424B4 1 j78447b4e424b4.htm 424B4 e424b4
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-171827
PROSPECTUS
 
1,800,000 Shares
 
(MOLYCORP, INC. LOGO)
 
Molycorp, Inc.
 
5.50% Series A Mandatory Convertible Preferred Stock
 
 
We are offering 1,800,000 shares of our 5.50% Series A Mandatory Convertible Preferred Stock, $0.001 par value per share, which we refer to in this prospectus as our mandatory convertible preferred stock.
 
Dividends on our mandatory convertible preferred stock will be payable on a cumulative basis when, as and if declared by our Board of Directors, or an authorized committee of our Board of Directors, at an annual rate of 5.50% on the liquidation preference of $100.00 per share. We may pay declared dividends in cash or, subject to certain limitations, in shares of our common stock, par value $0.001 per share, or in any combination of cash and common stock on March 1, June 1, September 1 and December 1 of each year, commencing on June 1, 2011 and to, and including, March 1, 2014.
 
Each share of our mandatory convertible preferred stock will automatically convert on March 1, 2014 into between 1.6667 and 2.0000 shares of our common stock, subject to anti-dilution adjustments. The number of shares of our common stock issuable on conversion will be determined based on the average VWAP (as defined herein) of our common stock over the 20 trading day period ending on, and including, the third trading day prior to the mandatory conversion date. At any time prior to March 1, 2014, holders may elect to convert each share of our mandatory convertible preferred stock into shares of common stock at the minimum conversion rate of 1.6667 shares of common stock per share of mandatory convertible preferred stock, subject to anti-dilution adjustments. If you elect to convert any shares of mandatory convertible preferred stock during a specified period beginning on the effective date of a fundamental change (as described herein), the conversion rate will be adjusted under certain circumstances and you will also be entitled to a fundamental change dividend make-whole amount (as described herein).
 
Concurrently with this offering, selling stockholders are also making a public offering of 13,500,000 shares of our common stock. The common stock will be offered pursuant to a separate prospectus. The public offering price of our common stock is $50.00 per share. In that offering, certain of the selling stockholders have granted the underwriters of that offering an option to purchase up to an additional 2,025,000 shares of common stock to cover over-allotments. The closing of our offering of our mandatory convertible preferred stock is not conditioned upon the closing of the offering of our common stock by the selling stockholders, and the closing of the offering of common stock is not conditioned upon the closing of this offering of our mandatory convertible preferred stock.
 
Prior to this offering, there has been no public market for our mandatory convertible preferred stock. We have applied to list our mandatory convertible preferred stock on the New York Stock Exchange under the symbol “MCP PrA.” Our common stock is listed on the New York Stock Exchange under the symbol “MCP.”
 
Investing in our mandatory convertible preferred stock involves risks. See “Risk Factors” beginning on page 25 of this prospectus.
 
                 
    Per Share   Total
 
Public offering price
  $ 100.00     $ 180,000,000  
Underwriting discounts and commissions
  $ 3.30     $ 5,940,000  
Proceeds, before expenses, to Molycorp, Inc. 
  $ 96.70     $ 174,060,000  
 
 
We have granted the underwriters an option to purchase up to an additional 270,000 shares of mandatory convertible preferred stock to cover over-allotments, if any, at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
The underwriters expect to deliver the shares of our mandatory convertible preferred stock to investors on or about February 16, 2011.
 
J.P. Morgan Morgan Stanley
 
 
Prospectus dated February 10, 2011.


 

 
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We have not, and the underwriters have not, authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We have not, and the underwriters have not, authorized any other person to provide you with different information. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, operating results and prospects may have changed since that date.


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PROSPECTUS SUMMARY
 
This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider before investing in our common stock. You should read this entire prospectus carefully, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our historical consolidated financial statements and related notes included elsewhere in this prospectus. In this prospectus, unless the context requires otherwise, references to “Molycorp,” “we,” “our” or “us” refer to Molycorp, LLC and its consolidated subsidiaries prior to the corporate reorganization (as described below) and Molycorp, Inc. and its consolidated subsidiaries after the corporate reorganization. As used in this prospectus, the term “ton” means a ton (equal to 2,000 pounds), the term “mt” means a metric tonne (equal to 2,205 pounds), the term “IMCOA” means the Industrial Minerals Company of Australia Pty Ltd, a rare-earth market consultant, and the terms “ROW” and “Rest of World” mean the entire world except China. For definitions of certain rare earth-related and mining terms, see “Glossary of Selected Mining Terms.” We provided compensation to IMCOA for industry reports that it prepared for us, although such compensation is not contingent on the success of this offering. Some of the information that we attribute to IMCOA in this prospectus has been derived from those reports. IMCOA data is accurate to within 20% of the stated amounts. IMCOA data takes into account only legal exports of rare earths, and ignores illegal exports from China and usage thereof, which could be significant due to the difficulties with accurately collecting information with respect thereto.
 
Our Business
 
We are the only rare earth oxide, or REO, producer in the Western hemisphere, and we own one of the world’s largest, most fully developed rare earth projects outside of China. Furthermore, following the execution of our “mine-to-magnets” strategy and completion of our initial modernization and expansion plan, we expect to be one of the world’s most integrated producers of rare earth products, including oxides, metals, alloys and magnets. In light of strong industry fundamentals, including reduced Chinese supply and strong pricing increases, our Board of Directors recently approved a second-phase capacity expansion plan in addition to our initial modernization and expansion plan, which we expect to result in the ability to produce approximately double the amount of REO that we will be able to produce upon completion of our initial modernization and expansion plan.
 
Our rare earths are critical inputs in many existing and emerging applications including: clean energy technologies, such as hybrid and electric vehicles and wind power turbines; multiple high-tech uses, including fiber optics, lasers and hard disk drives; numerous defense applications, such as guidance and control systems and global positioning systems; and advanced water treatment technology for use in industrial, military and outdoor recreation applications. Global demand for rare earth elements, or REEs, is projected to steadily increase due to continuing growth in existing applications and increased innovation and development of new end uses. We have made significant investments, and expect to continue to invest, in developing technologically advanced applications and proprietary applications for individual REEs.
 
For the year ended December 31, 2009 and for the nine months ended September 30, 2010, we generated approximately $7.1 million and $13.2 million of revenue, respectively, from sales of products manufactured from stockpiled feedstocks, although these levels of revenue are not representative of our planned level of operations after we complete our initial modernization and expansion plan and capacity expansion plan.
 
Our Mine Process and Development Plans
 
We and SRK Consulting (U.S.), Inc., or SRK Consulting, estimated total proven reserves as of February 6, 2010 of 88.0 million pounds of REO contained in 0.480 million tons of ore, with an average ore grade of 9.38%, and probable reserves of 2.12 billion pounds of REO contained in 13.108 million tons of ore, with an average ore grade of 8.20%, in each case using a cut-off grade of 5.0%, at our Mountain Pass mine. Upon the completion of our initial modernization and expansion plan, which we expect to be completed by the end of 2012, we will have the ability to produce approximately 19,050 mt of REO per year at our Mountain Pass facility. Upon the completion of our recently approved capacity expansion plan, by the end of 2013, we expect to have the ability to produce up to approximately 40,000 mt of REO per year at our Mountain Pass facility, or approximately double the amount we will be able to produce upon completion of our initial plan. Based on our estimated reserves and an expected annual production rate of approximately 19,050 mt of REO under our initial modernization and expansion plan, our expected mine life is in excess of 30 years (SRK Consulting has preliminarily indicated, however, that


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doubling the amount of production pursuant to the second-phase capacity expansion plan would reduce the current mine life by half, assuming no additional exploration, no realization of anticipated improvements in recoveries, and all other factors remain constant.) According to Roskill Consulting Group Limited, or Roskill, global REO production in 2008 was approximately 129,000 mt, of which only approximately 4,220 mt originated from outside of China, with Molycorp producing approximately 1,700 mt from its stockpiles and Russian producers producing approximately 2,500 mt. This contrasts with total demand outside of China in 2008 of approximately 56,000 mt, according to IMCOA, with rapid growth expected by industry analysts.
 
Mine-to-Oxides
 
At our Mountain Pass facility, we have the ability to mine, crush, mill and separate rare earth ore to produce individual REEs. We hold a mine plan permit and an associated environmental impact report, which currently allow continued operations of our Mountain Pass facility through 2034 and which we expect will be extended to allow continued operations through 2042. Since our acquisition of the Mountain Pass facility, we have been producing and selling REOs from stockpiled feedstocks to significantly improve our solvent extraction technologies and capabilities. We are now achieving greater than 98% recovery in our solvent extraction units at commercial scale for cerium, lanthanum and didymium, which we believe is one of the highest recovery rates in the world. We have also developed the expertise to produce the following REEs in many usable forms: bastnasite concentrate; cerium; lanthanum; neodymium; praseodymium; europium; samarium; gadolinium; dysprosium; and terbium. When used to describe the current recovery rate for our solvent extraction units, the term “commercial scale” means that the solvent extraction units are operating at such a production rate that the scale-up factor required to achieve the desired production rate is less than 10 times the current production rate.
 
Processing at our Mountain Pass facility entails mining the bastnasite ore followed by crushing and milling it to a fine powder. Milled bastnasite ore is then processed by flotation whereby the bastnasite, which is a mineral containing light and heavy rare earth elements, floats to the surface and is separated from the waste material, which sinks in a series of flotation cells. The resultant bastnasite concentrate is then processed by leaching with strong acid solutions followed by a series of solvent-extraction separation steps that produce various individual REO minerals, generally in a high purity (greater than 99%) oxide form. In the second quarter of 2010, we began processing bastnasite concentrate from our stockpiles in an effort to commercially demonstrate our new cracking technology while at the same time continue to further optimize our processing technologies and improve recovery rates compared to historical operations at the Mountain Pass facility.
 
(LINE GRAPH)
 
We recommenced mining operations in December 2010 and are preparing to recommence milling operations, which we expect to occur in the first quarter of 2012. Recommencement of mining and milling operations is coincident with our initial modernization and expansion plan, which will give us the capacity to efficiently produce at a rate of approximately 19,050 mt of REO per year by the end of 2012. Additionally, upon the completion of our capacity expansion plan, we expect to have the ability to produce up to approximately 40,000 mt of REO per year by the end of 2013. In an April 2010 briefing to the U.S. Government Accountability Office, or U.S. GAO, titled “Rare Earth Materials in the Defense Supply Chain,” which was prepared in accordance with the National Defense Reauthorization Act for Fiscal Year 2010 (Pub. L. No. 111-84), government and industry officials stated that for a typical exploration-stage mine, once a company has secured the necessary capital to start a mine, it can take from seven to 15 years to bring a property fully online, largely due to the time it takes to comply with multiple state and federal regulations. Since our Mountain Pass facility is not an early stage rare earth project, we believe we have a significant timeline advantage as we have a well-defined ore body, an existing open pit with over 50 years of production


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history, an existing mine and reclamation plan, proven reserves, substantial permitting, and all necessary technology to successfully process and separate the rare earth elements at a commercial scale.
 
Oxides-To-Metals/Alloys
 
We expect to sell and transport a portion of the REOs we produce to customers for use in their particular applications. The remainder of the REOs will be processed into rare earth metals. A portion of these metals will be sold to end-users and we expect to process the rest into rare earth alloys. These rare earth alloys can be used in a variety of applications, including but not limited to: electrodes for nickel metal hydride, or NiMH, battery production; samarium cobalt magnet production; and neodymium iron boron, or NdFeB, magnet production. A portion of these rare earth alloys will be manufactured into NdFeB magnets as part of our alloy and magnet production joint ventures, described below, and we expect to sell the rest to end-users.
 
Our modernization and expansion plans envision adding facilities and equipment for metal conversion and alloy production at the Mountain Pass facility or an off-site property. If we are able to add an off-site facility to produce rare earth metals and alloys instead of adding such facilities and equipment at Mountain Pass, we would transport cerium, lanthanum, neodymium, praseodymium, dysprosium, terbium and samarium oxide products from our Mountain Pass facility to that off-site location to produce rare earth metals and alloys. In December 2010, we entered into a non-binding letter of intent with Hitachi Metals, Ltd., or Hitachi, a leading manufacturer of NdFeB alloys and magnets, to form joint ventures for the production of rare earth alloys and magnets in the United States. Additionally, we have entered into a non-binding letter of intent with Neo Material Technologies Inc., or Neo Material, that, among other things, contemplates a technology transfer agreement pursuant to which Neo Material may provide us with technical assistance and know-how with respect to the production of rare earth metals, alloys and magnets.
 
Alloy and Magnet Production Joint Ventures
 
NdFeB magnets, which are critical components in “green” technologies and the miniaturization of electronics, are primarily manufactured in China (approximately 80%) and Japan (approximately 20%). Our proposed joint ventures with Hitachi would provide us with access to the technology, people and facilities to convert our rare earth materials into rare earth alloys and high-performance permanent rare earth magnets required for production of hybrid and electric vehicles, wind power turbines, high-tech applications and numerous advanced defense systems on which the U.S. economy and national security depend. The consummation of such joint ventures, in conjunction with our current modernization plans and the potential technology transfer agreement with Neo Material, is expected to provide us with the capability to mine, process, separate and alloy individual REEs and manufacture them into NdFeB magnets. This downstream integration, which we refer to as our “mine-to-magnets” strategy, would make us the only fully integrated producer of NdFeB magnets outside of China, helping to secure a rare earth supply chain for the Rest of World. In addition to the foregoing, we continue to explore additional joint ventures or other arrangements with third parties for the production of NdFeB alloys and/or magnets.
 
Rare earth “mine-to-magnets” production supply chain
 
(LINE GRAPH)
 
Industry Overview
 
The REE group includes 17 elements, namely the 15 lanthanide elements, which are cerium, lanthanum, neodymium, praseodymium, promethium (which does not occur naturally), samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium and lutetium, and two elements that have similar chemical properties to the lanthanide elements — yttrium and scandium. The oxides produced from processing REEs are collectively referred to as REOs. Light and heavy REEs are contained in all rare earth deposits,


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including in our deposit at Mountain Pass. Heavy REEs generally command higher sales prices on a per pound basis than light REEs because heavy REEs are not as prevalent. Cerium, lanthanum, neodymium, praseodymium and samarium are considered “light REEs” that are more predominant in bastnasite, while europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium and lutetium are considered “heavy REEs” that are more predominant in monazite. Our reserves are bastnasite, but there are also known monazite occurrences on our property that we are currently examining.
 
REEs have unique properties that make them critical materials to many existing applications upon which society has become dependent as well as many emerging applications. Examples include:
 
    Clean-Energy Technologies: hybrid and electric vehicles, wind power turbines and compact fluorescent lighting;
 
  •  High-Technology Applications: miniaturization of cell phones, personal digital assistant devices, digital music players, hard disk drives used in computers, computing devices, “ear bud” speakers and microphones, as well as fiber optics, lasers and optical temperature sensors;
 
  •  Critical Defense Applications: guidance and control systems, communications, global positioning systems, radar and sonar; and
 
  •  Advanced Water Treatment: industrial, military, homeland security and domestic and foreign aid applications.
 
Global consumption of REEs is projected to steadily increase due to continuing growth in existing applications and increased innovation and development of new end uses. For example, the integration of rare earth permanent magnet drives into wind power turbines has substantially reduced the need for gearboxes, which increases overall efficiency and reliability. According to IMCOA, total demand for rare earths outside of China is expected to increase at a compound annual growth rate, or CAGR, of approximately 7% between 2010 and 2015. In addition, according to IMCOA, global demand for rare earths used in magnets is expected to grow at a CAGR of approximately 13% over the same period. IMCOA estimates that total global demand for rare earths is expected to increase from 125,000 mt in 2010 to 185,000 mt in 2015, which results in a CAGR of approximately 8% for that period.
 
China has dominated the global supply of REOs for the last ten years and, according to IMCOA, accounted for approximately 96% of global REO production in 2008. Even with our planned production, global supply is expected by analysts to remain tight due to the combined effects of growing demand and actions taken by the Chinese government to restrict exports. The Chinese government heightened international supply concerns beginning in August 2009 when China’s Interior Ministry first signaled that it would further restrict exports of Chinese rare earth resources. Citing the importance of REE availability to internal industries and the desire to conserve resources, the Chinese government has announced export quotas, increased export tariffs and introduced a “mining quotas policy” that, in addition to imposing export quotas and export tariffs, also imposes production quotas and limits the issuance of new licenses for rare earth exploration. According to IMCOA, China’s export quotas have decreased from approximately 65,600 mt of REO in 2004 to approximately 50,000 mt of REO in 2009. In 2008, according to IMCOA, China imposed export taxes of up to 25% on selected REOs (primarily heavy REOs) and up to 15% for all other REOs (primarily light REOs). In addition, according to IMCOA, China’s Ministry of Industry and Information Technology issued a plan in 2009 to reduce the production of separated rare earths by 7% to 110,700 mt of REO in 2009. China’s internal consumption of rare earths is expected to continue to grow, leaving the Rest of World with less supply during a period of projected increasing global demand. China also dominates the manufacture of rare earth metals, producing substantially all of the world’s supply, and the manufacture of NdFeB magnets, producing approximately 80% of the world’s supply. Neither capability currently exists in the United States, as confirmed by the April 2010 U.S. GAO briefing.
 
