assets elimination is comprised of $2,662 intercompany investments and $78,326 intercompany accounts receivable and profits in inventory. The cost of sales elimination amounts of $11,470 for three months ended June 30, 2012 and $30,279 for the six months ended June 30, 2012, include elimination of the intercompany gross profits as well as elimination of lower of cost or market adjustments related to the intercompany inventory.
(b)
Includes expenses incurred by and capital invested in the sales office in Tokyo, Japan.
(c)
On an accrual basis excluding capitalized interest.


Prior to the acquisition of Molycorp Canada on June 11, 2012, the Company was organized into three operating segments: Molycorp Mountain Pass, Molycorp Silmet and MMA. The following tables provide operating and financial information of the three segments for the three months ended and at June 30, 2011, and for the six months ended June 30, 2011. Some of the prior interim period captions and segments subtotals have been modified to conform to the current interim period presentation:


12


Three months ended and at June 30, 2011 (In thousands)

Molycorp    
Mountain Pass    

Molycorp Silmet

 MMA

Eliminations(d)

Corporate and other(b)
 
Total
Molycorp, Inc.    
Sales:













 
 


External

$
60,348


$
29,017


$
10,250


$


 
 
$
99,615

Intersegment

15,947


3,639




(19,586
)

 
 

Total sales

76,295


32,656


10,250


(19,586
)

 
 
99,615

Cost of sales:

 
 
 
 
 
 
 
 
 
 
 
Costs excluding depreciation and amortization
 
(19,493
)
 
(20,321
)
 
(10,935
)
 
10,401

 

 
(40,348
)
Depreciation and amortization
 
(2,216
)
 
(151
)
 
(208
)
 

 

 
(2,575
)
Gross profit (loss)
 
54,586

 
12,184

 
(893
)
 
(9,185
)
 

 
56,692

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative

(1,518
)

(1,453
)

(112
)



(7,393
)
 
(10,476
)
Corporate development
 

 

 

 

 
(2,042
)
 
(2,042
)
Depreciation, amortization and accretion

(332
)



(191
)




 
(523
)
Research and development
 
(1,734
)
 

 

 

 
(19
)
 
(1,753
)
Operating income (loss)

51,002


10,731


(1,196
)

(9,185
)

(9,454
)
 
41,898

Other income (expense)



(61
)

2




304

 
245

Income before income taxes

$
51,002


$
10,670


$
(1,194
)

$
(9,185
)

$
(9,150
)
 
$
42,143

Total assets at June 30, 2011

$
399,908


$
152,984


$
29,705


$
(140,923
)

$
699,992

 
$
1,141,666

Capital expenditures (c)

$
70,142


$
2,231


$


$


$

 
$
72,373



(d)
The total assets elimination of $140,923 is comprised of $114,000 of intercompany investments and $26,923 of intercompany accounts receivable and profits in inventory.


13


Six months ended June 30, 2011 (In thousands)

Molycorp Mountain Pass

Molycorp Silmet

MMA

Eliminations

Corporate and other(b)
 
Total Molycorp, Inc.
Sales:













 
 


External

$
86,609


$
29,017


$
10,250


$


 
 
$
125,876

Intersegment

15,947


3,639




(19,586
)

 
 

Total sales

102,556


32,656


10,250


(19,586
)



 
125,876

Cost of sales:

 
 
 
 
 
 
 
 
 
 
 
Costs excluding depreciation and amortization
 
(34,214
)
 
(20,321
)
 
(10,935
)
 
10,401

 

 
(55,069
)
Depreciation and amortization
 
(4,172
)
 
(151
)
 
(208
)
 

 

 
(4,531
)
Gross profit (loss)
 
64,170

 
12,184

 
(893
)
 
(9,185
)
 

 
66,276

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative

(4,941
)

(1,453
)

(112
)



(12,669
)
 
(19,175
)
Corporate development
 

 

 

 

 
(3,317
)
 
(3,317
)
Depreciation, amortization and accretion

(649
)



(191
)




 
(840
)
Research and development
 
(3,000
)
 

 

 

 
(17
)
 
(3,017
)
Operating income (loss)

