Molycorp: Financing the Production of Rare Earth Minerals (A)

Posted: 2 Jul 2014

See all articles by Benjamin Esty

Benjamin Esty

Harvard Business School

Scott E. Mayfield

Harvard Business School

Date Written: June 8, 2014

Abstract

Molycorp, the western hemisphere's only producer of rare earth minerals, was in the middle of a $1 billion capital expenditure project in its effort to become a vertically integrated supplier of rare earth minerals, oxides, and metals. Yet it had just reported lower than expected revenues and earnings for the second quarter of 2012. In response to the announcement, its stock price fell 29% (its stock price had fallen from $77 to $11 in the past 18 months). The weakening financial performance was due in large part to falling prices for rare earth minerals. With less internally-generated cash flow available to fund the project, management had to decide: how much capital to raise, what kind to raise, and when to raise it. These decisions would determine its capital structure, at least in the short term, as well as its ability to implement its business strategy.

This case can be used as a comprehensive review for both introductory and advanced corporate finance courses. It covers a variety of topics including capital structure, DCF valuation, security issuance, debt pricing, option pricing, payoff diagrams, and sources & uses of cash, and does so in a very interesting setting. The demand for rare earth minerals is rising dramatically due to their unique electrical, mechanical, and magnetic properties while supply is influenced by a variety of economic and political factors (e.g., global trade, Chinese export quotas, new mines, conservation, and speculation). The case also highlights the relationship between the firm's business and its financing strategies, and challenges students to design a financing strategy that enables the firm to implement its business strategy while not exposing it to excessive financial risk.

This case is part of a 3-case series. The A case analyzes the firm's financing options. The B case explores the firm's chosen financing strategy which involved lending shares to potential short sellers as a way to fasciliate raising capital. The C case analyzes a structured product known as a "reverse convertible note" (RCN) that used Molycorp as the reference asset for an equity-linked note.

Keywords: financial strategy, convertible debt, capital structure, valuation, discounted cash flow, payoff diagrams, option pricing

JEL Classification: G03

Suggested Citation

Esty, Benjamin C. and Mayfield, Scott E., Molycorp: Financing the Production of Rare Earth Minerals (A) (June 8, 2014). HBS Case No. 214054, Available at SSRN: https://ssrn.com/abstract=2461307

Benjamin C. Esty (Contact Author)

Harvard Business School ( email )

Boston, MA 02163
United States

Scott E. Mayfield

Harvard Business School ( email )

Soldiers Field
387 Morgan Hall
Boston, MA 02163
United States
617-495-7898 (Phone)
617-496-7357 (Fax)

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