China has announced a national stockpile program, as has South Korea. Additionally, Japan has increased its national stockpile program. In December 2010, the U.S. Department of Energy released a study concluding that five rare earth metals, dysprosium, neodymium, terbium, europium and yttrium, are critical to clean energy technologies in the short term and medium term due to their importance to the clean energy economy and risk of supply disruption. The report emphasizes that diversified global supply chains for these critical


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materials are essential, and calls for steps to be taken to facilitate extraction, processing and manufacturing in the United States. Additionally, the U.S. Department of Defense is conducting a study to determine its rare earth requirements and supply chain vulnerabilities and whether to build a strategic stockpile. These stockpile programs will likely accelerate the pace of the current and projected global REE supply deficit.
 
According to the April 2010 U.S. GAO briefing:
 
  •  the Mountain Pass mine is the largest non-Chinese rare earth deposit in the world;
 
  •  other U.S. rare earth deposits exist, but these deposits are still in early exploratory stages of development;
 
  •  officials emphasized the significance of the widespread use of commercial-off-the-shelf products in defense systems that include rare earth materials, such as computer hard drives;
 
  •  heavy REEs, such as dysprosium, which provide much of the heat-resistant qualities of permanent magnets used in many industry and defense applications, are considered to be important;
 
  •  government and industry officials told the U.S. GAO that where rare earth materials are used in defense systems, the materials are responsible for the functionality of the component and would be difficult to replace without losing performance;
 
  •  a 2009 National Defense Stockpile configuration report identified lanthanum, cerium, europium and gadolinium as having already caused some kind of weapon system production delay and recommended further study to determine the severity of the delays; and
 
  •  defense systems will likely continue to depend on rare earth materials, based on their life cycles and lack of effective substitutes.
 
The forecasted demand by IMCOA set forth in the graph below assumes Mountain Pass and other rare earth projects commence production and account for a significant portion of the forecasted increase in supply. If these projects do not commence production when anticipated, there will be a gap between forecasted demand and forecasted supply. IMCOA expects that this anticipated market dynamic will underpin continued strong pricing.
 
Global Rare Earths Supply & Demand, 2005-2020 (mt REO)
 
(LINE GRAPH)
 
Source: IMCOA (January 2011)(1)
 
(1) Does not reflect our potential to increase production to 40,000 mt of REO per year following the completion of our capacity expansion plan, but instead reflects our production of 19,050 mt of REO per year beginning in 2013.
 
As a result of the global economic crisis, rare earth product prices declined by approximately 50% during 2008 and through the third quarter of 2009. According to Metal-Pages, from October 2009 through December


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2010, prices for rare earths have risen by approximately 780% on average. Furthermore, over the same period, prices for some of the most common rare earths (cerium oxide, lanthanum oxide, neodymium oxide, and rare earth carbonate) have risen by more than 1000% on average.
 
Recent Developments
 
Decision to Double Original Planned Production Capacity
 
We recommenced mining operations in December 2010 and are preparing to recommence milling operations, which we expect to occur in the first quarter of 2012. As of December 2010, we have secured all permits necessary to allow construction to start on the initial modernization and expansion plan. We have also entered into a number of construction contracts associated with our initial modernization and expansion plan.
 
In light of strong industry fundamentals, including reduced Chinese supply and strong pricing increases, our Board of Directors recently approved a second-phase capacity expansion plan in addition to our initial modernization and expansion plan. Upon the completion of this capacity expansion plan, by the end of 2013, we expect to have the ability to produce up to approximately 40,000 mt of REO per year at our Mountain Pass facility, or approximately double the amount we will be able to produce upon completion of our initial plan. Although our production capacity is expected to reach 40,000 mt of REO per year if our capacity expansion plan is successfully completed, we intend to sell our products into the market at a rate commensurate with customer and/or demand growth.
 
We will commence work on this second phase as we are working on our initial plan. In certain cases, we will not need to add additional equipment in connection with the second phase to provide additional capacity, including milling, but in other cases, including separations and power, we will need to install additional capacity. We do not believe we will need to obtain additional permits, other than air and building permits. We do not expect that work on the second phase will delay completion of our initial modernization and expansion plan, and we continue to expect completion of our initial plan pursuant to our current schedule, subject to obtaining full funding. We have estimated, based on consultation with our project manager, that we will incur approximately $250 million in additional capital costs in connection with the capital expansion plan beyond those budgeted for our initial plan. However, this estimate has not been independently reviewed, and actual costs could vary significantly. We will need to obtain additional funding for such plan. Because we will begin expenditures on the second phase before completion of the initial plan, any funding insufficiency for the second phase could also impact completion of our initial plan. See “Risk Factors — Risks Related to Our Business — We may be unsuccessful in raising the necessary capital to execute our current business plan.”
 
We have not yet performed a detailed study of expected operating costs for this proposed second phase, and we have not yet commissioned SRK Consulting or any other expert to prepare an external model or study of operating costs. We have not identified any reason to believe that there will be any per unit increase in operating costs under our capacity expansion plan as compared to our initial modernization and expansion plan (assuming we are able to sell all of our capacity), and in fact believe we will realize some decrease in per unit production costs due to economies of scale associated with the increased production rate. However, we cannot provide any assurances as to the actual operating costs, and such costs could be higher. For our internal analyses to model the viability of our capacity expansion plan, we have conservatively assumed operating costs higher than those projected by SRK Consulting for our initial plan. We have also not secured off-take commitments for the incremental production from this second phase and cannot assure you that we will secure such commitments.
 
Rare Earths Export Limitation Actions by China
 
On July 8, 2010, China’s Ministry of Industry and Information Technology issued the export quota for the second half of 2010, which reduced rare earth exports by 72% compared with the same period in 2009 and 40% for the year ended December 31, 2010 as compared to the year ended December 31, 2009.
 
Subsequently, on December 28, 2010, China announced it would further reduce export quotas of rare earth minerals by 35% for the first half of 2011 versus the first half of 2010. The Chinese government cited the desire to preserve China’s supply reserves and ensure it would meet trade requirements to Europe in 2011. Although no


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export quotas have been announced for the second half of 2011, we anticipate the total 2011 quota to be down significantly from 2010. With anticipated total consumption of rare earths outside China of 58,000 mt, the estimated 2011 quota of 28,000 mt falls significantly short of Rest of World demand, according to IMCOA.
 
The combined impact of these quota announcements, coupled with growing demand across end-use applications for rare earths, has resulted in significant price increases for sales of rare earth oxides, metals and alloys, as summarized in the table below:
 
                                         
Pricing (US/kg)  
    3-Year Average     March 2010(1)     June 2010(2)     Jan. 2011(3)     % change(5)  
 
Oxides
                                       
Lanthanum oxide
  $ 6.05     $ 6.60     $ 8.40     $ 62.00       839 %
Cerium
                                       
Oxide (glass applications)
  $ 4.03     $ 4.09     $ 6.50     $ 67.00       1,538 %
Oxide (water filters)
        $ 13.20                    
XSORBX®
        $ 9.90                    
Europium oxide
  $ 442.07     $ 473.00     $ 525.00     $ 630.00       33 %
Metals
                                       
Lanthanum
  $ 10.01     $ 13.20     $ 12.80     $ 65.50       396 %
Praseodymium
  $ 32.12     $ 37.99     $ 43.00     $ 137.50       262 %
Neodymium
  $ 32.41     $ 37.99     $ 43.00     $ 137.50       262 %
Alloy products
                                       
NdFeB alloy
        $ 35.20     $ 42.94     $ 84.37 (4)     140 %
SmCo alloy
        $ 50.60     $ 54.14     $ 69.36 (4)     37 %
 
 
(1) Estimates used for SRK Consulting engineering study
 
(2) As of June 29, 2010; Metal-Pages.com
 
(3) As of January 27, 2011; Metal-Pages.com
 
(4) Molycorp estimates
 
(5) From March 2010 to January 2011
 
Note: 3-year average refers to Metal-Pages oxide and metal prices averaged from May 2007 — May 2010, FOB China
 
Sumitomo Investment
 
On December 10, 2010, we entered into a memorandum of understanding with Sumitomo Corporation, or Sumitomo. If we execute the definitive agreements contemplated by the memorandum of understanding, we expect to, among other things, provide Sumitomo with approximately 1,500 mt per year (and following completion of our initial modernization and expansion plan, approximately 1,750 mt per year) of cerium and lanthanum-based products and 250 mt per year of didymium oxide for a period ending five years after the completion of our initial modernization and expansion plan, at market-based prices subject to a floor.
 
Pursuant to the transactions contemplated by the memorandum of understanding, Sumitomo will purchase $100 million of our common stock at a value based on a volume weighted average price for the 20 trading day period prior to closing and arrange for a $30 million debt financing at a low interest rate. Sumitomo is seeking financial support from the Japan Oil, Gas and Metals National Corporation (JOGMEC), a Japanese government entity, in connection with this effort. The transactions contemplated by the memorandum of understanding are subject to finalization of definitive agreements and various approvals, and the financing transactions are expected to close near the end of the first quarter of 2011. There is no assurance that these agreements will be finalized and that these transactions will be consummated.


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Hitachi Metals Joint Venture
 
On December 21, 2010, we announced the intent to establish joint ventures with Hitachi Metals for its NdFeB magnets and alloys. These joint ventures would provide us with access to intellectual property needed to implement our “mine-to-magnets” strategy. We expect to sign definitive agreements, which will be subject to the satisfaction of certain conditions, for the alloy joint venture by early April 2011. Signing of definitive agreements, subject to the satisfactory conclusion of the feasibility study and other conditions, for the joint venture to produce rare earth magnets would follow later in 2011. There is no assurance that these joint ventures will be established.
 
W.R. Grace Agreement
 
In November 2010, we entered into a contract to supply W. R. Grace & Co., or Grace, with a significant amount of REOs, primarily lanthanum oxide, through mid-2012 at market-based prices subject to a ceiling based on market prices at June 1, 2010, and a floor. We also entered into a second contract to supply Grace with up to 75 percent of our lanthanum product production per year (based on our initial planned capacity) at market-based prices subject to a floor for a three-year period commencing upon the achievement of expected annual production rates under our initial modernization and expansion plan, which may be extended at Grace’s option for an additional three-year period.
 
Commencement of Sales of XSORBX®
 
We commenced sales of XSORBX® in the third quarter of 2010. XSORBX® is a proprietary product and process, primarily consisting of cerium, that removes arsenic and other heavy metals from industrial processing streams and will allow our customers to more safely sequester arsenic and increase their production. XSORBX® is protected by over 100 issued and pending U.S. and foreign patents and patent applications. We have begun to sell XSORBX® for commercial use in the wastewater, recreation, pool and spa, industrial process and other water treatment markets.
 
Our Strengths
 
We believe that we possess a number of competitive strengths that position the Mountain Pass facility to regain its role as one of the leading global suppliers of REOs.
 
We have a proven source of REOs with high-grade ore and long reserve life.
 
Prior to the end of the last mining campaign at the Mountain Pass facility in 2002, the mine had been in continuous operation for over 50 years. Since our acquisition of the Mountain Pass facility, we have been processing stockpiled feedstocks as part of our ongoing effort to significantly improve our solvent extraction technologies and other processing capabilities. Today, based on estimated total proven reserves of 88.0 million pounds of REO contained in 0.480 million tons of ore, with an average ore grade of 9.38%, and probable reserves of 2.12 billion pounds of REO contained in 13.108 million tons of ore, with an average ore grade of 8.20%, in each case using a cut-off grade of 5.0%, the Mountain Pass mine has a life in excess of 30 years at an annual production rate of approximately 19,050 mt of REO. Our leadership team is committed to the continuous and sustainable manufacture of rare earth products at the Mountain Pass facility using advanced milling and processing technologies that will significantly increase the life of the known ore body at the Mountain Pass facility. Additionally, in 2010, we expanded our on-site exploratory drilling program to confirm the existence and extent of bastnasite, monazite and other rare earth phosphate mineral occurrences in unexplored areas of the Mountain Pass facility. This program will also help to establish whether our measured, indicated and inferred resources can become proven or probable reserves.
 
We expect to be well-positioned to capitalize on the tightening balance of global supply and demand of rare earth products.
 
As worldwide demand for rare earth products increases, the supply of REOs remains limited by available production capacity, which is currently concentrated in China. According to IMCOA, China accounted for


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approximately 96% of global REO production in 2008. China also dominates the manufacture of metals and NdFeB magnets from rare earths, capabilities that are not currently found in the United States.
 
Chinese government policies will also impact the supply and demand of REOs and rare earth products. We believe that the Chinese government intends to increase wind generated power to at least 150 gigawatts by 2020. The Chinese government has proposed a package of over $29 billion to fund hybrid and electric vehicle production, placing additional strain on the REE supply chain. Citing the importance of REE availability to internal industries and the desire to conserve resources, the Chinese government has also announced export quotas, increased export tariffs and introduced a “mining quotas policy” that, in addition to imposing export quotas and export tariffs, also imposes production quotas and limits the issuance of new licenses for rare earth exploration.
 
According to IMCOA, China’s export quotas have decreased from approximately 65,600 mt of REO in 2004 to approximately 50,000 mt of REO in 2009. On July 8, 2010, China’s Ministry of Industry and Information Technology issued the export quota for the second half of 2010, which reduced exports by 72% compared with the second half of 2009 and 40% for the year ended December 31, 2010 as compared to the year ended December 31, 2009. On December 28, 2010, China’s Ministry of Industry and Information Technology further reduced the export quota for the first half of 2011, reducing exports by 35% compared with the first half of 2010 and 20% for the twelve months ended June 30, 2011 as compared to the twelve months ended June 30, 2010. In 2008, according to IMCOA, China imposed export taxes of up to 25% on selected REOs (primarily heavy REOs) and up to 15% for all other REOs (primarily light REOs). In addition, according to IMCOA, China’s Ministry of Industry and Information Technology issued a plan in 2009 to reduce the production of separated rare earths by 7% to 110,700 mt of REO in 2009.
 
IMCOA estimates there is a currently a global deficit in REO supply, which anticipated to continue without the advent of production from new projects, such as Mountain Pass. Limits on rare earth exports from China and the lack of available substitutes make the development of new sources of REEs essential to meet the growing demand for existing and emerging technologies, such as hybrid and electric vehicles, wind power turbines, compact fluorescent light bulbs, hard disk drives and dual use electronics.
 
China has announced a national stockpile program, as has South Korea. Additionally, Japan has increased its national stockpile program. In December 2010, the U.S. Department of Energy released a study concluding that five rare earth metals, dysprosium, neodymium, terbium, europium and yttrium, are critical to clean energy technologies in the short term and medium term due to their importance to the clean energy economy and risk of supply disruption. The report emphasizes that diversified global supply chains for these critical materials are essential, and calls for steps to be taken to facilitate extraction, processing and manufacturing in the United States. Additionally, the U.S. Department of Defense is conducting a study to determine its rare earth requirements and supply chain vulnerabilities and whether to build a strategic stockpile. These stockpile programs will likely accelerate the pace of the current and projected global REE supply deficit.
 
U.S. federal government investments and policies may materially increase end-market demand for our rare earth products. For example, the U.S. federal government approved $45 billion in grant funding and loan guarantees directed toward wind power generation projects and hybrid and electric vehicles. Pending energy legislation may also increase demand for clean technology applications, which use rare earth products.
 
Upon reaching a full planned production rate of approximately 19,050 mt of REO per year by the end of 2012 under our initial modernization and expansion plan, we expect to be in a position to supply a substantial portion of the U.S. demand and also sell to export markets. In addition, under our capacity expansion plan, we expect to have the ability to produce up to approximately 40,000 mt of REO per year by the end of 2013.
 
We have a highly experienced and qualified management team.
 
Our President and Chief Executive Officer has over 29 years of experience, over 24 of which are associated with the Mountain Pass facility. In addition, our Chief Technology Officer, General Counsel and Chief Financial Officer have over 75 years of combined technical, operational, legal, financial and management experience. Many of our key employees have worked with the Mountain Pass facility for over


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20 years each. We also have a proven technology and product development group and as of February 3, 2011, held 73 issued and pending U.S. patents and patent applications, and 173 issued and pending foreign patents and patent applications. Management has also created a work environment that prioritizes safety. Since July 2005, the Mountain Pass facility has not had a lost-time accident and has received the coveted “Sentinels of Safety” award from the Mine Safety and Health Administration, or MSHA, for three of the last six years.
 
Our Business Strategy
 
Our business strategy is to:
 
Build the largest, most advanced and efficient fully integrated REO processing facility in the world.
 
We intend to replace existing equipment at the Mountain Pass facility in connection with our modernization and expansion efforts. We also intend to build the largest, most advanced and efficient fully integrated REO processing facility in the world to support our anticipated production requirements. Following the purchase, delivery, installation and start-up of new equipment, our fully integrated facility will allow us to reach full production, utilizing our newly optimized and commercially proven REO processing operations. Additionally, we expect that our proprietary production technology and our planned new paste tailings operation will reduce our environmental footprint and set the standard in the industry for environmental stewardship.
 
Successfully complete modernization and expansion efforts and reach full planned production rates for REOs at the Mountain Pass facility.
 
After reaching full planned production rates for REOs at the Mountain Pass facility under our initial modernization and expansion plan, we expect to produce approximately 19,050 mt of REO per year by the end of 2012. Additionally, under our capacity expansion plan, we expect to have the ability to produce up to approximately 40,000 mt of REO per year by the end of 2013. We operate the Mountain Pass facility pursuant to a conditional use permit that allows us to feed ore to the mill at a rate of 2,400 tons per day. While the Mountain Pass facility historically required 2,000 tons of mill feed per day to manufacture approximately 19,050 mt of REO per year, we expect that new proprietary technologies we developed will allow us to extract the same 19,050 mt of REO per year while only using approximately 1,100 to 1,200 tons of mill feed per day, thus allowing us to increase annual REO production from our initial plan of 19,050 mt of REO per year to up to 40,000 mt of REO per year without any change in the permit limit. These estimates are based on results achieved at the Mountain Pass facility in full scale mill test runs from 2001 to 2002. In addition, we have improved cracking technology at commercial scale (2,000 to 3,000 mt per year production rate) from 2009 to date and improved performance of our solvent extraction at commercial scale (2,000 to 3,000 mt per year production rate) as demonstrated from 2007 to 2009.
 
