Rare-Earth Bust Prompts Molycorp’s Biggest Bet With Neo Material: Real M&A
By Tara Lachapelle - Mar 8, 2012 11:11 PM ET .LinkedIn Google +1 0 Comments
Print QUEUEQ..Molycorp Inc. (MCP), after losing two- thirds of its value in 10 months as demand for rare-earth metals imploded, is now seeking to boost shareholder returns with its biggest takeover yet.
The owner of the largest rare-earth deposit outside China yesterday agreed to buy Neo Material Technologies Inc. for C$1.3 billion ($1.3 billion) in cash and stock. At 4.7 times earnings before interest, taxes, depreciation and amortization, the deal is the cheapest by a diversified metals producer on record, according to data compiled by Bloomberg. Molycorp’s stock rose in extended trading after the announcement.
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Molycorp Inc. CEO Mark Smith Scott Eells/Bloomberg
Mark Smith, chief executive officer of Molycorp Inc., said the acquisition “puts the upstream and the downstream together in a very significant way.”
Mark Smith, chief executive officer of Molycorp Inc., said the acquisition “puts the upstream and the downstream together in a very significant way.” Photographer: Scott Eells/Bloomberg
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Rare-Earth Bust Spurs Molycorp’s Biggest Takeover Bet Jacob Kepler/Bloomberg
The open pit mine at Molycorp Inc.'s rare earths mining and processing facility stands in Mountain Pass, California, U.S.
The open pit mine at Molycorp Inc.'s rare earths mining and processing facility stands in Mountain Pass, California, U.S. Photographer: Jacob Kepler/Bloomberg
.While Molycorp is opening a rare-earth mine in the Mojave Desert to compete with Chinese producers that control more than 90 percent of global supplies, shareholders have lost money since it reached an all-time high in May as prices plummeted for the elements used in hybrid cars, fluorescent bulbs and guided missiles. With Neo Material (NEM), Molycorp will gain the ability to produce more types of magnets and increase sales to China, boosting profitability, Byron Capital Markets Ltd. said.
“It actually makes it a stronger story,” Jonathan Hykawy, a Toronto-based analyst at Byron Capital, said in a telephone interview. “Molycorp effectively has the pieces of the puzzle if this acquisition goes through to basically do the entire magnet industry. That’s a big, big, added slice of added cash flow that Molycorp really isn’t paying all that much for.”
Jim Sims, a spokesman at Molycorp, said in an e-mail that “both sides of the transaction believed that a fair price was achieved. We believe this transaction will provide for growth and increased shareholder value.”
Acquisition Detail
Neo Material will get C$8.05 in cash and 0.122 of a Molycorp share for each Neo Material share held, Greenwood Village, Colorado-based Molycorp said in a statement yesterday.
The offer is equal to C$11.19 a share based on yesterday’s price, and represented a 32 percent premium to Neo Material’s average in the 20 days before the deal was announced.
Relative to Neo Material’s Ebitda, the agreement was struck at a 40 percent discount to the median multiple of 7.8 times for acquisitions of at least $500 million made by diversified metals producers, according to data compiled by Bloomberg.
Molycorp, which owns a 2,222-acre site located 60 miles southwest of Las Vegas that once met almost all of the world’s demand, will get Toronto-based Neo Material’s processing factories. It also will obtain its patented Magnequench range of metal powders used to make neodymium-iron-boron magnets, which can be found in electronic motors and sensors.
Periodic Table
The acquisition “puts the upstream and the downstream together in a very significant way,” Molycorp Chief Executive Officer Mark Smith said in a telephone interview. “This acquisition allows Molycorp to access 100 percent of the demand in the world now.”
The rare-earth elements are 17 chemically similar metals, such as lanthanum, neodymium and dysprosium. They are used in mobile devices, electric cars, wind turbines and targeting systems for tanks. IPads by Apple Inc. (AAPL), Research In Motion Ltd. (RIM)’s BlackBerrys, General Motors Co. (GM)’s plug-in Volt, Raytheon Co.’s Tomahawk cruise missiles, and Toyota Motor Corp.’s Prius all use rare-earth metals.
In 2010, rare-earth prices soared after China, the world’s biggest supplier of the metals, imposed a quota on exports. Many “light” rare-earth elements, including lanthanum and cerium, rose 600 percent to 700 percent on average that year, according to Mackie Research Capital Corp.
Light Versus Heavy
While the surge helped Molycorp jump more than fivefold after its initial public offering in July 2010, the company lost $4 billion in market value in the past 10 months as concern over a global economic slowdown sapped rare-earth demand and caused companies to cut back on components made from the elements.
China shipped only 60 percent of its export quota last year, Commerce Minister Chen Deming said March 7.
While Morgan Stanley anticipates that lower prices will drive a revival in rare-earth demand and benefit producers such as Molycorp, Alpine Mutual Funds’ Brian Hennessey said its greatest need is access to “heavy” rare-earth metals, which command the highest prices.
Lanthanum, cerium, praseodymium and neodymium, the “light” rare earths, accounted for 60 percent of Molycorp’s sales from its mine near Mountain Pass, California, last year.
“I would not be surprised to see them acquire mines to get them into heavy rare earth,” Hennessey, a Purchase, New York- based analyst at Alpine, said yesterday before the deal was announced. “There most likely is going to be a surplus in many of the light rare earths that Molycorp is mining.”
Shareholder Value
Acquiring Neo Material’s processing business can still help boost profit margins and increase the company’s value among investors, according to Byron Capital’s Hykawy.
The $2.2 billion company trades at just 2.8 times analysts’ Ebitda estimates for 2013, data compiled by Bloomberg show. That’s less than 97 percent of metals and mining companies globally with at least $1 billion in market value.
Shares of Molycorp rose 1.6 percent to $26.40 after regular U.S. trading hours.
“There’s been a lot of volatility on the name,” Scott Goginsky, a research analyst and portfolio manager at Milford, Pennsylvania-based Biondo Investment Advisors LLC, which oversees $450 million and owns shares of Molycorp, said in a telephone interview before the deal was announced. “Certainly at this price the stock is really cheap.”