55,580

 
10,731

 
(1,196
)
 
(9,185
)
 
(16,003
)
 
39,927

Other income (expense)

$
(37
)

$
(61
)

$
2


$


$
313

 
$
217

Income before income taxes

$
55,543


$
10,670


$
(1,194
)

$
(9,185
)

$
(15,690
)
 
$
40,144

Capital expenditures (c)

$
111,966


$
2,231


$


$


 
 
$
113,497




14


(4)
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company reviews the need for an allowance for doubtful accounts on a quarterly basis. At June 30, 2012 and December 31, 2011, the allowance for doubtful accounts was $2.5 million and $0, respectively.
(5)
Inventory
At June 30, 2012 and December 31, 2011, inventory consisted of the following (in thousands):

 
June 30,
2012
 
December 31,
2011
Current:
 
 
 
Concentrate stockpiles
$
1,341

 
$
3,704

Raw materials
103,554

 
44,770

Work in process
51,366

 
16,602

Finished goods
159,140

 
45,045

Materials and supplies
4,471

 
1,822

Total current
$
319,872

 
$
111,943

Long-term:
 
 
 
Concentrate stockpiles
$
2,112

 
$
1,144

Raw materials
8,329

 
3,186

Finished goods
4

 
32

Total long-term
$
10,445

 
$
4,362

Assessment of normal production levels
For the three months ended June 30, 2012 and 2011, Molycorp determined that $2.4 million and $0.9 million, respectively, of production costs would have been allocated to additional production, assuming Molycorp had been operating at normal production ranges. For the six months ended June 30, 2012 and 2011, the Company determined that $5.4 million and $3.5 million, respectively, of production costs would have been allocated to additional production, assuming Molycorp had been operating at normal production ranges. As a result, these costs were excluded from inventory and instead expensed during the applicable periods. The assessment of normal production levels is judgmental and is unique to each quarter.
Write-downs of inventory
For the three months ended June 30, 2012 and 2011, the Company recognized write-downs of $19.5 million, and $0, respectively, as a result of production or purchase costs in excess of net realizable value. For the six months ended June 30, 2012 and 2011, Molycorp recognized write-downs of $26.1 million, and $0.6 million, respectively, as a result of production or purchase costs in excess of net realizable value. In addition, the Company recognized write-downs of work-in-process and stockpile inventory totaling $0 and $1.0 million for the three months ended June 30, 2012 and 2011, respectively, based on adjustments to estimated REO quantities.
(6)
Deposits
The Company had $23.3 million in deposits reported as non-current assets at June 30, 2012 and December 31, 2011, respectively. The deposits at June 30, 2012 consist of $20.6 million under an escrow arrangement for the Company’s facilities agreement with Kern River Gas Transmission Company ("Kern River"), $1.5 million related to the Company’s construction insurance program and $1.2 million comprised primarily of other deposit requirements.
(7)
Property, Plant and Equipment, net
The Company capitalized $244.4 million and $73.0 million in plant modernization and other capital costs for the three months ended June 30, 2012 and 2011, respectively, and $510.2 million and $114.2 million for the six months ended June 30,

15


2012 and 2011, respectively. These amounts include capitalized interest of $9.5 million and $0.6 million for the three months ended June 30, 2012 and 2011, respectively, and $13.3 million and $0.7 million for the six months ended June 30, 2012 and 2011, respectively.
Capital expenditures under Project Phoenix Phase 1 and Project Phoenix Phase 2, and other capital projects related to operations at Molycorp Mountain Pass, totaled $226.0 million and $66.5 million for the three months ended June 30, 2012 and 2011, respectively, and $479.6 million and $106.0 million for the six months ended June 30, 2012 and 2011, respectively. These amounts are on an accrual basis and exclude capitalized interest.
At June 30, 2012 and December 31, 2011, property, plant and equipment consisted of the following (in thousands):
 
June 30,
2012
 
December 31,
2011
Land
$
12,106

 
$
11,059

Land improvements
15,823

 
15,748

Buildings and improvements
54,740

 
23,677

Plant and equipment
126,907

 
68,441

Vehicles
1,978

 
1,235

Computer software
4,669

 
3,002

Furniture and fixtures
731

 
464

Construction in progress (a)
926,864

 
436,547

Capital Leases
15,658

 