Improve our operating efficiencies with technically advanced manufacturing techniques.
 
We intend to continue to improve the efficiency of our operations through the creation and use of technically advanced manufacturing processes for production of rare earth products, which will allow us to deliver high-quality rare earth products at globally competitive prices. We have already invested significant resources towards perfecting our REO processing operations and developing new and proprietary applications for individual REEs. We expect that by advancing all of these technologies, we will continue to lower our operating costs.
 
Manage our costs to be cost competitive.
 
The success of our business will depend on our ability to manage our costs. We will manage these costs through the use of new production technologies that have been developed by our research and development group, which will use less energy and raw materials and will result in a reduced environmental footprint. These production technologies will substantially reduce the amount of water consumption and waste water generation. We plan to use our proprietary technology to maximize our process recoveries and maximize REO


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concentrate production per unit of extracted ore. We plan to install a natural gas powered co-generation power plant as part of our modernization and expansion of the Mountain Pass facility to reduce energy consumption and costs as well as minimize or eliminate our reliance on the regional electric power grid. As part of our modernization and expansion of the Mountain Pass facility, we also intend to produce our own hydrochloric acid and sodium hydroxide at the Mountain Pass facility and recycle our acid and base, thereby reducing our reliance on external sources of reagents. After completion of our modernization and expansion efforts, we anticipate our most significant cash operating costs will consist of natural gas and labor.
 
Secure customer commitments to provide a stable revenue stream.
 
We are working to establish stable revenue streams for the rare earth minerals and products we produce at the Mountain Pass facility. Upon reaching full planned production rates for REOs at the Mountain Pass facility under our initial modernization and expansion plan, we expect to produce approximately 19,050 mt of REO per year. Additionally, under our capacity expansion plan, we expect to have the ability to produce up to approximately 40,000 mt of REO per year by the end of 2013. Pursuant to our first contract with Grace, we have agreed to supply Grace with a significant amount of REOs, primarily lanthanum oxide, through mid-2012 at market-based prices subject to a ceiling based on market prices at June 1, 2010, and a floor. Pursuant to our second contract with Grace, we have agreed to supply Grace with up to 75 percent of our lanthanum product production per year (based on our initial planned capacity) at market-based prices subject to a floor for a three-year period commencing upon the achievement of expected annual production rates under our initial modernization and expansion plan, which may be extended at Grace’s option for an additional three-year period. Upon execution of definitive agreements with Sumitomo, we also expect to provide Sumitomo with approximately 1,500 mt per year (and following completion of our initial modernization and expansion plan, approximately 1,750 mt per year) of cerium and lanthanum-based products and 250 mt per year of didymium oxide for a period ending five years after the completion of our initial modernization and expansion of the Mountain Pass facility, at market-based prices subject to a floor. As of January 1, 2011, we also had 20 non-binding letters of intent to sell our rare earth products. These letters of intent, together with our second contract with Grace and memorandum of understanding with Sumitomo, represent approximately 158% of our anticipated production of approximately 19,050 mt of REO for 2013 under our initial modernization and expansion plan, and our non-binding letter of intent with Neo Material also contemplates the sale of certain rare earth products. Prior to commencing anticipated production of approximately 19,050 mt of REO year, we intend to enter into short- and long-term sales contracts with existing and new customers for amounts not in excess of our actual planned production. In addition, we are in discussions with multiple large, globally diversified mining companies regarding the sale of XSORBX®, which will expand demand for cerium in times when it is in surplus and low priced.
 
The following table compares the volume under our second contract with Grace, our memorandum of understanding with Sumitomo and our 20 non-binding letters of intent to our anticipated production of approximately 19,050 mt of REO for 2013 (in mt):
 
                                         
          Volume Under
                Percent of
 
    Anticipated 2013
    Letters of
    Contracted
    Uncommitted
    Anticipated 2013
 
Product Type
  Production(1)(2)     Intent(1)(2)     Volume(8)     Volume(9)     Production(10)  
 
Lanthanum oxide or other form
    3,098       4,641       4,535             296 %
Lanthanum metal
    2,502       700             1,802       28 %
Cerium non-metal
    9,663       11,265 (3)                 117 %
Cerium metal
          200                    
Neodymium oxide or other form
          50                    
Didymium oxide or other form
          1,545                    
Neodymium or NdPr metal
    312       3,806 (4)                 1,220 %
Praseodymium metal
    116       60 (4)           56       52 %
Europium oxide
    19       7 (5)           12       37 %
Samarium oxide
          40                    
Samarium metal(6)
    191       30             161       16 %
NdPr metal in NdFeB alloy
    1,960       1,103 (7)           857       56 %


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          Volume Under
                Percent of
 
    Anticipated 2013
    Letters of
    Contracted
    Uncommitted
    Anticipated 2013
 
Product Type
  Production(1)(2)     Intent(1)(2)     Volume(8)     Volume(9)     Production(10)  
 
NdPr metal in NdFeB magnets
          290 (7)                  
                                         
TOTAL
    17,860       23,737       4,535       2,888       158 %
 
 
(1) Alloy and magnet production and letter of intent volume are reported on a rare earth metal basis. Three of our non-binding letters of intent contain a volume range; these letters cover lanthanum oxide, cerium non-metal and NdPr metal in NdFeB alloy. With respect to these non-binding letters of intent, the table above reflects the high end of the range provided for in each letter. In addition, certain of our non-binding letters of intent provide for a certain volume of rare earth metals or alloys but do not allocate that volume among specific rare earth metals or alloys. In those instances, we have allocated the volume in those letters based on management’s estimates of the needs of those customers and their specific applications. The table above includes anticipated sales of cerium and lanthanum-based products and didymium oxide to Sumitomo, subject to execution of definitive agreements. The table above does not include any sales of any products under either of the agreements we have entered into with Traxys North America LLC, which we refer to as Traxys. See “Certain Relationships and Related-Party Transactions — Inventory Financing and Resale Agreements.” Additionally, pursuant to the terms of our non-binding letter of intent with Neo Material, Neo Material may agree to purchase 3,000 to 5,000 mt of mixed rare earth carbonate and 300 to 500 mt of neodymium oxide and praseodymium oxide per year, which amounts are included in the table above.
 
(2) With respect to our metal products, there is a 14.2% loss of mass when REOs are converted to rare earth metal due to oxygen evolution, which accounts for most of the difference between the 17,898 mt total 2013 production rate and our anticipated production rate of approximately 19,050 mt of REO per year in 2013.
 
(3) Volume shown is used in traditional glass or catalyst market segments and represents only a very small fraction of cerium buyers. Although IMCOA predicts that there will be a surplus of cerium in the future, we anticipate most of our production will serve the new, proprietary XSORBX® market segment if a surplus develops. At current prices, we would seek to sell cerium for other uses instead. This segment alone is expected to consume many times more cerium units than we can produce. We believe the new segment negates the need for additional letters of intent at this time.
 
(4) We anticipate most of our metal production will be consumed internally for downstream NdFeB alloy/magnet production.
 
(5) We expect to receive non-binding letters of intent from a number of phosphor producers, which will easily consume our europium production. At this time, we are the only producer outside of China for this element, which enables energy efficient, compact fluorescent lights and straight tube T-8 lamps.
 
(6) IMCOA estimates that there is a surplus of samarium metal.
 
(7) This represents the estimated NdPr metal contained in the non-binding letter of intent volume for NdFeB alloy and magnets.
 
(8) Represents volume under our second contract with Grace.
 
(9) Represents volume not committed under contract or covered by non-binding letters of intent.
 
(10) Represents volume under non-binding letters of intent and contracted volume as a percentage of anticipated 2013 production. Upon completion of our second phase capacity expansion plan, our production capacity will double to approximately 40,000 mt of REO per year, and we will need to secure additional off-take agreements.
 
Integrate downstream to profitably capture the full value chain.
 
We intend to utilize vertical integration through further downstream processing of our REOs into rare earth metals, alloys and finished magnets. Our initial modernization and expansion plan envisions adding facilities and equipment for metal conversion and alloy production at the Mountain Pass facility or an off-site property. If we add an off-site facility to produce rare earth metals and alloys instead of adding such facilities and equipment at Mountain Pass, we would transport cerium, lanthanum, neodymium, praseodymium, dysprosium, terbium and

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samarium oxide products from our Mountain Pass facility to that off-site location to produce rare earth metals and alloys. In December 2010, we entered into a non-binding letter of intent with Hitachi to form joint ventures for the production of rare earth alloys and magnets in the United States. Additionally, we have entered into a non-binding letter of intent with Neo Material that, among other things, contemplates a technology transfer agreement pursuant to which Neo Material may provide us with technical assistance and know-how with respect to the production of rare earth metals, alloys and magnets. This “mine-to-magnets” strategy, if successfully implemented, would make us the first fully integrated supplier of NdFeB magnets in the world and the only producer of NdFeB magnets in the United States. In addition, we are working to identify and develop new downstream opportunities for the REOs, rare earth metals and alloys and rare earth products we will manufacture.
 
Develop new higher margin products.
 
We intend to develop new higher margin products and processes for REEs that historically have had lower demand. For example, cerium is used primarily for glass polishing and has typically sold at prices lower than those for other REEs. However, we have developed XSORBX®, a proprietary product and process, primarily consisting of cerium, that we have proven to be effective in removing arsenic and other heavy metals from industrial processing streams. This will allow our customers to more safely sequester arsenic and increase their production. We believe this product is applicable to a broad range of applications with higher margins. For example, in addition to removing arsenic and other contaminants from industrial waste water, XSORBX® can also be used to treat drinking water, which we believe is an application with a higher margin as compared to cerium spot prices. We have begun to sell XSORBX® for commercial use in the wastewater, recreation, pool and spa, industrial process and other water treatment markets. We are continuing to seek additional letters of intent and sales contracts with existing and new customers for sales of XSORBX®. XSORBX® is protected by over 100 issued and pending U.S. and foreign patents and patent applications. We will continue to focus on establishing proprietary markets for low-demand REEs to provide us with an opportunity to sell these REEs as higher margin products.
 
Risks That We Face
 
Although the Mountain Pass facility had been in continuous operation for 50 years, mining and milling operations ended in 2002, and our activities at the facility in recent years have consisted of manufacturing products from stockpiled feedstocks to improve our solvent extraction technologies and other processing capabilities, which have resulted in minimal revenue. Our ongoing modernization and expansion efforts at the Mountain Pass facility to reach our planned production rate of approximately 19,050 mt of REO per year by the end of 2012 requires the commitment of substantial resources for operating expenses and capital expenditures. Our continued viability is based on successfully implementing our strategy, including our modernization and expansion plans at the Mountain Pass facility, successfully commencing mining operations at the facility and reaching full planned production rates in accordance with our expected timeframe. Any unanticipated costs or delays associated with our ongoing modernization and expansion efforts at the Mountain Pass facility could have a material adverse effect on our financial condition or results of operations and could require us to seek additional capital, which may not be available on commercially acceptable terms or at all.
 
We are subject to numerous other risks that may adversely impact our ability to successfully implement our business strategy, including, without limitation:
 
  •  our potential inability to obtain any incremental funding required to complete our modernization and expansion;
 
  •  our potential inability to successfully establish or maintain collaborative, joint venture, technology transfer and licensing arrangements;
 
  •  our potential inability to convert existing non-binding letters of intent with customers for the sale of REO products into binding contracts;
 
  •  fluctuations in demand for, and prices of, rare earth products;
 
  •  our potential inability to successfully implement new processing technologies and capabilities;


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  •  the competitive industry in which we operate;
 
  •  customers pursuing rare earth alternatives or products that do not rely on rare earth products; and
 
  •  the lack of development of new uses and markets for rare earth products.
 
For more information regarding these and other risks that we face, see “Risk Factors” elsewhere in this prospectus.
 
Our Corporate History and Structure
 
Molycorp Minerals, LLC, a Delaware limited liability company formerly known as Rare Earth Acquisitions LLC, was formed on June 12, 2008 to purchase the Mountain Pass, California rare earth deposit and associated assets from Chevron Mining Inc., a subsidiary of Chevron Corporation. Prior to the acquisition, the Mountain Pass facility was owned by Chevron Mining Inc. and, before 2005, by Unocal Corporation. Molycorp, LLC, which was the parent of Molycorp Minerals, LLC, was formed on September 9, 2009 as a Delaware limited liability company. Molycorp, Inc. was formed on March 4, 2010 as a new Delaware corporation and was not, prior to the date of the consummation of its initial public offering, conducting any material activities.
 
The members of Molycorp, LLC contributed either (a) all of their member interests in Molycorp, LLC or (b) all of their equity interests in entities that hold member interests in Molycorp, LLC (and no other assets or liabilities) to Molycorp, Inc. in exchange for shares of Molycorp, Inc. Class A common stock. Additionally, all of the holders of profits interests in Molycorp Minerals, LLC, which were represented by incentive shares, contributed all of their incentive shares to Molycorp, Inc. in exchange for shares of Molycorp, Inc. Class B common stock. Accordingly, Molycorp, LLC and Molycorp Minerals, LLC became subsidiaries of Molycorp, Inc. We refer to this process as the “corporate reorganization” throughout this prospectus. Following the corporate reorganization, Molycorp, LLC was merged with and into Molycorp Minerals, LLC. Immediately prior to the consummation of Molycorp, Inc.’s initial public offering, all of the shares of Class A common stock and Class B common stock were converted into shares of common stock.
 
Company Information
 
Our principal executive offices are located at 5619 Denver Tech Center Parkway, Suite 1000, Greenwood Village, Colorado 80111, and our telephone number is (303) 843-8040. Our website address is www.molycorp.com. Information on or accessible through our website is not a part of this prospectus.


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The Offering
 
The summary below describes the principal terms of the mandatory convertible preferred stock. Certain of the terms and conditions described below are subject to important limitations and exceptions. Refer to the section of this prospectus entitled “Description of Mandatory Convertible Preferred Stock” for a more detailed description of the terms of the mandatory convertible preferred stock. As used in this section, the terms “Molycorp,” “us,” “we,” or “our” refer to Molycorp, Inc. and not any of its subsidiaries.
 
Concurrently with this offering of our mandatory convertible preferred stock, selling stockholders are offering shares of our common stock. The closing of this offering of mandatory convertible preferred stock is not conditioned upon the closing of the offering of our common stock by the selling stockholders, and the closing of the offering of common stock is not conditioned upon the closing of this offering of mandatory convertible preferred stock.
 
Securities we are offering 1,800,000 shares of 5.50% Series A Mandatory Convertible Preferred Stock, $0.001 par value per share, which we refer to in this prospectus as our mandatory convertible preferred stock.
 
Public offering price $100.00 per share of mandatory convertible preferred stock.
 
Underwriters’ option We have granted the underwriters a 30-day option to purchase up to 270,000 additional shares of our mandatory convertible preferred stock to cover over-allotments, if any, at the public offering price, less the underwriting discount.
 
Dividends 5.50% of the liquidation preference of $100.00 per share of our mandatory convertible preferred stock per year. Dividends will accumulate from the first original issue date and, to the extent that we are legally permitted to pay dividends and our Board of Directors or an authorized committee thereof declares a dividend payable with respect to our mandatory convertible preferred stock, we will pay such dividends in cash, or, subject to certain limitations, by delivery of shares of our common stock or through any combination of cash and shares of our common stock, as determined by us in our sole discretion; provided that any unpaid dividends will continue to accumulate. Dividends that are declared will be payable on the dividend payment dates (as described below) to holders of record on the immediately preceding February 15, May 15, August 15 and November 15 (each a “record date”), whether or not such holders convert their shares, or such shares are automatically converted, after a record date and on or prior to the immediately succeeding dividend payment date. The expected dividend payable on the first dividend payment date is approximately $1.604 per share. Each subsequent dividend is expected to be approximately $1.375 per share. See “Description of Mandatory Convertible Preferred Stock — Dividends.”
 
If we elect to make any such payment of a declared dividend, or any portion thereof, in shares of our common stock, such shares shall be valued for such purpose at the average VWAP per share (as defined under “Description of Mandatory Convertible Preferred Stock — Definitions”), of our common stock over the five consecutive trading day period ending on the second trading day immediately preceding the applicable dividend payment date (the “five-day average price”), multiplied by 97%. Notwithstanding the foregoing, in no event will the number of shares of our common


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stock delivered in connection with any declared dividend exceed a number equal to the total dividend payment divided by $17.50, which amount represents approximately 35% of the initial price (as defined below), subject to adjustment in a manner inversely proportional to any anti-dilution adjustment to each fixed conversion rate (such dollar amount, as adjusted, the “floor price”). To the extent that the amount of the declared dividend exceeds the product of the number of shares of common stock delivered in connection with such declared dividend and 97% of the five-day average price, we will, if we are legally able to do so, notwithstanding any notice by us to the contrary, pay such excess amount in cash.
 
The initial price is $50.00, which equals the price at which the selling stockholders initially offered our common stock to the public in the concurrent offering of our common stock.
 
