Monday, June 13, 2011

Molycorp Final Prospectus and Some Thoughts on the Insiders Selling (MCP)

The stock is down $4.84 at $46.65. After the issue was priced I said the stock was a buy at $51.42.
Not my timeliest call.
Here's the final prospectus in a 424B filing with the SEC.
Last Wednesday Creamer's Mining Weekly had an article that caught my attention:
Molycorp insider share dump 'abandonment' - analyst 
Insiders selling up to 24% of Molycorp’s outstanding shares is “an abandonment” of the company, and could signal the stock has peaked, an analyst said on Wednesday.

While it could be argued that the core shareholders bought into the company at far lower pricers and are cashing out to diversify their investments, “this isn’t diversification, this is an abandonment”, Byron Capital Markets analyst Jon Hykawy told Mining Weekly Online.

Last month, Molycorp, refurbishing and expanding the shuttered Mountain Pass rare earths mine in California, announced that certain core shareholders were selling up to 11.5-million shares, equal to about 12% of the company.

On Tuesday, the company said insiders were selling another equal amount of shares, bringing the total to up to 24% of outstanding shares.

“One of the touchstones of investing is to watch what the insiders are doing,” said Hykawy, addind that the dumping of shares by Molycorp’s core investors could signal that they view that prices for the products that the company produces will decline significantly once its expansion is complete and Australia’s Lynas Corp comes into production....MORE
The analyst either double counted the 11.5 mil. or got the dates wrong and conflated the February 2011 offering of 13.5 million shares. That's just sloppy.

More important is understanding the motivation of the sellers. These folks are not some hardscrabble miners who spent a lifetime prospecting for the motherlode.
To paraphrase one of my all-time favorite Barron's headlines:
Better Get The Leg Irons Boys.
These Ain't Regular Criminals,
These is Private Equity.
(the original miscreants were 'Stockbrokers')

If the IPO market had been stronger at the time MCP came public these share would have come out like any other P.E. deal. Instead my headline was:
Rare Earth Metals: Molycorp IPO Very Weak (MCP)
The underwriters knew they were selling into a poor IPO market and peddled as much stock as the market would take. Here's Bloomberg:

Molycorp, Envestnet Slash IPOs, SurgiVision Postpones
Molycorp Inc., owner of the world’s largest non-Chinese deposit of rare-earth metals, and Internet investment-services provider Envestnet Inc. priced initial public offerings after reducing their size, while two other companies delayed or postponed sales.

Molycorp fell as much as 14 percent and traded at $12.42 as of 12:10 p.m. in New York. The company sold 28.13 million shares at $14 after its underwriters failed to attract enough buyers at $15 to $17 apiece....
An understanding of the selling shareholders' mentality could be gleaned from our January 2011 post:
UPDATED-Rare Earth: "Molycorp Looks Like One Of The Greatest Private Equity Deals Ever" (MCP):
We last visited Resource Capital in November* with MCP at $35.99. Today it is changing hands at $52.70, down 54 cents on the day.
From Forbes' The Jungle blog:
Move over billionaires Stephen Schwarzman and David Rubenstein. Eat your heart out Goldman Sachs. One of the greatest private equity deals going, Molycorp, belongs to a little-known private equity firm based far from Wall Street. Resource Capital Funds is headquartered in Denver. Its chief and co-founder, James McClements, actually lives in Australia.

Resource Capital has not realized a penny from its investment in Molycorp, which aims to produce rare earth minerals at a previously shuttered mine in Mountain Pass, Calif. But on paper the investment is staggering. In the last two years, Resource Capital has invested $110 million in Molycorp. At Molycorp’s recent share price that investment is now worth $1.5 billion. In the private equity business, that doesn’t happen very often, especially with figures as big as these. By comparison, one of the most legendary private equity deals ever saw Thomas H. Lee buy Snapple for $135 million in 1992 and sell it two years later to Quaker Oats for $1.7 billion, reportedly making $900 million on the investment.

Resource Capital still needs to execute the selling part of this equation while keeping Molycorp successful, a detail not lost on Ross Bhappu, the Resource Capital partner who put the investment together and is the chairman of Molycorp. “We don’t want to count our chickens before they hatch,” says Bhappu. “It would be hard not to be excited about it, everybody is really pleased about the performance of Molycorp and that is shared around the office and our (investors) are also equally very happy and we get calls about it from them all the time.”...
The earlier post was: "The Money Man Behind America’s Rare Earth Minerals" (MCP)

And for those who care about such things we included a link to a piece of real analysis:

UPDATED: Rare Earth Mania: What the Heck is Molycorp Worth? (MCP; SHZ; REE; AVL)

Over the years I've found that it helps to know what you're talking about.