Mineral properties
24,457

 
24,692

Property, plant and equipment at cost
1,183,933

 
584,865

Less accumulated depreciation
(30,629
)
 
(23,237
)
Property, plant and equipment, net
$
1,153,304

 
$
561,628

(a) Represents costs incurred for Project Phoenix Phase 1 and Project Phoenix Phase 2 and all other capital projects. See Note 2.
(8)
Mineral Properties and Development Costs
Mineral properties and development costs, which are referred to collectively as mineral properties, include acquisition costs, drilling costs, and the cost of other development work, all of which are capitalized. The Company began depleting mineral properties in 2012 using the units of production method over estimated proven and probable reserves. For the three and six months ended June 30, 2012, the Company capitalized $61 thousand and $82 thousand, respectively, of depletion costs in work-in-process inventory related to the reserves that were mined and crushed during these periods.
(9)
Intangible Assets
At June 30, 2012 and December 31, 2011, amortizable intangible assets consisted of the following (in thousands):





16


 
June 30,
2012
 
December 31,
2011
Customer relationships
$
350,077

 
$
2,153

Rare earth quotas
80,300

 

Patents
39,753

 

Trade name
16,586

 
786

Land use rights
3,420

 

Other
4,890

 
516

Gross carrying amount
495,026

 
3,455

Less accumulated amortization
(3,099
)
 
(383
)
Net carrying amount
$
491,927

 
$
3,072

At June 30, 2012, the net carrying amounts of customer relationships, rare earth quotas, patents, trade name, and other intangible assets included preliminary estimates of $489.2 million as a result of the Molycorp Canada acquisition. The Company expects to complete the final determination of these estimates and related estimated lives for amortizable intangible assets no later than the second quarter of 2013.

(10)
Investments
Boulder Wind Power, Inc.
On September 13, 2011, the Company invested $20.0 million into Boulder Wind Power, Inc. Series B convertible preferred stock, which is accounted for at cost. At June 30, 2012, the fair value of this investment was not estimated as there were no identified events or changes in circumstances that may have had a significant adverse effect on the fair value of the investment.
Intermetallics Japan Joint Venture
On November 28, 2011, Molycorp, Daido Steel Co., Ltd. (“Daido”) and Mitsubishi Corporation (“Mitsubishi”) entered into a preliminary shareholders agreement for the purpose of establishing a new private company, IMJ, to manufacture sintered NdFeB permanent rare earth magnets. The capital contribution ratio of the newly formed company is 30.0% by Molycorp, 35.5% by Daido and 34.5% by Mitsubishi. According to the definitive shareholders agreement, which was signed in January 2012, Molycorp will contribute, upon achievement of certain milestones and subject to the approval of Molycorp’s Board of Directors, Japanese Yen (JPY) 2.5 billion in cash (or approximately $31.4 million based on the JPY/ U.S. dollar exchange rate at June 30, 2012), in exchange for ordinary shares of IMJ over a period of twelve months. The actual remittance amounts will vary depending on the future exchange rate between the U.S. dollar and the Japanese Yen, and the achievement of certain milestones by the joint venture. The Company contributed $14.8 million to IMJ through June 30, 2012.
Molycorp accounts for this investment under the equity method because it has the ability to exercise significant influence over the operating and financial policies of IMJ, as evidenced by Molycorp’s ownership share and its proportional voting rights and representation in the Board of Directors of IMJ. The condensed consolidated statement of operations and comprehensive income for the three and six months ended June 30, 2012 include a loss of $0.2 million and $0.6 million, respectively, associated with this equity method interest.
Ganzhou Keli Rare Earth New Material Co., Ltd.
As a result of the Molycorp Canada acquisition in June 2012, Molycorp acquired a 25% ownership interest in Ganzhou Keli Rare Earth New Material Co., Ltd. (“Keli”), a company that converts REO into metals for use in Neo Powders. The preliminary purchase allocation attributable to this investment at the time of the Molycorp Canada acquisition was $12.2 million. Molycorp accounts for this ownership interest under the equity method because it has the ability to exercise significant influence over the operating and financial policies of Keli, as evidenced by Molycorp’s ownership share and its proportional voting rights. The condensed consolidated statements of operations and comprehensive income include a gain of $0.3 million for the period from June 12, 2012 to June 30, 2012 associated with this equity method ownership interest.