Dividend payment dates March 1, June 1, September 1 and December 1 of each year, commencing on June 1, 2011 and to, and including, the mandatory conversion date.
 
Redemption Our mandatory convertible preferred stock is not redeemable.
 
Mandatory conversion date March 1, 2014.
 
Mandatory conversion On the mandatory conversion date, each share of our mandatory convertible preferred stock, unless previously converted, will automatically convert into a number of shares of our common stock equal to the conversion rate as described below.
 
If we declare a dividend for the dividend period ending on the mandatory conversion date, we will pay such dividend to the holders of record on the applicable record date, as described above. If, on or prior to the record date immediately preceding the mandatory conversion date, we have not declared all or any portion of the accumulated and unpaid dividends on the mandatory convertible preferred stock, the conversion rate will be adjusted so that holders receive an additional number of shares of common stock equal to the amount of accumulated and unpaid dividends that have not been declared (the “additional conversion amount”) divided by the greater of the floor price and 97% of the five-day average price. To the extent that the additional conversion amount exceeds the product of the number of additional shares and 97% of the five-day average price, we will, if we are legally able to do so, declare and pay such excess amount in cash.
 
Conversion rate Upon conversion on the mandatory conversion date, the conversion rate for each share of our mandatory convertible preferred stock will be not more than 2.0000 shares of common stock and not less than 1.6667 shares of common stock, depending on the applicable market value of our common stock, as described below and subject to certain anti-dilution adjustments.
 
The “applicable market value” of our common stock is the average VWAP per share of our common stock over the 20 consecutive trading day period ending on, and including, the third trading day immediately preceding the mandatory conversion date. The


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conversion rate will be calculated as described under “Description of Mandatory Convertible Preferred Stock — Mandatory Conversion,” and the following table illustrates the conversion rate per share of our mandatory convertible preferred stock, subject to certain anti-dilution adjustments.
 
     
Applicable market value of our common stock   Conversion rate (number of shares of common stock issuable upon conversion of each share of mandatory convertible preferred stock on the mandatory conversion date)
Greater than $60.00
  1.6667 shares
Equal to or less than $60.00
but greater than or equal to $50.00
  Between 1.6667 and 2.0000 shares, determined by dividing $100.00 by the applicable market value
Less than $50.00
  2.0000 shares
 
Conversion at the option of the holder Other than during a fundamental change conversion period (as defined below), at any time prior to March 1, 2014, you may elect to convert your shares of mandatory convertible preferred stock in whole or in part at the minimum conversion rate of 1.6667 shares of common stock per share of mandatory convertible preferred stock as described under “Description of Mandatory Convertible Preferred Stock — Conversion at the Option of the Holder.” This minimum conversion rate is subject to certain anti-dilution and other adjustments.
 
If, as of the effective date of any early conversion (the “early conversion date”), we have not declared all or any portion of the accumulated and unpaid dividends for all full dividend periods ending on a dividend payment date prior to such early conversion date, the conversion rate will be adjusted so that converting holders receive an additional number of shares of common stock equal to such amount of accumulated and unpaid dividends that have not been declared for such full dividend periods (the “early conversion additional conversion amount”), divided by the greater of the floor price and the average VWAP per share of our common stock over the 20 consecutive trading day period ending on, and including, the third trading day immediately preceding the early conversion date (the “early conversion average price”). To the extent that the early conversion additional conversion amount exceeds the product of the number of additional shares and the early conversion average price, we will not have any obligation to pay the shortfall in cash.
 
Conversion at the option of the holder upon a fundamental change; fundamental change dividend make-whole amount If a fundamental change (as defined under “Description of Mandatory Convertible Preferred Stock— Conversion at the Option of the Holder upon Fundamental Change; Fundamental Change Dividend Make-whole Amount”) occurs on or prior to March 1, 2014, holders of the mandatory convertible preferred stock will have the right to convert their shares of mandatory convertible preferred stock, in whole or in part, into shares of common stock at


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the “fundamental change conversion rate” during the period beginning on the effective date of such fundamental change and ending on the date that is 20 calendar days after the effective date (or, if earlier, the mandatory conversion date). The fundamental change conversion rate will be determined based on the effective date of the fundamental change and the price paid (or deemed paid) per share of our common stock in such fundamental change. Holders who convert shares of our mandatory convertible preferred stock within that timeframe will also receive: (1) a fundamental change dividend make-whole amount equal to the present value (calculated using a discount rate of 5.50% per annum) of all dividend payments on such shares (excluding any accumulated and unpaid dividends for any dividend period prior to the effective date of the fundamental change, including for the dividend period, if any, from the dividend payment date immediately preceding the effective date to but excluding the effective date (collectively, the “accumulated dividend amount”)) for all the remaining full dividend periods and for the partial dividend period from and including the effective date to but excluding the next dividend payment date (the “fundamental change dividend make-whole amount”); and (2) to the extent that there is any accumulated dividend amount, the accumulated dividend amount, in the case of clauses (1) and (2), subject to our right to deliver shares of our common stock in lieu of all or part of such amounts; provided that if the effective date or the conversion date falls after the record date for a declared dividend and prior to the next dividend payment date, such dividend will be paid on such dividend payment date to the holders as of such record date, and will not be included in the accumulated dividend amount, and the fundamental change dividend make-whole amount will not include the present value of the payment of such dividend.
 
If we elect to make any such payment of the fundamental change dividend make-whole amount or the accumulated dividend amount, or any portion thereof, in shares of our common stock, such shares shall be valued for such purpose at 97% of the price paid (or deemed paid) per share of our common stock in the fundamental change. Notwithstanding the foregoing, in no event will the number of shares of our common stock delivered in connection with the fundamental change dividend make-whole amount and the accumulated dividend amount, in the aggregate, exceed a number equal to the sum of such amounts (the “additional fundamental change amount”), divided by the greater of the floor price and 97% of the price paid (or deemed paid) per share of our common stock in the fundamental change. To the extent that the additional fundamental change amount exceeds the product of the number of shares of common stock delivered in respect of such additional fundamental change amount and 97% of the price paid (or deemed paid) per share of our common stock in the fundamental change, we will, if we are legally able to do so, notwithstanding any notice by us to the contrary, pay such excess amount in cash. See “Description of Mandatory Convertible Preferred Stock —


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Conversion at the Option of the Holder upon Fundamental Change; Fundamental Change Dividend Make-whole Amount.”
 
Anti-dilution adjustments The conversion rate may be adjusted in the event of, among other things: (1) stock dividends or distributions; (2) certain distributions to holders of our common stock of rights or warrants to purchase our common stock; (3) subdivisions or combinations of our common stock; (4) certain distributions to holders of our common stock of evidences of our indebtedness, shares of capital stock, securities, rights to acquire our capital stock, cash or other assets; (5) distributions to holders of our common stock of cash; and (6) certain tender or exchange offers by us or one of our subsidiaries for our common stock, in each case subject to certain exceptions. See “Description of Mandatory Convertible Preferred Stock — Anti-dilution Adjustments.”
 
Liquidation preference $100.00 per share of mandatory convertible preferred stock.
 
Voting rights Except as specifically required by Delaware law or our Amended and Restated Certificate of Incorporation, which will include the certificate of designations for the mandatory convertible preferred stock, the holders of mandatory convertible preferred stock will have no voting rights.
 
Whenever dividends on shares of mandatory convertible preferred stock have not been declared and paid for six or more dividend periods, whether or not consecutive, the holders of mandatory convertible preferred stock, voting together as a single class with holders of all other preferred stock of equal rank having similar voting rights, will be entitled at our next special or annual meeting of stockholders to vote for the election of a total of two additional members of our Board of Directors, subject to certain limitations.
 
We will not, without the affirmative vote or consent of holders of at least two-thirds of the outstanding shares of mandatory convertible preferred stock and all other preferred stock of equal rank having similar voting rights, voting together as a single class (1) authorize or create, or increase the authorized amount of, any specific class or series of stock ranking senior to the mandatory convertible preferred stock; (2) amend, alter or repeal the provisions of our Amended and Restated Certificate of Incorporation so as to adversely affect the special rights, preferences, privileges or voting powers of the mandatory convertible preferred stock; or (3) consummate a binding share exchange or reclassification involving shares of mandatory preferred stock or a merger or consolidation of us with another entity unless the mandatory convertible preferred stock remains outstanding or is replaced by preference securities with terms not materially less favorable to holders, in each case subject to certain exceptions.
 
See “Description of Mandatory Convertible Preferred Stock — Voting Rights.”


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Ranking The mandatory convertible preferred stock will rank with respect to dividend rights and rights upon our liquidation, winding-up or dissolution:
 
• senior to all of our common stock and to each other class of capital stock or series of preferred stock issued in the future unless the terms of that stock expressly provide that it ranks senior to, or on a parity with, the mandatory convertible preferred stock;
 
• on a parity with any class of capital stock or series of preferred stock issued in the future the terms of which expressly provide that it will rank on a parity with the mandatory convertible preferred stock;
 
• junior to each class of capital stock or series of preferred stock issued in the future the terms of which expressly provide that such capital stock or preferred stock will rank senior to the mandatory convertible preferred stock; and
 
• junior to all of our existing and future indebtedness.
 
At September 30, 2010, we had total outstanding debt of approximately $5.0 million and no outstanding shares of preferred stock.
 
In addition, the mandatory convertible preferred stock, with respect to dividend rights and rights upon our liquidation, winding-up or dissolution, will be structurally subordinated to existing and future indebtedness of our subsidiaries as well as the capital stock of our subsidiaries held by third parties.
 
Use of proceeds We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us for this offering and the concurrent offering of our common stock by the selling stockholders, will be approximately $173.1 million (or approximately $199.2 million if the underwriters exercise their over-allotment option in full). We intend to use the net proceeds from this offering to fund our initial modernization and expansion plan and our capacity expansion plan.
 
We will not receive any proceeds from the sale of our common stock by the selling stockholders in the concurrent offering. See “Use of Proceeds.”
 
Material U.S. federal tax consequences The material U.S. federal income tax consequences of purchasing, owning and disposing of the mandatory convertible preferred stock and any common stock received upon its conversion are described in “Material U.S. Federal Income Tax Consequences.”
 
Listing We have applied to list our mandatory convertible preferred stock on the New York Stock Exchange under the symbol “MCP PrA.” Our common stock is listed on the New York Stock Exchange under the symbol “MCP.”
 
Concurrent common stock offering Concurrently with this offering of mandatory convertible preferred stock, the selling stockholders are making a public offering of


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13,500,000 shares of our common stock. In that offering, certain of the selling stockholders have granted the underwriters of that offering a 30-day option to purchase up to an additional 2,025,000 shares of common stock to cover over-allotments, if any. The closing of this offering of mandatory convertible preferred stock is not conditioned upon the closing of the offering of our common stock by the selling stockholders, and the closing of the offering of common stock is not conditioned upon the closing of this offering of mandatory convertible preferred stock.
 
Transfer agent and registrar Computershare Trust Company, N.A. is the transfer agent and registrar for the mandatory convertible preferred stock.
 
Risk factors See “Risk Factors” beginning on page 25 of this prospectus for a discussion of risks you should carefully consider before deciding to invest in our mandatory convertible preferred stock.
 
As of February 3, 2011, 82,300,757 shares of common stock were outstanding.
 
Unless otherwise indicated, all information in this prospectus reflects or assumes:
 
  •  the retroactive adjustment of a 38.23435373-for-one stock split with respect to shares of our Class A common stock and Class B common stock effective on July 9, 2010;
 
  •  the conversion of all of our Class A common stock and Class B common stock into an aggregate of 53,125,000 shares of common stock immediately prior to the consummation of our initial public offering as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;
 
  •  the exclusion of shares of common stock expected to be issued to Sumitomo, subject to the finalization of definitive agreements; and
 
  •  the exclusion of 4,065,628 shares of common stock authorized and reserved for future issuance under our stock incentive plan. See “Management — Compensation Discussion and Analysis — Molycorp, Inc. 2010 Equity and Performance Incentive Plan.”
 
The number of shares of common stock that will be outstanding after this offering also excludes up to 3,600,000 shares of our common stock (up to 4,140,000 shares if the underwriters in this offering of mandatory convertible preferred stock exercise their over-allotment option in full), in each case subject to anti-dilution, make-whole and other adjustments, that would be issuable upon conversion of shares of mandatory convertible preferred stock issued in this offering.


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Summary Consolidated Financial Data
 
Upon the formation of Molycorp, LLC on September 9, 2009, all members of Molycorp Minerals, LLC contributed their member interests to Molycorp, LLC in exchange for member interests in Molycorp, LLC. That exchange was treated as a reorganization of entities under common control and Molycorp Minerals, LLC is the predecessor to Molycorp, LLC. Accordingly, all financial information of Molycorp, LLC for periods prior to its formation is the historical financial information of Molycorp Minerals, LLC. Molycorp Minerals, LLC acquired the Mountain Pass, California rare earth deposit and associated assets from Chevron Mining Inc., a subsidiary of Chevron Corporation, on September 30, 2008.
 
The summary consolidated financial data as of December 31, 2009 and 2008, and for the year ended December 31, 2009 and for the period from June 12, 2008 (Inception) through December 31, 2008 has been derived from Molycorp, LLC’s audited consolidated financial statements and the related notes included elsewhere in this prospectus. The summary consolidated financial data as of September 30, 2010, for the nine months ended September 30, 2010 and 2009 and cumulatively for the period from June 12, 2008 (Inception) through September 30, 2010 have been derived from Molycorp, Inc.’s unaudited condensed consolidated financial statements and the related notes included elsewhere in this prospectus.
 
Molycorp, Inc. was formed on March 4, 2010 for the purpose of continuing the business of Molycorp, LLC in corporate form. On April 15, 2010, the members of Molycorp, LLC contributed either (a) all of their member interests in Molycorp, LLC or (b) all of their equity interests in entities that hold member interests in Molycorp, LLC (and no other assets or liabilities) to Molycorp, Inc. in exchange for shares of Molycorp, Inc., and, as a result, Molycorp, LLC became a wholly owned subsidiary of Molycorp, Inc. Accordingly, all financial information of Molycorp, Inc. for periods prior to the corporate reorganization is the historical financial information of Molycorp, LLC.
 
As a limited liability company, the taxable income and losses of Molycorp, LLC were reported on the income tax returns of its members. Molycorp, Inc. is subject to federal and state income taxes and will file consolidated income tax returns. If the corporate reorganization had been effective as of January 1, 2009, our net loss of $28.6 million for the year ended December 31, 2009 would have generated an unaudited pro forma deferred income tax benefit of $11.3 million for the year ended December 31, 2009 assuming a combined federal and state statutory income tax rate. However, as realization of such tax benefit would not have been assured, we would have also established a valuation allowance of $11.3 million to eliminate such pro forma tax benefit.
 
The unaudited pro forma balance sheet data as of September 30, 2010 has been prepared to give effect to the consummation of our offering of mandatory convertible preferred stock, as if it had occurred on September 30, 2010. The unaudited pro forma balance sheet data is for informational purposes only and does not purport to indicate balance sheet information as of any future date.
 
The summary consolidated financial data set forth below should be read in conjunction with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the notes thereto included elsewhere in this prospectus.


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    Nine Months Ended     Year Ended
    June 12, 2008
    June 12, 2008
 
    September 30,
    September 30,
    December 31,
    (Inception) Through
    (Inception) Through
 
Statement of Operations Data
  2010     2009     2009     December 31, 2008     September 30, 2010  
    (Unaudited)                 (Unaudited)  
    (In thousands, except share and per share data)  
 
Net sales
  $ 13,176     $ 4,889     $ 7,093     $ 2,137     $ 22,406  
Cost of goods sold(1)
    (18,989 )     (14,896 )     (21,785 )     (13,027 )     (53,801 )
Selling, general and administrative expense
    (12,851 )     (8,380 )     (12,444 )     (2,979 )     (28,274 )
Stock-based compensation
    (21,660 )     (241 )     (241 )           (21,901 )
Depreciation and amortization expense
    (239 )     (123 )     (191 )     (19 )     (449 )
Accretion expense
    (695 )     (755 )     (1,006 )     (250 )     (1,951 )
Operating loss
    (41,258 )     (19,506 )     (28,574 )     (14,138 )     (83,970 )
Net loss
  $ (41,185 )   $ (19,492 )   $ (28,587 )   $ (14,074 )   $ (83,846 )
Weighted average shares outstanding (Common shares)(2):
                                       
Basic
    56,027,460       38,831,232       38,921,015       38,234,354       44,721,664  
Diluted
    56,027,460       38,831,232       38,921,015       38,234,354       44,721,664  
Loss per share of common stock(2):
                                       
Basic
  $ (0.74 )   $ (0.50 )   $ (0.73 )   $ (0.37 )   $ (1.87 )
Diluted
  $ (0.74 )   $ (0.50 )   $ (0.73 )   $ (0.37 )   $ (1.87 )
 
                                 
    Pro Forma
                   
    September 30,
    September 30,
    December 31,
       
Balance Sheet Data
  2010     2010     2009     December 31, 2008  
    (Unaudited)     (Unaudited)              
    (In thousands)  
 
Cash and cash equivalents
  $ 524,566     $ 351,472     $ 6,929     $ 2,189  
Total current assets
    544,462       371,368       18,520       8,710  
Total assets
    649,582       476,488       97,666       95,355  
Total non-current liabilities
    11,394       11,394       13,509       13,196  
Total liabilities
    27,465       27,465       23,051       17,279  
Members’ equity
                74,615       78,076  
Stockholders’ equity(3)
    622,117       449,023              
 
                                         
    Nine Months Ended     Year Ended
    June 12, 2008
    June 12, 2008
 
    September 30,
    September 30,
    December 31,
    (Inception) Through
    (Inception) Through
 
Other Financial Data
  2010     2009     2009     December 31, 2008     September 30, 2010  
    (Unaudited)                 (Unaudited)  
    (In thousands)  
 
Capital expenditures(4)
  $ 12,965     $ 5,365     $ 7,285     $ 321     $ 20,571  
 
 
(1) Cost of goods sold includes write-downs of inventory to estimated net realizable value of $1.6 million, $7.5 million, $9.0 million, $9.5 million and $20.1 million for the nine months ended September 30, 2010 and 2009, for the year ended December 31, 2009, for the period from June 12, 2008 (Inception) through December 31, 2008 and cumulatively for the period from June 12, 2008 (Inception) through September 30, 2010, respectively.


