Moly Corp Valuation Study Case

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Mariana Ferro 152115220 - Joana Penida 152415011 - Rafael Belo 152415038

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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

Index

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Western Hemisphere’s 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. About Molycorp

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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

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Strengths

-Only producer in the Western Hemisphere - Reduced labor costs

- Experienced Management- Skilled workforce

- 50%-70% lower costs than competitors

Weaknesses

- High debt level

Opportunities

- Growing Economy

Threats

- Price Volatility- Increasing

1.2. SWOT Analysis

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REM – critical inputs to many emerging technologies

REO’s are refined REM’s 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

2. Industry and Backgrounds

55 million in China 13 million in US

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3. Valuation3.1 DCF model

Using the DCF model we calculate the value of the company as a whole

(extraction activity together with production activity)

The DCF model does not take into account the value of the flexibility

related to the mine exploration

Assumptions for Rates g (Growht Rate) 1,4% Income Tax Rate (on average) 35% Risk Free Rate 2,65% Kd (CCC Rating) 10,92% Ke Levered 16,63% Ke Unlevered 10,16% ßL (equity) 2,33

Risk Premium (Rm-Rf) 6,00% ßu (equity) 1,252 Bankruptcy Costs 20%

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Cash Flow ForecastJul-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

Metal/Alloy Price ($/Kg) $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

FCFF $-520,20 $69,40 $130,25 $159,85 $161,80 $164,73


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NPV:

NPV

WACC 12%

FCFF Discounted -495,18

NPV of Molycorp Inc. $1 711,11


Assumptions:

1) D/V@ market value: We assumed the data from the case. 47% till June 2015, after New

Debt we assume that the ratio will take the value of 51%. Beside that, it is given that D/V@

market value would stablished on 20-30% till last year (2020), where the debt is zero.

2) Capital Structure is changing every year till the debt = 0. In this case, WACC = Ke

Levered from 2020 on.

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In order to value correctly a mining company one must sum the value of the “developed

business” (APV Valuation for the factory) and the value of the “undeveloped reserves”

(Real option Valuation for the mine);

The Value of Molycorp Inc. is the sum of the values of both parts of the company, the

Mining Operations with the Metals and Magnets Production Operations.

Value APV Valuation

Real Option Valuation

3. Valuation3.2. APV and Real Options Model

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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.

3. Valuation3.2. APV

Unlevered Enterprise Value $1170,8

Total Net Debt End $779,8

NPV Tax Shields $167,3

Probability of Bankruptcy Cost 20%

PV Bankruptcy Cost $109,1

Enterprise Value $843,05

US Treasury Yields

Maturity Yield1 month 0,03%6 months 0,08%

1 year 0,16%3 years 0,33%5 years 0,67%

10 years 1,60%30 years 2,65%

Credit Rating

AAA 2,35%

AA 2,45%

A 2,65%

BBB 3,60%

BB 6,10%

B 7,35%

CCC 10,92%

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BS model inputs:

1. Value of the underlying asset : 8226,8

2. Exercise price : 4849,3

3. Volatility of the underlying asset: 0.2

4. Time of expiration: 24 years

5. Dividend Rate: 4.2 %

6. Adjusted Rate: 8,65%

Regarding the calculation of real options we used the black-scholes model, and assumed

that all REO produced is sold at market prices.

We also assumed the mine will be operating at it’s maximum capacity.

Value of the call option at June

30:

$5164,2

3. Valuation3.2. Real Options Model

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Value of the Company:

APV + Real Options DCF Model

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


Option Value $5164, 18

Value of the company (US$ million)

$5753,31NPV of Molycorp INC. $1 711,77

Vs.

3. Valuation

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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 P/E

Turquoise Hill Resources Ltd 16,9

BHP Billiton PLC 25,2

Hi Crush Partners LP 2,5

Nevsun Resources Ltd 8,9

HudBay Minerals Inc 44,3

peer mean 19,56

peer median 16,9

peer high 44,3

peer low 2,5

P/E

These values are too distant and therefore are not useful

3. Valuation3.3. Multiples

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peer mean

peer median

peer high

peer low

0 1000 2000 3000 4000 5000 6000 7000

Enterprise Value / EBITDA

EV/EBITDA

Enterprise Value/EBITDA Aug 3, 2012peer mean 4,99peer low 1,06peer high 11,1peer median 4,66

Molycorp 2014 EBITDA (year when expansion project is completed)

peer mean 2959,07peer median 2763,38

peer high 6582,3peer low 628,58

3. Valuation3.3. Multiples

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We analyzed one possible scenario of higher costs.

We didn’t choose to analyze price because price fluctuations are already incorporated in real options’ volatility

Scenario 2 : decrease in Metal/Alloys Cost of 55% in 2013 (base scenario – decrease of

60%) and a decrease in REO cost of 70% ( base scenario- decrease of 77%)


Option Value $5 126,20

Value of the company (US$ million) $5 153,89

Sensitivity Analysis

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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Convertible bonds vs. Straight bonds

Convertible Bond Straight BondFace Value 1000 1000Annual Coupon Rate 0,06 0,1Years to Maturity 5 5Payment Frequency 2 2Value of Bond 1206,68296 975,7774532Yield To Maturity 1,67% 10,64%

4. Decisions about MolycorpWhich sources of funding should they use?

First we calculated the amount of debt necessary for the project’s 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 $300M2. Convertible Debt: up to $350M3. Straight Debt: up to $350M

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Moly Corp Valuation Study Case

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