17


Toda Magnequench Magnetic Materials Co. Ltd.
As a result of the Molycorp Canada acquisition in June 2012, Molycorp acquired a 33% ownership interest in Toda Magnequench Magnetic Materials Co. Ltd. (“TMT”), a company that produces rare earth magnetic compounds with Neo Powders supplied by Magnequench (Tianjin) Company Limited in its normal course of business. The preliminary purchase allocation attributable to this investment at the time of the Molycorp Canada acquisition was $1.6 million. Molycorp accounts for this ownership interest under the equity method because it has the ability to exercise significant influence over the operating and financial policies of TMT, as evidenced by Molycorp’s ownership share and its proportional voting rights.
Ingal Stade GmbH
As a result of the Molycorp Canada acquisition in June 2012, Molycorp acquired a 50% ownership interest in Ingal Stade GmbH (“Ingal Stade”), a joint venture facility in Stade, Germany with 5N Plus that extracts gallium metal from alumina smelter bayer liquor. The preliminary purchase allocation attributable to this investment at the time of the Molycorp Canada acquisition was $4.9 million. Molycorp accounts for this ownership interest under the equity method.
Atlantic Metals & Alloys, LLC
As a result of the Molycorp Canada acquisition in June 2012, Molycorp acquired a 19.5% ownership interest in Atlantic Metals & Alloys, LLC, a company which provides refining services for residues and scrap of the rare and platinum group metals. The preliminary purchase allocation attributable to this investment at the time of the Molycorp Canada acquisition was $1.4 million. Molycorp accounts for this ownership interest under the cost method. At June 30, 2012, the fair value of this investment was not estimated as there were no identified events or changes in circumstances that may have had a significant adverse effect on the fair value of the investment.
Vive Crop Protection
As a result of the Molycorp Canada acquisition in June 2012, Molycorp acquired a 7% ownership interest in Vive Crop Protection, a company that specializes in the formulation of active ingredients used in crop protection. The preliminary purchase allocation attributable to this investment at the time of the Molycorp Canada acquisition was $0.9 million. Molycorp accounts for this ownership interest under the cost method. At June 30, 2012, the fair value of this investment was not estimated as there were no identified events or changes in circumstances that may have had a significant adverse effect on the fair value of the investment.
(11)
Acquisitions
On June 11, 2012, Molycorp completed the acquisition of all of the outstanding equity of Molycorp Canada's predecessor company pursuant to the terms of an arrangement agreement (the "Arrangement Agreement") for an aggregate purchase price of approximately $1.2 billion. Pursuant to the Arrangement Agreement, Molycorp Canada's former shareholders elected to receive: (a) cash consideration equal to Canadian dollars ("Cdn") $11.30 per share of Molycorp Canada's predecessor company's common stock; or (b) share consideration of 0.4242 shares of Molycorp common stock or 0.4242 shares (the "Exchangeable Shares") issued by MCP Exchangeco Inc., Molycorp's wholly owned Canadian subsidiary, which are exchangeable for shares of Molycorp's common stock on a one for one basis, per each share of Molycorp Canada's predecessor company's common stock; or (c) a combination of cash and shares of Molycorp common stock or Exchangeable Shares, all subject to the proration mechanics set forth in the Arrangement Agreement.
The consideration paid to Molycorp Canada's former shareholders was comprised of approximately $908.2 million in cash, exclusive of realized losses on the contingent forward contract to purchase Canadian dollars, accounted for as a separate transaction apart from the business combination, as further discussed in Note 25. Additionally, approximately 13.5 million shares of Molycorp common stock and 0.5 million Exchangeable Shares were issued and collectively valued at $284.1 million based on the closing price of the Company's common stock on the acquisition date in accordance with the relevant accounting guidance.
The following is a preliminary allocation of the Molycorp Canada purchase price (in thousands) and is based on management's preliminary estimates of the fair value of the tangible and intangible assets and liabilities of Molycorp Canada.