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(2) Weighted average shares outstanding gives retroactive effect to the corporate reorganization, the conversion of all of our Class A common stock and Class B common stock into shares of common stock and the consummation of our initial public offering, and the 38.23435373-for-one stock split completed by Molycorp, Inc. on July 9, 2010 as if such events had occurred on June 12, 2008.
 
(3) Although a final determination cannot be made until issuance, we currently believe the mandatory convertible preferred stock will be classified as permanent equity and included in stockholders’ equity.
 
(4) Reflected in cash flows from investing activities on our consolidated statements of cash flows.


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RISK FACTORS
 
An investment in our mandatory convertible preferred stock involves a high degree of risk. Accordingly, you should carefully consider the following risk factors, together with all of the other information contained in this prospectus, including our consolidated financial statements and related notes, before making an investment in our mandatory convertible preferred stock. If any of the following risks actually occurs, we may not be able to conduct our business as currently planned, and our business, operating results and financial condition could be harmed. In that case, the market price of our mandatory convertible preferred stock could decline, and you could lose all or a part of your investment.
 
Risks Related to Our Business
 
The production of rare earth products is a capital-intensive business and our ongoing modernization and expansion efforts at the Mountain Pass facility to reach initial planned production rates by the end of 2012 and to expand our capacity to produce up to approximately 40,000 mt of REO per year by the end of 2013 will require the commitment of substantial resources. Any unanticipated costs or delays associated with our ongoing modernization and expansion efforts at the Mountain Pass facility could have a material adverse effect on our financial condition or results of operations.
 
Our ongoing modernization and expansion efforts at the Mountain Pass facility to reach initial planned production rates by the end of 2012 and to expand our capacity to produce up to approximately 40,000 mt of REO per year by the end of 2013 require the commitment of substantial resources for operating expenses and capital expenditures. We expect to incur approximately $531 million in capital costs to achieve full planned production rates under our initial modernization and expansion plan prior to December 31, 2012. In addition, we expect to incur approximately $250 million in additional capital costs to build additional production capacity prior to December 31, 2013. Our estimated expenses may increase in subsequent years as consultants, personnel and equipment associated with advancing development and commercial production are added. The progress of our modernization and expansion efforts at the Mountain Pass facility and the amounts and timing of expenditures will depend in part on the following:
 
  •  the replacement of a significant portion of the existing process, plant and equipment that consists of aging or outdated facilities and equipment, retooling and development and the preparation of the mine pit for renewed production of ore;
 
  •  maintaining required federal, state and local permits;
 
  •  the results of consultants’ analysis and recommendations;
 
  •  negotiating contracts for equipment, earthwork, construction, equipment installation, labor and completing infrastructure and construction work;
 
  •  negotiating sales and off-take contracts for our planned production;
 
  •  the execution of any joint venture agreements or similar arrangements with strategic partners; and
 
  •  other factors, many of which are beyond our control.
 
Most of these activities require significant lead times and must be advanced concurrently. Any unanticipated costs or delays associated with our ongoing modernization and expansion efforts at the Mountain Pass facility could have a material adverse effect on our financial condition or results of operations and could require us to seek additional capital, which may not be available on commercially acceptable terms or at all.
 
The actual amount of capital required for the expansion and modernization of the Mountain Pass facility may vary materially from our current estimates, in which case we would need to raise additional funds, which may delay completion and have a material adverse effect on our business and financial condition.
 
The anticipated funding required to complete the expansion and modernization of the Mountain Pass facility, including the second phase capacity expansion, is based on certain estimates and assumptions we have made about the additional facilities, equipment, labor, permits and other factors required to complete the project. If any of these estimates or assumptions change, the actual timing and amount of capital required to


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complete the initial expansion and modernization of the Mountain Pass facility as well as the capacity expansion may vary materially from what we anticipate. Additional funds may be required in the event of significant departures from our current expansion and modernization plan, unforeseen delays, cost overruns, engineering design changes or other unanticipated expenses. There can be no assurance that additional financing will be available to us, or, if available, that it can be obtained on a timely basis and on commercially acceptable terms.
 
There is no assurance that we will be able to successfully implement our capacity expansion plan within our current timetable, that the actual costs of the capacity expansion will not exceed our currently estimated costs or that we will be able to secure off-take agreements for the incremental production capacity, and we cannot provide any assurance as to the actual operating costs once we have completed the capacity expansion.
 
Our Board of Directors recently approved a second-phase capacity expansion plan in addition to our initial modernization and expansion plan. We will commence work on this second phase as we are working on our initial plan and there is no assurance that our work on the second phase will not interfere with our completion of the initial modernization and expansion plan. In certain cases, including separations and power, we will need to install additional capacity. We do not believe we will need to obtain additional permits for the capacity expansion, other than air and building permits. However there is no assurance that we will not in the future learn of permits that we will be required to obtain or existing permits that we will be required to modify. We have estimated, based on consultation with our project manager, that we will incur approximately $250 million in additional capital costs in connection with the capital expansion plan beyond those budgeted for our initial plan. However, this estimate has not been independently reviewed, and actual costs could vary significantly. We have not yet obtained this additional funding and there is no assurance that we will be able to do so on terms acceptable to us or at all. Because we will begin expenditures on our capacity expansion plan before completion of our initial modernization and expansion plan, any funding insufficiency for the capacity expansion could also impact completion of our initial plan.
 
We have not yet performed a detailed study of expected operating costs for this proposed second phase, and we have not yet commissioned SRK Consulting or any other expert to prepare an external model or study of operating costs. While we have not identified any reason to believe that there will be any per unit increase in operating costs under our capacity expansion plan as compared to our initial modernization and expansion plan (assuming we are able to sell all of our capacity), we cannot provide any assurances as to the actual operating costs, and such costs could be higher. We have also not secured off-take commitments for the incremental production from this second phase, and we cannot assure that we will secure such commitments.
 
Any failure to successfully implement our capacity expansion plan due to insufficient funding, delays or unanticipated costs, or to realize the anticipated benefits of our capacity expansion plan, including securing off-take commitments for the incremental production, could have a material adverse effect on our business, financial condition and results of operations.
 
We may be unsuccessful in raising the necessary capital to execute our current business plan.
 
Under our current business plan, we intend to spend approximately $531 million through the end of 2012 to restart mining operations, construct and refurbish processing facilities and other infrastructure at the Mountain Pass facility in connection with our initial modernization and expansion plan and expand into metal, alloy and magnet production. In addition, we expect to spend approximately $250 million in additional capital costs to build additional production capacity through the end of 2013 in connection with our capacity expansion plan, and we will need to obtain additional funding for such plan. If the assumptions on which we based our estimated capital expenditures of $781 million change or are inaccurate, we may require additional funding. We may also require additional financing as part of our collaborative joint ventures with Hitachi for the production of rare earth alloys and magnets in the United States, which is not included in our estimated capital expenditures of $781 million. Our estimated capital expenditures of $781 million also do not include corporate, selling, general and administrative expenses, which we estimate to be an additional $20 million to $25 million per year.
 
We expect to finance these capital expenditures and selling, general and administrative expenses, as well as our working capital requirements with the approximately $360.4 million in net proceeds from our initial public offering (after giving effect to our use of $18.2 million of net proceeds for surety bonds), our net proceeds from


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our offering of mandatory convertible preferred stock and anticipated cash flows from operations, combined with traditional debt financing, project financing, additional public or private equity offerings and/or government programs, including the U.S. Department of Energy loan guarantee program for which we have submitted applications. We cannot assure you that the offering of mandatory convertible preferred stock will be completed or, if completed, on what terms it will be completed. Additionally, on December 10, 2010, we entered into a memorandum of understanding with Sumitomo, pursuant to which Sumitomo agreed to, among other things, purchase $100 million of our common stock and arrange for a $30 million debt financing. The consummation of these transactions with Sumitomo is subject to numerous conditions and finalization of definitive agreements. There can be no assurance that we will be successful in raising the incremental capital needed to fully execute our business plan on terms acceptable to us, or at all. Because we will begin expenditures on our capacity expansion plan before completion of our initial modernization and expansion plan, any funding insufficiency for the capacity expansion could also impact completion of our initial plan.
 
We currently have limited sources of revenue from our operations, and in order to modernize and expand the Mountain Pass facility, we will need to obtain additional debt and/or equity financing.
 
Our growth depends on the modernization and expansion of our Mountain Pass facility, which is our only rare earth mining, manufacturing and processing facility.
 
Our only rare earth mining, manufacturing and processing facility at this time is the Mountain Pass facility. Our continued viability is based on successfully implementing our strategy, including our modernization and expansion plans at the Mountain Pass facility, successfully commencing mining operations at the Mountain Pass facility and reaching full planned production rates in accordance with our expected timeframe. The deterioration or destruction of any part of the Mountain Pass facility may significantly hinder our ability to reach or maintain full planned production rates within the expected time frame or at all. If we are unsuccessful in reaching and maintaining full planned production rates for REOs at the Mountain Pass facility, within expected time frames or at all, we may not be able to build a sustainable or profitable business.
 
We may not successfully establish or maintain collaborative, joint venture and licensing arrangements, or establish new ones, which could adversely affect our ability to develop and commercialize our rare earth products.
 
A key element of our business strategy is to utilize vertical integration through further downstream processing of our REOs into rare earth metal alloys and finished magnets for clean-energy, high-technology and defense applications. To implement this “mine-to-magnets” vertical integration successfully, we will need to license certain intellectual property related to these downstream processes and form a joint venture with an existing magnet producer for the final production of finished rare earth magnets. While we have entered into non-binding letters of intent with Hitachi to form joint ventures for the production of rare earth alloys and magnets in the United States and to acquire a license for certain technology related to the production of rare earth metals, alloys and magnets, we may not be able to finalize definitive agreements and successfully consummate these partnerships. In addition, other licenses that may be necessary for some of these downstream processing steps have not yet been obtained, and we are currently only in negotiations with respect to a joint venture for the production of finished magnets and have only entered into a non-binding letter of intent with Neo Material that contemplates a technology transfer agreement with respect to the production of rare earth metals, alloys and magnets. Any failure to establish or maintain collaborative, joint venture or licensing arrangements for the production of downstream products on favorable terms could adversely affect our business prospects, financial condition or ability to develop and commercialize downstream rare earth products.
 
We may not be able to convert existing letters of intent with customers for the sale of REO products into binding contracts, or meet the conditions necessary for customers to commence purchasing under existing contracts, which may have a material adverse effect on our financial position and results of operations.
 
We are working to establish stable revenue streams for the rare earth minerals and products we produce at the Mountain Pass facility. Upon reaching full planned production rates for REOs at the Mountain Pass facility under our initial modernization and expansion plan, we expect to produce approximately 19,050 mt of REO per year. Additionally, under our capacity expansion plan, we expect to have the ability to produce up to approximately 40,000 mt of REO per year by the end of 2013. Pursuant to our first contract with Grace, we


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have agreed to supply Grace with a significant amount of REOs, primarily lanthanum oxide, through mid-2012 at market-based prices subject to a ceiling based on market prices at June 1, 2010, and a floor. Pursuant to our second contract with Grace, we have agreed to supply Grace with up to 75 percent of our lanthanum product production per year (based on our initial planned capacity) at market-based prices subject to a floor for a three-year period commencing upon the achievement of expected annual production rates under our initial modernization and expansion plan, which may be extended at Grace’s option for an additional three-year period. Upon execution of definitive agreements with Sumitomo, we also expect to provide Sumitomo with approximately 1,500 mt per year (and following completion of our initial modernization and expansion plan, approximately 1,750 mt per year) of cerium and lanthanum-based products and 250 mt per year of didymium oxide for a period ending five years after the completion of our initial modernization and expansion of the Mountain Pass facility, at market-based prices subject to a floor. As of January 1, 2011, we also had 20 non-binding letters of intent to sell our rare earth products. These letters of intent, together with our second contract with Grace and memorandum of understanding with Sumitomo, represent approximately 158% of our anticipated production for 2013 under our initial modernization and expansion plan, and our non-binding letter of intent with Neo Material also contemplates the sale of certain rare earth products. Prior to commencing full production, we intend to enter into short- and long-term sales contracts with existing and new customers for amounts not in excess of our actual planned production under our initial modernization and expansion plan and our capacity expansion plan, respectively. However, there can be no assurance that these customers will enter into binding sales contracts for the same amount of REO products as in the letters of intent, or at all, or that we will secure off-take commitments for the incremental capacity provided by our capacity expansion plan. The failure to enter into binding contracts, or the failure to meet the conditions necessary for customers to commence purchasing under existing agreements, may have a material adverse effect on our financial position and results of operations.
 
We have limited commercial production and revenues and there can be no assurance that we will successfully reach full planned production rates for REOs and other planned downstream products at the Mountain Pass facility or other facilities and obtain profitability.
 
We currently have limited commercial production and revenues from the Mountain Pass facility and have carried on our business at a loss since inception. We expect to continue to incur losses unless and until we achieve full planned production rates and generate sufficient revenues to fund our continuing operations. We expect to incur substantial losses for the foreseeable future related to operating expenses, modernization and expansion activities and other capital expenditures, which may increase in subsequent years as needed consultants, personnel and equipment are retained as we continue to implement our business plan. The amounts and timing of expenditures will depend on the progress of our ongoing modernization and expansion efforts, the results of consultants’ analysis and recommendations, the rate at which operating losses are incurred, the execution of any joint venture agreements with strategic partners and other factors, many of which are beyond our control. As a result, we may not ever achieve profitability.
 
We rely on a limited number of customers for a significant portion of our revenue, and the loss of significant customers, or significant changes in prices or other terms with significant customers, prior to the completion of the restart of our mining operations and modernization and expansion of the Mountain Pass facility, could have a material adverse effect on our business, results of operations and financial condition.
 
There is a limited market for the REOs that we currently produce from stockpile concentrates. We currently have four customers that individually account for a significant portion of our revenue. The percentage of our total sales that is attributed to these customers is as follows for the indicated periods.
 
                 
    Three Months
    Nine Months
 
    Ended
    Ended
 
    September 30, 2010     September 30, 2010  
 
W.R. Grace & Co.-Conn
    23 %     43 %
Shin-Etsu Chemical Co. 
    22 %     15 %
Mitsubishi Corporation Unimetals U.S.A. 
    18 %     11 %
3M Company
    17 %     15 %


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If our total sales to these customers are reduced or if the prices we realize from these customers are reduced before we are able to reduce costs, our operating revenues would likely be materially adversely affected. As a result, significant changes in volume, prices or other terms with these customers, prior to the completion of the restart of our mining operations and modernization and expansion of the Mountain Pass facility could have a material adverse effect on our business, results of operations and financial condition.
 
We may be adversely affected by fluctuations in demand for, and prices of, rare earth products.
 
Because our sole source of revenue is the sale of rare earth minerals and products, changes in demand for, and the market price of, rare earth minerals and products could significantly affect our profitability. The value and price of our common stock and our financial results may be significantly adversely affected by declines in the prices of rare earth minerals and products. Rare earth minerals and product prices may fluctuate and are affected by numerous factors beyond our control such as interest rates, exchange rates, inflation or deflation, fluctuation in the relative value of the U.S. dollar against foreign currencies on the world market, global and regional supply and demand for rare earth minerals and products, and the political and economic conditions of countries that produce rare earth minerals and products.
 
As a result of the global economic crisis, rare earth product prices declined by approximately 50% during 2008 and through the third quarter of 2009. Similarly, there can be no assurance that the recent increase in market prices will be sustained in future periods. Protracted periods of low prices for rare earth minerals and products could significantly reduce revenues and the availability of required development funds in the future. This could cause substantial reductions to, or a suspension of, REO production operations, impair asset values and reduce our proven and probable rare earth ore reserves.
 
Demand for our products may be impacted by demand for downstream products incorporating rare earths, including hybrid and electric vehicles, wind power equipment and other clean technology products, as well as demand in the general automotive and electronic industries. Lack of growth in these markets may adversely affect the demand for our products.
 
In contrast, extended periods of high commodity prices may create economic dislocations that may be destabilizing to rare earth minerals supply and demand and ultimately to the broader markets. Periods of high rare earth mineral market prices generally are beneficial to our financial performance. However, strong rare earth mineral prices, as well as real or perceived disruptions in the supply of rare earth minerals, also create economic pressure to identify or create alternate technologies that ultimately could depress future long-term demand for rare earth minerals and products, and at the same time may incentivize development of otherwise marginal mining properties. For example, automobile manufacturers have recently announced plans to develop motors for electric and hybrid cars that do not require rare earth metals, due to concerns about the available supply of rare earths. If the automobile industry reduces its reliance on rare earth products, the resulting change in demand could have a material adverse effect on our business.
 
Conditions in the rare earth industry have been, and may continue to be, extremely volatile, which could have a material impact on our company.
 
Conditions in the rare earth industry have been extremely volatile, and prices, as well as supply and demand, have been significantly impacted by a number of factors, principally (1) changes in economic conditions and demand for rare earth materials and (2) changes, or perceived changes, in Chinese quotas for export of rare earth materials. As a result of the global economic crisis, rare earth product prices declined by approximately 50% during 2008 and through the third quarter of 2009. According to Metal-Pages, from October 2009 through December 2010, prices for rare earths have risen by approximately 780% on average. Furthermore, over the same period, prices for some of the most common rare earths (cerium oxide, lanthanum oxide, neodymium oxide, and rare earth carbonate) have risen by more than 1000% on average. If conditions in our industry remain volatile, our stock price may continue to exhibit volatility as well. In particular, if prices or demand for rare earths were to decline, our stock price would likely decline, and this could also impair our ability to obtain remaining capital needed for development of our property and our ability to find purchasers for our products.


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If we finance the necessary capital to execute our current business plan through a securities offering or debt financing, you may experience dilution in the event of an equity financing, or we may be highly leveraged in the event of a debt financing.
 
We may finance the capital expenditures necessary for our modernization and expansion costs, including the capacity expansion plan, through a public or private offering of securities or debt financing. An equity offering, including any issuance of common stock to Sumitomo, will have the effect of diluting the proportionate equity interest and voting power of holders of our common stock. A debt financing may result in us being highly leveraged, and our level of indebtedness could restrict our ability to execute our current business plan.
 
Our business will be adversely affected if we do not successfully implement new processing technologies and capabilities.
 
Our processing technologies and capabilities are key components of our competitive strengths and are expected to contribute to low operating costs and increasing the life of the ore body at the Mountain Pass facility. In the second quarter of 2010, we began to process bastnasite concentrate from our stockpiles in an effort to significantly improve these technologies and capabilities and optimize recovery rates. Although this effort has been successful at pilot-scale level with over 95% recovery, we may not be able to scale the new technology and recovery rates to commercial levels, or may not be able to do so by 2012, as planned. We are also working to optimize other steps in our production process. Any failure may affect our ability to achieve the expected benefits of the new technologies and may have a material adverse effect on our financial condition or results of operations.
 
We operate in a highly competitive industry.
 
The rare earths mining and processing markets are capital intensive and competitive. Our Chinese competitors may have greater financial resources, as well as other strategic advantages to maintain, improve and possibly expand their facilities. Additionally, the Chinese producers have historically been able to produce at relatively low costs due to domestic economic factors. Even upon successful implementation of the new processing technologies and capabilities at the Mountain Pass facility, if we are not able to achieve anticipated costs of production, then any strategic advantages that our competitors may have over us, such as lower labor costs, could have a material adverse effect on our business.
 
The success of our business will depend, in part, on the establishment of new uses and markets for rare earth products.
 
The success of our business will depend, in part, on the establishment of new markets by us or third parties for certain rare earth products that may be in low demand. Although we are developing rare earth products for use in NdFeB magnets, which are used in critical existing and emerging technologies, such as hybrid and electric vehicles, wind power turbines and compact fluorescent lighting, the success of our business depends on creating new markets and successfully commercializing rare earth products in existing and emerging markets. Any unexpected costs or delays in the commercialization of any of the foregoing products and applications could have a material adverse effect on our financial condition or results of operations.
 
An increase in the global supply of rare earth products, dumping and predatory pricing by our competitors may materially adversely affect our profitability.
 
The pricing and demand for our products is affected by a number of factors beyond our control, including growth of economic development and the global supply and demand for REO products. According to IMCOA, it is estimated that China accounted for approximately 96% of global REO production in 2008. China also dominates the manufacture of metals and NdFeB magnets from rare earths, a capacity that is not currently found in the United States. Once we reach full planned production rates for REOs and other planned downstream products, the increased competition may lead our competitors to engage in predatory pricing behavior. Any increase in the amount of rare earth products exported from other nations and increased competition may result in price reductions, reduced margins and loss of potential market share, any of which


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could materially adversely affect our profitability. As a result of these factors, we may not be able to compete effectively against current and future competitors.
 
We may not be able to adequately protect our intellectual property rights. If we fail to adequately enforce or defend our intellectual property rights, our business may be harmed.
 
Much of the technology used in the markets in which we compete is protected by patents and trade secrets, and our commercial success will depend in significant part on our ability to obtain and maintain patent and trade secret protection for our products and methods. To compete in these markets, we rely on a combination of trade secret protection, nondisclosure and licensing agreements, patents and trademarks to establish and protect our proprietary intellectual property rights, including our proprietary rare earth production processes that are not patented. We also have a proven technology and product development group and as of February 3, 2011, held 73 issued and pending U.S. patents and patent applications, and 173 issued and pending foreign patents and patent applications. We intend to rely on patented products, such as XSORBX®, and related licensing agreements to establish proprietary markets for low demand REEs. These intellectual property rights may be challenged or infringed upon by third parties or we may be unable to maintain, renew or enter into new license agreements with third-party owners of intellectual property on reasonable terms. In addition, our intellectual property may be subject to infringement or other unauthorized use outside of the United States. In such case, our ability to protect our intellectual property rights by legal recourse or otherwise may be limited, particularly in countries where laws or enforcement practices are undeveloped or do not recognize or protect intellectual property rights to the same extent as the United States. Unauthorized use of our intellectual property rights or our inability to preserve existing intellectual property rights could adversely impact our competitive position and results of operations. The loss of our patents could reduce the value of the related products. In addition, the cost to litigate infringements of our patents, or the cost to defend ourselves against patent infringement actions by others, could be substantial.
 
Proprietary trade secrets and unpatented know-how are also very important to our business. We rely on trade secrets to protect certain aspects of our technology, especially where we do not believe that patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. Our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our confidential information to competitors, and confidentiality agreements may not provide an adequate remedy in the event of unauthorized disclosure of confidential or proprietary information. Enforcing a claim that a third party illegally obtained and is using our trade secrets is expensive and time consuming, and the outcome is unpredictable. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. Failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
 
We may not be able to obtain additional patents and the legal protection afforded by any additional patents may not adequately protect our rights or permit us to gain or keep any competitive advantage.
 
Our ability to obtain additional patents is uncertain and the legal protection afforded by these patents is limited and may not adequately protect our rights or permit us to gain or keep any competitive advantage. In addition, the specific content required of patents and patent applications that are necessary to support and interpret patent claims is highly uncertain due to the complex nature of the relevant legal, scientific and factual issues. Changes in either patent laws or interpretations of patent laws in the United States or elsewhere may diminish the value of our intellectual property or narrow the scope of our patent protection. Even if patents are issued regarding our products and processes, our competitors may challenge the validity of those patents. Patents also will not protect our products and processes if competitors devise ways of making products without infringing our patents.
 
If we infringe, or are accused of infringing, the intellectual property rights of third parties, it may increase our costs or prevent us from being able to sell our existing products or commercialize new products.
 
There is a risk that we may infringe, or may be accused of infringing, the proprietary rights of third parties under patents and pending patent applications belonging to third parties that may exist in the United States and elsewhere in the world that relate to our rare earth products and processes. Because the patent


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application process can take several years to complete, there may be currently pending applications that may later result in issued patents that cover our products and processes. In addition, our products and processes may infringe existing patents.
 
Defending ourselves against third-party claims, including litigation in particular, would be costly and time consuming and would divert management’s attention from our business, which could lead to delays in our expansion and modernization efforts. If third parties are successful in their claims, we might have to pay substantial damages or take other actions that are adverse to our business. As a result of intellectual property infringement claims, or to avoid potential claims, we might:
 
  •  be prohibited from, or delayed in, selling or licensing some of our products or using some of our processes unless the patent holder licenses the patent to us, which it is not required to do;
 
  •  be required to pay substantial royalties or grant a cross license to our patents to another patent holder; or
 
  •  be required to redesign a product or process so it does not infringe a third party’s patent, which may not be possible or could require substantial funds and time.
 
In addition, we could be subject to claims that our employees, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of third parties.
 
If we are unable to resolve claims that may be brought against us by third parties related to their intellectual property rights on terms acceptable to us, we may be precluded from offering some of our products or using some of our processes.
 
Power shortages at the Mountain Pass facility may temporarily delay mining and processing operations and increase costs, which may materially adversely impact our business.
 
Due to its position on the regional electric grid, the Mountain Pass facility faces occasional power shortages during peak periods. Instability in electrical supply in past years has caused sporadic outages and brownouts and higher costs. Such outages and brownouts have had a negative impact on production. We plan to install a natural gas powered co-generation power plant as part of our modernization and expansion of the Mountain Pass facility to reduce energy costs at the Mountain Pass facility as well as minimize or eliminate our reliance on the regional electric power grid. If the co-generation power plant is not installed, or is significantly delayed, we will remain subject to the effects of occasional power outages and brownouts and could experience temporary interruptions of mining and processing operations. We then may be unable to fill customer orders in a timely manner and may be subject to higher power costs at the Mountain Pass facility. As a result, our revenue could be adversely impacted and our relationships with our customers could suffer, adversely impacting our ability to generate future revenue. In addition, if power to the Mountain Pass facility is disrupted during certain phases of our REO extraction process, we may incur significant expenses that may adversely affect our business.
 
Increasing costs or limited access to raw materials may adversely affect our profitability.
 
We use significant amounts of hydrochloric acid and sodium hydroxide as reagents to process REOs. We ultimately intend to produce our own hydrochloric acid and sodium hydroxide at the Mountain Pass facility. While the technology used to produce hydrochloric acid and sodium hydroxide is well developed, this technology has not yet been implemented at the Mountain Pass facility. Accordingly, we currently purchase hydrochloric acid and sodium hydroxide in the open market and, as a result, could be subject to significant volatility in the cost or availability of these reagents. We may not be able to pass increased prices for these reagents through to our customers in the form of price increases. A significant increase in the price, or decrease in the availability, of these reagents before we perfect our ability to produce them on site could materially increase our operating costs and adversely affect our profit margins from quarter to quarter.


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Fluctuations in transportation costs or disruptions in transportation services could increase competition or impair our ability to supply rare earth minerals or products to our customers, which could adversely affect our results of operations.
 
Finding affordable and dependable transportation is important because it allows us to supply customers around the world. Labor disputes, derailments, adverse weather conditions or other environmental events and changes to rail or ocean freight systems could interrupt or limit available transport services, which could result in customer dissatisfaction and loss of sales potential and could materially adversely affect our results of operations.
 
We must process REOs to exacting specifications in order to provide customers with a consistently high quality product. An inability to perfect the mineral extraction process to meet individual customer specifications may have a material adverse effect on our financial condition or results of operations.
 
We process REOs to meet customer needs and specifications and to provide customers with a consistently high quality product and a purity higher than previously achieved in prior mining operations at the Mountain Pass facility. An inability to perfect the mineral extraction process to meet individual customer specifications may have a material adverse effect on our financial condition or results of operations. In addition, customer needs and specifications may change with time. Any delay or failure in developing processes to meet changing customer needs and specifications may have a material adverse effect on our financial condition or results of operations.
 
Diminished access to water may adversely affect our operations.
 
Currently, processing of REOs requires significant amounts of water. The technology we are developing to significantly reduce our need for fresh water, including proprietary production of our own hydrochloric acid and sodium hydroxide from waste water at our own chlor-alkali plant, has not yet been proven at commercial scale and has not yet been implemented. Although we believe our existing water rights and water supply are sufficient to meet our projected water requirements, any decrease or disruption in our available water supply until this technology is successfully developed may have a material adverse effect on our operations and our financial condition or results of operations.
 
Inaccuracies in our estimates of REO reserves and resource deposits could result in lower than expected revenues and higher than expected costs.
 
We base our REO reserve and resource estimates on engineering, economic and geological data assembled and analyzed by outside firms, which are reviewed by our engineers and geologists. Ore reserve estimates, however, are necessarily imprecise and depend to some extent on statistical inferences drawn from available drilling data, which may prove unreliable. There are numerous uncertainties inherent in estimating quantities and qualities of REO reserves and non-reserve REO deposits and costs to mine recoverable reserves, including many factors beyond our control. Estimates of economically recoverable REO reserves necessarily depend upon a number of variable factors and assumptions, all of which may vary considerably from actual results, such as:
 
  •  geological and mining conditions and/or effects from prior mining that may not be fully identified by available data or that may differ from experience;
 
  •  assumptions concerning future prices of rare earth products, operating costs, mining technology improvements, development costs and reclamation costs; and
 
  •  assumptions concerning future effects of regulation, including the issuance of required permits and taxes by governmental agencies.
 
Any inaccuracy in our estimates related to our REO reserves and non-reserve REO deposits could result in lower than expected revenues and higher than expected costs or a shortened estimated life for the mine at the Mountain Pass facility.


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Period-to-period conversion of probable rare earth ore reserves to proven ore reserves may result in increases or decreases to the total reported amount of ore reserves. Conversion, an indicator of the success in upgrading probable ore reserves to proven ore reserves, is evaluated annually. Conversion rates are affected by a number of factors, including geological variability, applicable mining methods and changes in safe mining practices, economic considerations and new regulatory requirements.
 
Work stoppages or similar difficulties could significantly disrupt our operations, reduce our revenues and materially adversely affect our results of operations.
 
As of December 31, 2010, approximately 72 employees at the Mountain Pass facility were covered by a collective bargaining agreement with the United Steelworkers of America that expires in March 2012. A work stoppage at the Mountain Pass facility could significantly disrupt our operations, reduce our revenues and materially adversely affect our results of operations.
 
A shortage of skilled technicians and engineers may further increase operating costs, which may materially adversely affect our results of operations.
 
Efficient production of rare earth products using modern techniques and equipment requires skilled technicians and engineers. In addition, our expansion efforts will significantly increase the number of skilled technicians and engineers required to successfully operate our business. In the event that we are unable to hire and train the necessary number of skilled technicians and engineers, there could be an adverse impact on our labor costs and our ability to reach full planned production levels in a timely manner, which could have a material adverse effect on our results of operations.
 
We depend on key personnel for the success of our business.
 
We depend on the services of our senior management team and other key personnel. The loss of the services of any member of senior management or a key employee could have an adverse effect on our business. We may not be able to locate, attract or employ on acceptable terms qualified replacements for senior management or other key employees if their services are no longer available.
 
Because of the dangers involved in the mining of minerals and the manufacture of mineral products, there is a risk that we may incur liability or damages as we conduct our business.
 
The mining of minerals and the manufacture of mineral products involves numerous hazards, including:
 
  •  unusual and unexpected rock formations affecting ore or wall rock characteristics;
 
  •  ground or slope failures;
 
  •  environmental hazards;
 
  •  industrial accidents;
 
  •  processing problems;
 
  •  periodic interruptions due to inclement or hazardous weather conditions or other acts of God; and
 
  •  mechanical equipment failure and facility performance problems.
 
Although we maintain insurance to address certain risks involved in our business, such as coverage for pollution liability, property damage, business interruption and workers compensation, there can be no assurance that we will be able to maintain insurance to cover these risks at economically feasible premiums. Additionally, we cannot be certain that all claims we may make under our insurance policies will be deemed to be within the scope of, or fully covered by, our policies. Furthermore, we do not maintain coverage for losses resulting from acts of terrorism. We might also become subject to liability for environmental damage or other hazards that may be uninsurable or for which we may elect not to insure because of premium costs or commercial impracticality. These policies contain limits of coverage and exclusions that are typical of such policies generally. For example, our pollution liability policy has $20 million aggregate and per incident limits


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and excludes, among other things, costs associated with closure, post-closure and reclamation. The payment of such premiums, or the assumption of such liabilities, may have a material adverse effect on our financial position and results of operations.
 
Risks Related to Environmental Regulation
 
Our operations are subject to extensive and costly environmental requirements; and current and future laws, regulations and permits will impose significant costs, liabilities or obligations or could limit or prevent our ability to continue our current operations or to undertake new operations.
 
We are subject to numerous and detailed, federal, state and local environmental laws, regulations and permits, including those pertaining to employee health and safety, environmental permitting and licensing, air quality standards, greenhouse gas, or GHG, emissions, water usage and pollution, waste management, plant and wildlife protection, including the protection of endangered species, handling and disposal of radioactive substances, remediation of soil and groundwater contamination, land use, reclamation and restoration of properties, the discharge of materials into the environment and groundwater quality and availability. These requirements may result in significant costs, liabilities and obligations, impose conditions that are difficult to achieve or otherwise delay, limit or prohibit current or planned operations. Consequently, the modernization and expansion of the Mountain Pass facility may be delayed, limited or prevented and current operations may be curtailed. Failure to comply with these laws, regulations and permits may result in the assessment of administrative, civil and criminal penalties, the issuance of injunctions to limit or cease operations, the suspension or revocation of permits and other sanctions. Pursuant to such requirements, we may also be subject to third-party claims, including for damages to property or injury to persons arising from our operations. Moreover, these environmental requirements, and the interpretation and enforcement thereof, change frequently and have tended to become more stringent over time. For example, GHG emission regulation is becoming more rigorous. As a result of our planned expansion, we expect to be required to report annual GHG emissions from our operations, and additional GHG emission related requirements are in various stages of development. The U.S. Congress is considering various legislative proposals to address climate change, including a nationwide limit on GHGs. In addition, the U.S. Environmental Protection Agency, or EPA, has issued regulations, including the “Tailoring Rule,” that subject GHG emissions from certain stationary sources to the Prevention of Significant Deterioration and Title V provisions of the federal Clean Air Act. California is also implementing regulations pursuant to its Global Warming Solutions Act that will establish a state-wide cap-and trade program for GHG emissions. Any such regulations could require us to modify existing permits or obtain new permits, implement additional pollution control technology, curtail operations or increase significantly our operating costs. Any regulation of GHG emissions, including through a cap-and-trade system, technology mandate, emissions tax, reporting requirement or other program, could adversely affect our business, financial condition, reputation, operating performance and product demand.
 