18


This valuation is subject to change as the Company obtains additional information on the assets acquired and liabilities assumed during the acquisition measurement period (up to one year from the acquisition date).
 
June 11, 2012

Purchase consideration:
 
Cash consideration
$
908,181

Fair value of Molycorp common stock and Exchangeable Shares issued
284,144

Total purchase consideration
$
1,192,325

Estimated fair values of the assets and liabilities acquired:
 
Cash and cash equivalents
$
317,169

Accounts receivable
101,470

Inventory
250,989

Prepaid expenses and other current assets
26,893

Property, plant and equipment
70,391

Investments
21,019

Intangibles
491,786

Goodwill
501,571

Other non-current assets
22,859

Accounts payable and accrued expenses
(138,576
)
Debt - current
(255,056
)
Other current liabilities
(29,939
)
Deferred tax liabilities
(158,177
)
Long-term debt
(281
)
Other non-current liabilities
(14,032
)
Non-controlling interests
(15,761
)
Total purchase consideration
$
1,192,325


The fair value of the accounts receivable acquired includes trade receivables of $101.5 million, which are considered to be collectible at June 30, 2012.
Molycorp Canada's intangible assets subject to amortization relate to: a) customer relationships of $348.1 million with a weighted average useful life of approximately fifteen years; b) rare earth quotas of $80.3 million with a useful life of approximately eleven years; c) patents of $39.8 million with a weighted average useful life of approximately two years; d) trade name of $15.8 million with a useful life of approximately ten years; and e) other of $7.8 million with a weighted average useful life of approximately twelve years.
Goodwill associated with the Molycorp Canada acquisition arose primarily because of Molycorp Canada's proven leadership in the development, processing, and distribution of technically advanced rare earth products; greater exposure to the world’s largest and fastest-growing rare earths consuming market; deferred tax liabilities and expected synergies that do not qualify for separate recognition. The goodwill is not amortized and is not deductible for tax purposes.
The amounts of Molycorp Canada's sales, earnings and earnings per share included in the Company’s condensed consolidated statements of operations since the acquisition date, and the sales, earnings and earnings per share of the combined entity had the acquisition date been January 1, 2011, are as follows:

19




(In thousands, except per share amounts)    
 
Sales
 
Net Income (Loss)
 
Net Income (Loss)
Attributable To Molycorp
 
EPS Basic
Actual June 11, 2012 to June 30, 2012 (acquiree)
 
$
43,647

 
$
47

 
$
(633
)
 
$
(0.01
)
Unaudited pro forma April 1, 2012 to June 30, 2012 (combined entity)
 
$
260,542

 
$
(59,519
)
 
$
(62,114
)
 
$
(0.60
)
Unaudited pro forma January 1, 2012 to June 30, 2012 (combined entity)
 
$
523,865

 
$
(59,079
)
 
$
(63,466
)
 
$
(0.63
)
Unaudited pro forma April 1, 2011 to June 30, 2011 (combined entity)
 
$
315,758

 
$
83,642

 
$
78,354

 
$
0.69

Unaudited pro forma January 1, 2011 to June 30, 2011 (combined entity)
 
$
474,817

 
$
92,564

 
$
86,352

 
$
0.75

The unaudited pro forma amounts are not necessarily indicative of the operating results that would have occurred if the Molycorp Canada acquisition had taken place on January 1, 2011.
The unaudited pro forma sales, earnings and earnings per share of the combined entity above are adjusted a) to eliminate the effect of sales and costs that occurred previous to the business combination between the Company and Molycorp Canada; b) to reflect the net incremental depreciation and amortization expense as a result of the allocation of the purchase price to certain depreciable and amortizable assets with useful lives ranging from two to thirty years c) the tax effect of unaudited pro forma adjustments using the Molycorp federal, state and international statutory tax rates based on the applicable tax jurisdictions; and d) the estimated net increase of interest expense associated with the issuance the Senior Notes as part of the acquisition. The weighted average number of shares outstanding utilized in the EPS basic calculation have been adjusted to reflect the additional shares issued pursuant to the acquisition of Molycorp Canada and the related Molibdenos y Metales S.A. equity financing further discussed in Note 16. The unaudited pro forma earnings of the combined entity for the three and six months ended June 30, 2012, were also adjusted to exclude $103.9 million and $114.7 million, respectively, of non-recurring transaction costs, which resulted directly from the transaction. For the three and six months ended June 30, 2012, the Company recognized approximately $52.8 million and $61.6 million, respectively, of transaction costs in the condensed consolidated statements of operations and comprehensive income as follows:
    
(In thousands)
Three Months
Ended
June 30, 2012
 
Six Months
Ended
June 30, 2012
Corporate development
 
 
 
    Legal, accounting and advisory fees
$
14,043

 
$
16,074

Other expenses:
 
 
 
    Contingent forward contract loss
$
30,770

 
$
37,589

Interest expense:
 
 
 
Bridge loan fee
$
7,937

 
$
7,937

Molycorp Silmet and MMA
The following table summarizes the purchase prices and opening balance sheets for the acquisition of 90.023% controlling interest in Molycorp Silmet on April 1, 2011 and of MMA on April 15, 2011 (in thousands):

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Effective acquisition date for financial reporting purposes:
 
Molycorp Silmet
April 1, 2011
 
MMA
April 15, 2011
Purchase consideration:
 
 
 
 
Cash consideration
 
$
9,021

 
$
17,500

Fair value of Molycorp common stock issued
 
72,653

 

Total purchase consideration
 
$
81,674

 
$
17,500

Fair values of the assets and liabilities acquired:
 
 
 
 
Cash
 
$
105

 
$
6,395

Accounts receivable and other current assets
 
8,626

 
5,474

Inventory
 
37,404

 
11,327

Property, plant and equipment, net
 
63,393

 
4,512

Intangible assets subject to amortization
 
2,669

 

Goodwill
 
1,455

 
1,977

Liabilities
 
(19,974
)
 
(8,989
)
Deferred tax liabilities
 

 
(3,196
)
Long-term debt
 
(3,184
)
 

Noncontrolling interest
 
(8,820
)
 

Total purchase consideration
 
$
81,674

 
$
17,500

The fair value of the accounts receivable acquired includes trade receivables of $5.0 million for Molycorp Silmet and $4.9 million for MMA. These trade receivables were collected by December 31, 2011. Molycorp Silmet’s intangible assets subject to amortization relate primarily to customer relationships with a weighted average useful life of 15 years. Goodwill associated with the Molycorp Silmet acquisition arose primarily because of the acquired workforce. Goodwill associated with the MMA acquisition arose primarily because of the requirement to record a deferred tax liability for the difference between the assigned values and the tax basis of assets acquired and liabilities assumed at amounts that do not reflect fair value. The goodwill is not amortized and is not deductible for tax purposes. The fair value of the noncontrolling interest in Molycorp Silmet as of April 1, 2011 was valued using a combination of the market approach and income approach.
The pro forma sales, earnings and earnings per share of the Company had both acquisitions occurred on January 1, 2011, are as follows:
(In thousands, except per share amounts)
 
Sales
 

Net Income
 
Net Income
Attributable To
Molycorp
 
EPS Basic
Unaudited pro forma January 1, 2011 to June 30, 2011 (combined entity)
 
$
159,350

 
$
55,463

 
$
54,495

 
$
0.6

The unaudited pro forma amounts are not necessarily indicative of the operating results that would have occurred if these acquisitions had taken place on January 1, 2011.
The 2011 earnings of the combined entity were adjusted to exclude $19.6 million of intercompany sales and $1.8 million of non-recurring acquisition-related costs the Company incurred to acquire Molycorp Silmet and MMA, and to reverse $1.1 million of purchase price variance MMA capitalized during the first quarter of 2011.
Molycorp Silmet
On April 1, 2011, Molycorp acquired 80% of the outstanding shares of Molycorp Silmet from AS Silmet Grupp in exchange for 1,593,419 shares of Molycorp common stock contractually valued at $80.0 million based on the average closing price of the Company’s common stock as reported by The New York Stock Exchange for the 20 consecutive trading days immediately preceding April 1, 2011, the acquisition date.
Generally, the acquisition-date fair value of shares of common stock transferred by the acquirer is the closing price of that stock on the same date adjusted by a discount that a market participant would require as a result of any restrictions on the sale or transferability of the stock. The fair value of common stock of $72.7 million disclosed in the table above is based on the closing price of the Company’s common stock on the acquisition date, net of an estimated discount of 23% that a market