Any future changes in these laws, regulations or permits (or the interpretation or enforcement thereof) or any sanctions, damages, costs, obligations or liabilities in respect of these matters could have a material adverse effect on our business, results of operations and financial condition.
 
We are subject to the Federal Mine Safety and Health Act of 1977 and the California Occupational Safety and Health Program, and regulations adopted pursuant thereto, which impose stringent health and safety standards on numerous aspects of our operations.
 
Our operations at the Mountain Pass facility are subject to the Federal Mine Safety and Health Act of 1977, as amended by the Mine Improvement and New Emergency Response Act of 2006, and the regulations adopted by the California Occupational Safety and Health Administration, which impose stringent health and safety standards on numerous aspects of mineral extraction and processing operations, including the training of personnel, operating procedures, operating equipment and other matters. Our failure to comply with such standards, or changes in such standards or the interpretation or enforcement thereof, could have a material adverse effect on our business, financial condition or otherwise impose significant restrictions on our ability to conduct mineral extraction and processing operations.


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Our operations may affect the environment or cause exposure to hazardous substances, any of which could result in material costs, obligations or liabilities.
 
Our operations currently use, and in the past have used, hazardous materials and generate, and in the past have generated, hazardous and naturally occurring radioactive wastes. The Mountain Pass facility has been used for mining and related purposes since 1952, and contamination is known to exist around the facility. We may be subject to claims under environmental laws, regulations and permits for toxic torts, natural resource damages and other liabilities, as well as for the investigation and remediation of soil, surface water, groundwater and other environmental media. The Mountain Pass facility is currently subject to an order issued by the Lahontan Regional Water Quality Control Board pursuant to which we have conducted various investigatory and remedial actions, primarily related to certain onsite impoundments, including groundwater monitoring, extraction and treatment and soil remediation. We are still in the process of delineating the extent of groundwater contamination at and around the facility and cannot assure you that we will not incur material costs relating to the remediation of such contamination. Also, prior to our acquisition of the Mountain Pass facility, leaks in a wastewater pipeline from the Mountain Pass facility to offsite evaporation ponds on the Ivanpah dry lake bed caused contamination. However, that contamination is being remediated by Chevron Mining Inc., who retained ownership of the ponds and the pipeline. In addition to claims arising out of our current or former properties, such claims may arise in connection with contaminated third-party sites at which we have disposed of waste. As a matter of law, and despite any contractual indemnity or allocation arrangements or acquisition agreements to the contrary, our liability for these claims may be joint and several, so that we may be held responsible for more than our share of any contamination, or even for the entire share. These and similar unforeseen impacts that our operations may have on the environment, as well as human exposure to hazardous or radioactive materials or wastes associated with our operations, could have a material adverse effect on our business, reputation, results of operation and financial condition.
 
We may be unable to obtain, maintain or renew permits necessary for the development or operation of the Mountain Pass facility, which could have a material adverse effect on our business, results of operations and financial condition.
 
We must obtain a number of permits that impose strict conditions, requirements and obligations relating to various environmental and health and safety matters in connection with our current and future operations, including the modernization and expansion of the Mountain Pass facility. To obtain, maintain and renew certain permits, we may be required to conduct environmental studies and collect and present data to governmental authorities pertaining to the potential impact of our current and future operations upon the environment, including the potential impact on endangered species, and to take steps to avoid or mitigate those impacts. The permitting rules, and interpretation thereof, are complex and have tended to become more stringent over time. In some cases, the public (including environmental interest groups) has rights to comment upon and submit objections to permit applications and environmental analysis prepared in connection therewith, and otherwise participate in the permitting process, including challenging the issuance of permits, validity of environmental analyses and determinations and performance of permitted activities. Accordingly, permits required for our operations, including the modernization and expansion of the Mountain Pass facility, may not be issued, maintained or renewed in a timely fashion or at all, may be issued or renewed upon conditions that restrict our ability to conduct our operations economically, or may be subsequently revoked. Any such failure to obtain, maintain or renew permits, or other permitting delays or conditions, including in connection with any environmental impact analyses, could have a material adverse effect on our business, results of operations and financial condition.
 
Our inability to acquire, maintain or renew financial assurances related to the reclamation and restoration of mining property could have a material adverse effect on our business and results of operations.
 
We are generally obligated to restore property after it has been mined in accordance with regulatory standards and our approved reclamation plan. We are required under federal, state and local laws to maintain financial assurances, such as surety bonds, to secure such obligations. The failure to acquire, maintain or


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renew such assurances, as required by federal, state and local laws, could subject us to fines and penalties as well as the revocation of our operating permits. Such failure could result from a variety of factors, including:
 
  •  the lack of availability, higher expense or unreasonable terms of such financial assurances;
 
  •  the ability of current and future financial assurance counterparties to increase required collateral; and
 
  •  the exercise by third-party financial assurance counterparties of any rights to refuse to renew the financial assurance instruments.
 
Our inability to acquire or failure to maintain or renew such financial assurances could have a material adverse effect on our business, financial condition and results of operations.
 
If the assumptions underlying our reclamation plan and mine closure obligations are inaccurate, we could be required to expend materially greater amounts than anticipated to reclaim mined property, which could materially and adversely affect our business, results of operations and financial condition.
 
Federal, state and local laws and regulations establish reclamation and closure standards applicable to our surface mining and other operations as well. Estimates of our total reclamation and mine closing liabilities are based upon our closure and reclamation plans, third-party expert reports, current applicable laws and regulations, certain permit terms and our engineering expertise related to these requirements. Any change in the underlying assumptions or other variation between the estimated liabilities and actual costs could materially and adversely affect our business, results of operations and financial condition.
 
Risks Related to Ownership of Our Mandatory Convertible Preferred Stock
 
You will bear the risk of a decline in the market price of our common stock between the pricing date for the mandatory convertible preferred stock and the mandatory conversion date.
 
The number of shares of our common stock that you would receive upon mandatory conversion is not fixed, but instead will depend on the applicable market value, which is the average VWAP per share of our common stock over the 20 consecutive trading day period ending on, and including, the third trading day immediately preceding the mandatory conversion date. The aggregate market value of the shares of our common stock that you would receive upon mandatory conversion may be less than the aggregate liquidation preference of your shares of mandatory convertible preferred stock. Specifically, if the applicable market value of our common stock is less than the initial price of $50.00, subject to certain anti-dilution adjustments, the market value of the shares of our common stock that you would receive upon mandatory conversion of each mandatory convertible preferred stock will be less than the $100.00 liquidation preference, and an investment in the mandatory convertible preferred stock would result in a loss. Accordingly, you will bear the entire risk of a decline in the market price of our common stock. Any such decline could be substantial.
 
Purchasers of our mandatory convertible preferred stock may not realize any or all of the benefit of an increase in the market price of shares of our common stock.
 
The market value of each share of our common stock that you will receive upon mandatory conversion of each share of our mandatory convertible preferred stock on the mandatory conversion date will only exceed the liquidation preference of $100.00 per share of mandatory convertible preferred stock if the applicable market value of our common stock exceeds the threshold appreciation price of $60.00, subject to certain anti-dilution adjustments. The threshold appreciation price represents an appreciation of 20% over the initial price. If the applicable market value of our common stock exceeds the threshold appreciation price, you will receive on the mandatory conversion date approximately 83% (which percentage is equal to the initial price divided by the threshold appreciation price) of the value of our common stock that you would have received if you had made a direct investment in our common stock on the date of this prospectus. This means that the opportunity for equity appreciation provided by an investment in our mandatory convertible preferred stock is less than that provided by a direct investment in shares of our common stock.


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In addition, if the market value of our common stock appreciates and the applicable market value of our common stock is equal to or greater than the initial price but less than or equal to the threshold appreciation price, the aggregate market value of the shares of our common stock that you would receive upon mandatory conversion will only be equal to the aggregate liquidation preference of the mandatory convertible preferred stock, and you will realize no equity appreciation on our common stock.
 
The market price of our common stock, which may fluctuate significantly, will directly affect the market price for our mandatory convertible preferred stock.
 
We expect that generally the market price of our common stock will affect the market price of our mandatory convertible preferred stock more than any other single factor. This may result in greater volatility in the market price of the mandatory convertible preferred stock than would be expected for nonconvertible preferred stock. The market price of our common stock will likely fluctuate in response to a number of factors, including our financial condition, operating results and prospects, as well as economic, financial and other factors, such as prevailing interest rates, interest rate volatility, changes in our industry and competitors and government regulations, many of which are beyond our control. For more information regarding such factors, see the sections of this prospectus above entitled “— Risks Related to Our Business” and “— Risks Related to Ownership of Our Common Stock.”
 
In addition, we expect that the market price of the mandatory convertible preferred stock will be influenced by yield and interest rates in the capital markets, the time remaining to the mandatory conversion date, our creditworthiness and the occurrence of certain events affecting us that do not require an adjustment to the fixed conversion rates. Fluctuations in yield rates in particular may give rise to arbitrage opportunities based upon changes in the relative values of the mandatory convertible preferred stock and our common stock. Any such arbitrage could, in turn, affect the market prices of our common stock and the mandatory convertible preferred stock.
 
Recent regulatory actions may adversely affect the trading price and liquidity of the mandatory convertible preferred stock.
 
We expect that many investors in, and potential purchasers of, the mandatory convertible preferred stock will employ, or seek to employ, a convertible arbitrage strategy with respect to the mandatory convertible preferred stock. Investors that employ a convertible arbitrage strategy with respect to convertible securities typically implement that strategy by selling short the common stock underlying the convertible securities and dynamically adjusting their short position while they hold the securities. As a result, any specific rules regulating short selling of securities or other governmental action that interferes with the ability of market participants to effect short sales in our common stock could adversely affect the ability of investors in, or potential purchasers of, the mandatory convertible preferred stock to conduct the convertible arbitrage strategy that we believe they will employ, or seek to employ, with respect to the mandatory convertible preferred stock. This could, in turn, adversely affect the trading price and liquidity of the mandatory convertible preferred stock.
 
At an open meeting on February 24, 2010, the SEC adopted a new short sale price test through an amendment to Rule 201 of Regulation SHO. The amendments to Rule 201 became effective on May 10, 2010 and restrict short selling when the price of a “covered security” has triggered a “circuit breaker” by falling at least 10% in one day, at which point short sale orders can be displayed or executed only if the order price is above the current national best bid, subject to certain limited exceptions. Compliance with the amendments to Rule 201 was required by November 10, 2010. Because our common stock is a “covered security,” the new restrictions may interfere with the ability of investors in, and potential purchasers of, the mandatory convertible preferred stock, to effect short sales in our common stock and conduct the convertible arbitrage strategy that we believe they will employ, or seek to employ, with respect to the mandatory convertible preferred stock.
 
In addition, on June 10, 2010, the SEC approved a six-month pilot (the “circuit breaker pilot”) pursuant to which several national securities exchanges and the Financial Industry Regulatory Authority, Inc.


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(“FINRA”) adopted rules to halt trading in securities included in the S&P 500 Index if the price of any such security moves 10% or more from a sale in a five-minute period. On September 10, 2010, the SEC approved an expansion of the circuit breaker pilot to include component securities of the Russell 1000 Index and over 300 exchange traded funds. Our common stock is not included in either the S&P 500 Index or the Russell 1000 Index and therefore is not subject to the circuit breaker pilot at this time. However, the SEC could further expand the circuit breaker pilot in the future or adopt other rules that limit trading in response to market volatility. Any such additional regulatory actions may decrease or prevent an increase in the market price and/or liquidity of our common stock and/or interfere with the ability of investors in, and potential purchasers of, the mandatory convertible preferred stock, to effect hedging transactions in or relating to our common stock and conduct the convertible arbitrage strategy that we believe they will employ, or will seek to employ, with respect to the mandatory convertible preferred stock.
 
Although the direction and magnitude of the effect that the amendments to Regulation SHO, the circuit breaker pilot and any additional regulations may have on the trading price and the liquidity of the mandatory convertible preferred stock will depend on a variety of factors, many of which cannot be determined at this time, past regulatory actions have had a significant impact on the trading prices and liquidity of convertible securities. For example, in September 2008, the SEC issued emergency orders generally prohibiting short sales in the common stock of a variety of financial services companies while Congress worked to provide a comprehensive legislative plan to stabilize the credit and capital markets. The orders made the convertible arbitrage strategy that many investors in convertible securities employ difficult to execute and adversely affected both the liquidity and trading price of convertible securities issued by many of the financial services companies subject to the prohibition. Any governmental actions that restrict the ability of investors in, or potential purchasers of, the mandatory convertible preferred stock to effect short sales in our common stock or to implement hedging strategies, including the recently adopted amendments to Regulation SHO, could similarly adversely affect the trading price and the liquidity of the mandatory convertible preferred stock.
 
The fundamental change conversion rate and the payment of the fundamental change dividend make-whole amount upon the occurrence of certain fundamental changes may not adequately compensate you for the lost option value and lost dividends as a result of early conversion upon a fundamental change.
 
If a fundamental change (as defined in the section of this prospectus entitled “Description of Mandatory Convertible Preferred Stock — Conversion at the Option of the Holder upon Fundamental Change; Fundamental Change Dividend Make-whole Amount”) occurs on or prior to the mandatory conversion date, the fundamental change conversion rate will apply to the shares of mandatory convertible preferred stock converted during the fundamental change conversion period (as defined in the section of this prospectus entitled “Description of Mandatory Convertible Preferred Stock — Conversion at the Option of the Holder upon Fundamental Change; Fundamental Change Dividend Make-whole Amount”) unless the stock price is less than $5.00 or above $300.00 (in each case, subject to adjustment) and, with respect to those shares of mandatory convertible preferred stock converted, you will also receive, among other consideration, a fundamental change dividend make-whole amount, subject to our right to deliver shares of common stock in lieu of all or part of such amount. The number of shares to be issued upon conversion in connection with a fundamental change will be determined as described in the section of this prospectus entitled “Description of Mandatory Convertible Preferred Stock — Conversion at the Option of the Holder upon Fundamental Change; Fundamental Change Dividend Make-whole Amount.” Although the fundamental change conversion rate and the payment of the fundamental change dividend make-whole amount are generally designed to compensate you for the lost option value that you would suffer and lost dividends as a result of converting your shares of mandatory convertible preferred stock upon a fundamental change, the fundamental change conversion rate is also designed to compensate us for the lost option value that we would suffer as a result of any such conversion. As a result, in many cases the fundamental change conversion rate will be less than the conversion rate that would apply upon mandatory conversion. The fundamental change conversion rate and fundamental change dividend make-whole amount are generally only an approximation of such lost option value and lost dividends and may not adequately compensate you for your actual loss. Furthermore, our obligation to deliver a number of shares of common stock, per share of the mandatory convertible preferred stock, equal to the fundamental change conversion rate and pay the fundamental change dividend make-whole amount (whether


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in cash or shares of our common stock) upon a conversion during the fundamental change conversion period could be considered a penalty under state law, in which case the enforceability thereof would be subject to general principles of reasonableness of economic remedies.
 
The fixed conversion rates of the mandatory convertible preferred stock may not be adjusted for all dilutive events that may adversely affect the market price of the mandatory convertible preferred stock or the common stock issuable upon conversion of the mandatory convertible preferred stock.
 
The fixed conversion rates are subject to adjustment only for share splits and combinations, share dividends and specified other transactions. See the section of this prospectus entitled “Description of Mandatory Convertible Preferred Stock — Anti-dilution Adjustments” for further discussion of anti-dilution adjustments. However, other events, such as employee stock option grants or offerings of our common stock or securities convertible into common stock (other than those set forth in the section of this prospectus entitled “Description of Mandatory Convertible Preferred Stock — Anti-dilution Adjustments”) for cash or in connection with acquisitions, which may adversely affect the market price of our common stock, may not result in any adjustment. Further, if any of these other events adversely affects the market price of our common stock, it may also adversely affect the market price of the mandatory convertible preferred stock. In addition, the terms of our mandatory convertible preferred stock do not restrict our ability to offer common stock or securities convertible into common stock in the future or to engage in other transactions that could dilute our common stock. We have no obligation to consider the specific interests of the holders of our mandatory convertible preferred stock in engaging in any such offering or transaction.
 
Purchasers of our mandatory convertible preferred stock may be adversely affected upon the issuance of a new series of preferred stock ranking equally with the mandatory convertible preferred stock sold in this offering.
 
The terms of our mandatory convertible preferred stock will not restrict our ability to offer a new series of preferred stock that ranks equally with our mandatory convertible preferred stock as to dividend payments or liquidation preference in the future. We have no obligation to consider the specific interests of the holders of our mandatory convertible preferred stock in engaging in any such offering or transaction.
 
You will have no rights with respect to our common stock until you convert your mandatory convertible preferred stock, but you may be adversely affected by certain changes made with respect to our common stock.
 