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participant would require given that issuance of the shares of common stock Molycorp transferred in consideration to AS Silmet Grupp was not registered under the Securities Act of 1933 and such shares were subject to certain lock-up provisions, which limited AS Silmet Grupp’s ability to sell these shares. AS Silmet Grupp retained a 9.977% ownership interest in Molycorp Silmet on the acquisition date; Molycorp acquired the other 10.023% from Treibacher Industrie AG for $9.0 million in cash also on April 1, 2011.
On October 24, 2011, the Company acquired the remaining 9.977% ownership interest in Molycorp Silmet for $10.0 million in cash, which resulted in an adjustment to Additional Paid-In Capital of $0.4 million for the difference between the consideration paid and the carrying value of the noncontrolling interest at October 24, 2011.
The Molycorp Silmet acquisition provides Molycorp with a European base of operations and increases the Company’s yearly REO production capacity by approximately 3,000 mt. Molycorp Silmet sources a portion of rare earth feed stocks for production of its products primarily from the Molycorp Mountain Pass facility. The main focus of Molycorp Silmet is on the production of REO and metals, including didymium metal, a critical component in the manufacture of NdFeB permanent rare earth magnets. Molycorp Silmet’s manufacturing operation is located in Sillamäe, Estonia.
MMA
On April 15, 2011, Molycorp completed the acquisition from Santoku Corporation (“Santoku”) of all the issued and outstanding shares of capital stock of Santoku America, Inc., which is now known as MMA, an Arizona based corporation, in an all-cash transaction for $17.5 million. The acquisition provides Molycorp with access to certain intellectual properties relative to the development, processing and manufacturing of neodymium and samarium magnet alloy products. As part of the stock purchase agreement, Santoku will provide consulting services to Molycorp for the purpose of maintaining and enhancing the quality of MMA’s products. Molycorp and Santoku also entered into five-year marketing and distribution agreements for the sale and distribution of neodymium and samarium magnet alloy products produced by each party. Additionally, the parties entered into a rare earth products purchase and supply agreement through which MMA will supply Santoku with certain rare earth alloys for a two-year period at prices equal to the feedstock cost plus the applicable product premium as such terms are defined in the agreement.
(12)
Accrued Expenses
Accrued expenses at June 30, 2012 and December 31, 2011 consisted of the following (in thousands):
 
June 30,
2012
 
December 31,
2011
Defined contribution plan
$
1,312

 
$
1,088

Professional fees
14,242

 

Accrued payroll and related benefits
10,570

 
3,024

Sales and use tax
6,671

 
1,367

Bonus accrual
2,426

 
4,845

Interest payable
6,992

 
345

Advance from customer
5,120

 

Other accrued expenses
9,272

 
2,229

Total accrued expenses
$
56,605

 
$
12,898

(13)
Asset Retirement Obligation
The following table presents the activity in the Company’s asset retirement obligation for the six months ended June 30, 2012, and for the year ended December 31, 2011 (in thousands):

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Six Months Ended June 30, 2012
 
Year Ended December 31, 2011
Balance at beginning of period
$
15,541

 
$
12,471

Obligations settled
(500
)
 
(1,030
)
Accretion expense
495

 
955

Revisions in estimated cash flows
8,433

 
2,508

Gain on settlement

 
637

Balance at end of period
$
23,969

 
$
15,541

The balance above for the six months ended June 30, 2012 includes a short-term portion of $3.8 million, which is recorded under other current liabilities. The Company is required to provide the applicable governmental agencies with financial assurances relating to its closure and reclamation obligations. At June 30, 2012, the Company had financial assurance requirements of $28.8 million, which were satisfied with surety bonds placed with California state and regional agencies.
(14)
Debt and Capital Lease Obligations
On May 25, 2012, Molycorp issued $650.0 million aggregate principal amount of the senior secured notes due 2020 ("Senior Notes") in an offering exempt from the registration requirements of the Securities Act of 1933. The Senior Notes will bear interest at the rate of 10% per year payable on June 1 and December 1 of each year beginning on December 1, 2012. At any time and from time to time prior to June 1, 2016, the Company may redeem any of the Senior Notes at a price equal to 100% of the principal amount thereof plus an applicable make-whole premium and accrued and unpaid interest. At any time and from time to time from and after June 1, 2016, Molycorp may redeem the Senior Notes, in whole or in part, at a redemption price for the Senior Notes plus accrued and unpaid interest, initially at 105% of the principal amount thereof, but gradually declining to 100% of the principal amount thereof. In addition, at any time and from time to time prior to June 1, 2015, the Company may redeem up to 35% of the aggregate principal amount of the Senior Notes with the net cash proceeds of one or more permitted sales of Molycorp’s capital stock at a redemption price (expressed as a percentage of principal amount) of 110% plus accrued and unpaid interest. Upon the occurrence of a change of control, Molycorp will be required to offer to repurchase all of the Senior Notes. The Senior Notes are senior secured obligations of Molycorp and are guaranteed by certain of Molycorp’s domestic subsidiaries ("Guarantors"). A substantial portion of the net proceeds from the offering of the Senior Notes were used to fund the cash consideration the Company paid for Molycorp Canada. The remainder of the net proceeds from the issuance of the Senior Notes will be used for general corporate purposes. The Company, the Guarantors and the initial purchasers of the Senior Notes agreed to file an exchange offer registration statement with the Securities and Exchange Commission ("SEC") within 180 days of the May 25, 2012 issuance date, and use their respective commercially reasonable efforts to have it declared effective at the earliest possible time and in any event within 270 days following the issuance date.
As a result of the Molycorp Canada acquisition, the Company assumed $230.0 million principal amount of the Debentures with a par value of $1,000 per Debenture and maturing on December 31, 2017. The Debentures carry a 5% coupon and are convertible at $13.80 per share of Molycorp Canada's predecessor company. As required under the change in control provisions of the Debentures, holders of the Debentures have the option to either require the Company to repurchase the Debentures at par plus accrued interest, convert the Debentures to shares of Molycorp common stock, or hold the Debentures to maturity. The Debenture holders that convert will receive, at their election, the same cash and/or share consideration that was paid to Molycorp Canada's former shareholders in connection with the acquisition of Molycorp Canada, subject to the same pro-ration calculation, as if such holders had converted immediately prior to the acquisition. The Debenture holders must exercise their options under the change in control provisions, if at all, on or before August 11, 2012. The Company separately accounts for the liability and equity components of the Debentures to reflect the issuer's economic interest cost. The equity component of the Debentures is included in the additional paid-in capital section of the condensed consolidated statement of stockholders' equity at June 30, 2012, and the value of the equity component is treated as original issue discount for purposes of accounting for the debt component of the Debentures. At June 30, 2012, Molycorp recognized a liability component related to the Debentures of approximately $230.2 million, which includes a small accretion of the original issue discount for the 19 days following the acquisition of Molycorp Canada, and an equity component of $3.1 million. Total interest cost related to the Debentures for the period from June 12, 2012 to June 30, 2012 was $0.6 million.
Additional short-term indebtedness was assumed as part of the acquisition of Molycorp Canada totaling $31.7 million, which relates to various bank loans maturing between July 2012 and December 2012 with a weighted average interest rate of

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approximately 4.2%.
On September 1, 2010, Molycorp and Kern River entered into a firm Transportation Service Agreement ("TSA") under which Kern River agreed to construct and operate facilities necessary to provide natural gas transportation services to the Molycorp Mountain Pass facility. Under the terms of the TSA, Molycorp agreed to pay Kern River for the cost attributable to the design, permitting, and construction of the delivery facilities through a transportation service charge of approximately $0.4 million per m