You will have no rights with respect to our common stock, including voting rights, rights to respond to common stock tender offers, if any, and rights to receive dividends or other distributions on our common stock, if any, prior to the conversion date with respect to a conversion of your mandatory convertible preferred stock, but your investment in our mandatory convertible preferred stock may be negatively affected by these events. Upon conversion, you will be entitled to exercise the rights of a holder of common stock only as to matters for which the record date occurs after the conversion date. For example, in the event that an amendment is proposed to our Amended and Restated Certificate of Incorporation or our Bylaws requiring stockholder approval and the record date for determining the stockholders of record entitled to vote on the amendment occurs prior to the conversion date, you will not be entitled to vote on the amendment, unless it would adversely affect the special rights, preferences, privileges and voting powers of the mandatory convertible preferred stock, although you will nevertheless be subject to any changes in the powers, preferences or special rights of our common stock.
 
You will have no voting rights except under limited circumstances.
 
You do not have voting rights, except with respect to certain amendments to the terms of the mandatory convertible preferred stock, in the case of certain dividend arrearages, in certain other limited circumstances and except as specifically required by Delaware law. You will have no right to vote for any members of our Board of Directors except in the case of certain dividend arrearages. If dividends on any shares of the mandatory convertible preferred stock have not been declared and paid for the equivalent of six or more


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dividend periods, whether or not for consecutive dividend periods, the holders of shares of mandatory convertible preferred stock, voting together as a single class with holders of any and all other classes or series of our preferred stock ranking equally with the mandatory convertible preferred stock either as to dividends or the distribution of assets upon liquidation, dissolution or winding up and having similar voting rights, will be entitled to vote for the election of a total of two additional members of our Board of Directors, subject to the terms and limitations described in the section of this prospectus entitled “Description of Mandatory Convertible Preferred Stock — Voting Rights.”
 
Our mandatory convertible preferred stock will rank junior to all of our and our subsidiaries’ liabilities, as well as the capital stock of our subsidiaries held by third parties, in the event of a bankruptcy, liquidation or winding up of our or our subsidiaries’ assets.
 
In the event of a bankruptcy, liquidation or winding up, our assets will be available to make payments to holders of our mandatory convertible preferred stock only after all of our liabilities have been paid. In addition, our mandatory convertible preferred stock will effectively rank junior to all existing and future liabilities of our subsidiaries, as well as the capital stock of our subsidiaries held by third parties. Your rights to participate in the assets of our subsidiaries upon any liquidation or reorganization of any subsidiary will rank junior to the prior claims of that subsidiary’s creditors and third party equity holders. In the event of a bankruptcy, liquidation or winding up, there may not be sufficient assets remaining, after paying our and our subsidiaries’ liabilities, to pay any amounts to the holders of our mandatory convertible preferred stock then outstanding. At September 30, 2010, we had total outstanding debt of approximately $5.0 million and no outstanding shares of preferred stock.
 
Our ability to pay dividends on our mandatory convertible preferred stock may be limited.
 
Our payment of dividends on our mandatory convertible preferred stock in the future will be determined by our Board of Directors (or an authorized committee thereof) in its sole discretion and will depend on business conditions, our financial condition, earnings and liquidity, and other factors.
 
The agreements governing any existing or future indebtedness of ours may limit our ability to pay cash dividends on our capital stock, including the mandatory convertible preferred stock. In the event that the agreements governing any such indebtedness restrict our ability to pay dividends in cash on the mandatory convertible preferred stock, we may be unable to pay dividends in cash on the mandatory convertible preferred stock unless we can refinance the amounts outstanding under such agreements.
 
In addition, under Delaware law, our Board of Directors (or an authorized committee thereof) may declare dividends on our capital stock only to the extent of our statutory “surplus” (which is defined as the amount equal to total assets minus total liabilities, in each case at fair market value, minus statutory capital), or if there is no such surplus, out of our net profits for the then current and/or immediately preceding fiscal year. Further, even if we are permitted under our contractual obligations and Delaware law to pay cash dividends on the mandatory convertible preferred stock, we may not have sufficient cash to pay dividends in cash on the mandatory convertible preferred stock.
 
If upon (i) mandatory conversion, (ii) an early conversion at the option of a holder or (iii) an early conversion during the fundamental change conversion period, we have not declared all or any portion of the accumulated and unpaid dividends payable on the mandatory convertible preferred stock for specified periods, in the case of clauses (i) and (ii), the applicable conversion rate will be adjusted so that converting holders receive an additional number of shares of common stock having a market value generally equal to the amount of such accumulated and unpaid dividends, and in the case of clause (iii), we will pay the amount of such accumulated and unpaid dividends in cash, shares of our common stock or any combination thereof, in our sole discretion, subject to the limitations described under “Description of the Mandatory Convertible Preferred Stock — Mandatory Conversion,” “— Conversion at the Option of the Holder” and “— Conversion at the Option of the Holder upon Fundamental Change; Fundamental Change Dividend Make-whole Amount,” respectively. In the case of mandatory conversion or conversion upon a fundamental change, if these limits to the adjustment of the conversion rate or the amount of such dividends payable in shares, as applicable, are reached, we will pay the shortfall in cash if we are legally permitted to do so. We will not have an obligation


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to pay the shortfall in cash if these limits to the adjustment of the conversion rate are reached in the case of an early conversion at the option of the holder.
 
You may be subject to tax upon an adjustment to the conversion rate of the mandatory convertible preferred stock even though you do not receive a corresponding cash distribution.
 
The conversion rate of the mandatory convertible preferred stock is subject to adjustment in certain circumstances. Refer to the section of this prospectus entitled “Description of Mandatory Convertible Preferred Stock — Anti-dilution Adjustments.” If, as a result of an adjustment (or failure to make an adjustment), your proportionate interest in our assets or earnings and profits is increased, you may be deemed to have received for U.S. federal income tax purposes a taxable dividend without the receipt of any cash or property. If you are a Non-U.S. Holder (as defined in the section of this prospectus entitled “Material U.S. Federal Income Tax Consequences”), such deemed dividend generally will be subject to U.S. federal withholding tax (currently at a 30% rate, or such lower rate as may be specified by an applicable treaty), which may be set off against subsequent payments on the mandatory convertible preferred stock. Refer to the section of this prospectus entitled “Material U.S. Federal Income Tax Consequences” for a further discussion of U.S. federal tax implications for U.S. Holders (as defined therein) and Non-U.S. Holders.
 
An active trading market for the mandatory convertible preferred stock does not exist and may not develop.
 
The mandatory convertible preferred stock is a new issue of securities with no established trading market. We have applied to list our mandatory convertible preferred stock on the New York Stock Exchange under the symbol “MCP PrA.” Even if the mandatory convertible preferred stock is approved for listing on the New York Stock Exchange, such listing does not guarantee that a trading market for the mandatory convertible preferred stock will develop or, if a trading market for the mandatory convertible preferred stock does develop, the depth or liquidity of that market or the ability of the holders to sell the mandatory convertible preferred stock, or to sell the mandatory convertible preferred stock at a favorable price.
 
Risks Related to Ownership of Our Common Stock
 
A trading market that will provide our stockholders with adequate liquidity may not be sustained. Our common stock has only been publicly traded since July 2010, and the price of our common stock may fluctuate significantly. Accordingly, stockholders could lose all or part of their investment.
 
Our shares of common stock began trading on the New York Stock Exchange, or NYSE, in July 2010. An active trading market for our common stock may not be sustained, which could depress the market price of our common stock and could affect holders’ ability to sell their shares of common stock. Limited trading volumes and liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of our common stock and limit the number of investors who are able to buy our common stock.
 
The market price of our common stock has been, and is likely to continue to be, highly volatile and may be influenced by many factors, some of which are beyond our control, including:
 
  •  the extremely volatile rare earth industry;
 
  •  our quarterly or annual earnings or those of other companies in our industry;
 
  •  loss of a large customer;
 
  •  changes in accounting standards, policies, guidance, interpretations or principles;
 
  •  general economic conditions;
 
  •  the failure of securities analysts to cover our stock or changes in financial estimates by analysts;
 
  •  future sales of our common stock; and
 
  •  other factors described in this “Risk Factors” section.
 
Our common stock price has been particularly affected by the volatility in the rare earths industry, as the high and the low sales price of our common stock in the period since we went public in July 2010 to February 10, 2011 has ranged from a low of $12.10 to a high of $62.80. If conditions in our industry remain


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volatile, our common stock price may continue to exhibit volatility as well. In particular, if prices or demand for rare earth were to decline, our stock price would likely decline.
 
Reports published by securities or industry analysts, including projections in those reports that exceed our actual results, could adversely affect our stock price and trading volume.
 
Research analysts publish their own quarterly projections regarding our operating results. These projections may vary widely from one another and may not accurately predict the results we actually achieve. Our stock price may decline if we fail to meet securities research analysts’ projections. Similarly, if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price could decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, our stock price or trading volume could decline.
 
Future sales, or availability for sale, of shares of common stock by stockholders could depress the market price of our common stock.
 
Sales of a substantial number of shares of our common stock in the public market following this offering, or the perception that large sales could occur, or the conversion of shares of our mandatory convertible preferred stock into common stock or the perception that conversion could occur, could depress the market price of our common stock. As of February 3, 2011, we had 82,300,757 shares of our common stock outstanding. All of these shares are freely tradable, except for any shares held by our “affiliates” as defined in Rule 144 under the Securities Act of 1933. Following the concurrent offering of common stock by the selling stockholders, 41,142,835 shares of common stock, or 39,137,087 shares of common stock if the underwriters exercise their option to purchase additional shares of common stock in the concurrent offering in full, will be beneficially owned by our affiliates. Additionally, up to 3,600,000 shares of common stock (or up to 4,140,000 shares if the underwriters in this offering exercise their over-allotment option in full), in each case subject to anti-dilution, make-whole and other adjustments, will be issuable upon conversion of shares of mandatory convertible preferred stock. All of these shares will be freely tradeable.
 
Holders, some of whom are selling stockholders in the concurrent offering, of 54,851,203 shares of common stock (and following the concurrent offering, 41,351,203 shares of common stock, or 39,326,203 shares of common stock if the underwriters exercise their option to purchase additional shares of common stock in the concurrent offering in full) have signed lock-up agreements under which they have agreed, subject to certain exceptions, including the sale of shares in the concurrent offering, not to sell, transfer or dispose of, directly or indirectly, any shares of our common stock or any securities into or exercisable or exchangeable for shares of our common stock without the prior written consent of J.P. Morgan Securities LLC and Morgan Stanley & Co. Incorporated for a period of 90 days, subject to a possible extension under certain circumstances, after the date of this prospectus. J.P. Morgan Securities LLC and Morgan Stanley & Co. Incorporated may, in their sole discretion, permit the sale of these shares prior to the expiration of the lock-up agreements. After the expiration of the lock-up period, these shares may be sold in the public market, subject to prior registration or qualification for an exemption from registration, including, in the case of shares held by affiliates, compliance with the volume restrictions of Rule 144. To the extent that any of these stockholders sell, or indicate an intent to sell, substantial amounts of our common stock in the public market after the contractual lock-ups and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline significantly.
 
In addition, the 4,065,628 shares reserved for future issuance under our Molycorp, Inc. 2010 Equity and Performance Incentive Plan, as of February 3, 2011, will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the price of our common stock could decline substantially.
 
The availability of shares of our common stock for sale in the future could reduce the market price of our common stock.
 
In the future, we may issue additional securities to raise capital, including our expected issuance of $100 million of common stock to Sumitomo, which is subject to numerous conditions and finalization of


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definitive agreements. The number of shares of common stock issued to Sumitomo if definitive agreements are executed will vary depending on changes in the price of our common stock. We may also acquire interests in other companies by using a combination of cash and our common stock or just our common stock. We may also issue securities convertible into our common stock in addition to our mandatory convertible preferred stock. Any of these events may dilute your ownership interest in our company and have an adverse impact on the price of our common stock. In addition, sales of a substantial amount of our common stock in the public market, or the perception that these sales may occur, could reduce the market price of our common stock. This could also impair our ability to raise additional capital through the sale of our securities.
 
We do not intend to pay dividends on our common stock, in the foreseeable future.
 
For the foreseeable future, we intend to retain any earnings to finance the development of our business, and we do not anticipate paying any cash dividends on our common stock. Any future determination to pay dividends will be at the discretion of our board of directors and will be dependent upon then-existing conditions, including our operating results and financial condition, capital requirements, contractual restrictions, business prospects and other factors that our board of directors considers relevant. So long as any share of our mandatory convertible preferred stock remains outstanding, no dividend or distribution may be declared or paid on our common stock unless all accumulated and unpaid dividends have been paid on our mandatory convertible preferred stock, subject to exceptions, such as dividends on our common stock payable solely in shares of our common stock. Accordingly, holders of our common stock must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize a return on their shares of common stock.
 
Our ability to use our net operating loss carryforwards may be subject to limitation due to significant changes in the ownership of our common stock.
 
As of September 30, 2010, we had gross net operating loss carryforwards of approximately $13.5 million for U.S. federal income tax purposes. Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other tax attributes to offset its post-change income may be limited and may result in a partial or full writedown of the related deferred tax assets. An ownership change is defined generally for these purposes as a greater than 50% change in ownership over a three-year period, taking into account shareholders that own 5% or more by value of our common stock. Depending on the number of shares sold by the selling stockholders in the concurrent offering of common stock by the selling stockholders, it is possible that the concurrent offering, in combination with past and future transactions involving our common stock, will cause an ownership change to occur that would limit our ability to use our existing net operating loss carryforwards. As of September 30, 2010, we have established a full valuation allowance against our $4.8 million net deferred tax assets.
 
Anti-takeover provisions contained in our certificate of incorporation and bylaws after the corporate reorganization, as well as provisions of Delaware law, could impair a takeover attempt.
 
Our certificate of incorporation and bylaws provisions may have the effect of delaying, deferring or discouraging a prospective acquiror from making a tender offer for our shares or otherwise attempting to obtain control of us. To the extent that these provisions discourage takeover attempts, they could deprive stockholders of opportunities to realize takeover premiums for their shares. Moreover, these provisions could discourage accumulations of large blocks of common stock, thus depriving stockholders of any advantages which large accumulations of stock might provide.
 
As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the General Corporation Law of the State of Delaware. Section 203 prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations unless the business combination was approved in advance by our board of directors, results in the stockholder holding more than 85% of our outstanding common stock or is approved by the holders of at least 662/3% of our outstanding common stock not held by the stockholder engaging in the transaction.


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Any provision of our certificate of incorporation or our bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.
 
Our board of directors can issue, without stockholder approval, preferred stock with voting and conversion rights that could adversely affect the voting power of the holders of common stock.
 
Our board of directors can issue, without stockholder approval, preferred stock with voting and conversion rights that could adversely affect the voting power of the holders of common stock and reduce the likelihood that such holders will receive dividend payments or payments upon liquidation, including shares of our mandatory convertible preferred stock. Such issuance could have the effect of decreasing the market price of the common stock. The issuance of preferred stock or even the ability to issue preferred stock could also have the effect of delaying, deterring or preventing a change of control or other corporate action.
 
The mandatory convertible preferred stock may adversely affect the market price of our common stock.
 
The market price of our common stock is likely to be influenced by the mandatory convertible preferred stock. For example, the market price of our common stock could become more volatile and could be depressed by:
 
  •  investors’ anticipation of the potential resale in the market of a substantial number of additional shares of our common stock received upon conversion of the mandatory convertible preferred stock;
 
  •  possible sales of our common stock by investors who view the mandatory convertible preferred stock as a more attractive means of equity participation in us than owning shares of our common stock; and
 
  •  hedging or arbitrage trading activity that may develop involving the mandatory convertible preferred stock and our common stock.
 
Our board of directors and management have broad discretion over the use of our cash reserves and might not apply this cash in ways that increase the value of your investment.
 
We raised approximately $378.6 million after underwriting discounts and commissions and offering expenses in our initial public offering, and we used $18.2 million of the net proceeds as cash collateral to secure surety bonds issued for the benefit of certain regulatory agencies relating to our Mountain Pass facility’s closure and reclamation obligations. We presently intend to use the majority of our remaining cash reserves, any proceeds received from the sale of our common stock to Sumitomo and our net proceeds from our offering of mandatory convertible preferred stock to restart mining operations, construct and refurbish processing facilities and other infrastructure at the Mountain Pass facility in connection with our initial modernization and expansion plan and the capacity expansion plan and expand into metal, alloy and magnet production. Our board of directors and management have broad discretion to use our cash reserves, and you will be relying on their judgment regarding the application of this cash. Our board of directors and management might not apply the cash in ways that increase the value of your investment. Until we use the cash, we plan to invest it, and these investments may not yield a favorable rate of return. If we do not invest or apply the cash in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.


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We identified a material weakness in our internal control over financial reporting which, if not satisfactorily remediated, could result in material misstatements in our consolidated financial statements in future periods.
 
During the preparation of our consolidated financial statements as of December 31, 2009 and 2008 and for the year ended December 31, 2009, the period from June 12, 2008 (Inception) through December 31, 2008, and cumulatively for the period from June 12, 2008 (Inception) through December 31, 2009, we identified deficiencies in our internal control over financial reporting which, when considered in the aggregate, represent a material weakness. If not remediated, this material weakness could result in material misstatements in our consolidated financial statements in future periods. Specifically, we did not maintain a sufficient complement of personnel with an appropriate level of accounting and financial reporting knowledge, experience and training in the application of U.S. generally accepted accounting principles, or U.S. GAAP. We also did not maintain an adequate system of processes and internal controls sufficient to support our financial reporting requirements and to produce timely and accurate consolidated financial statements in accordance with U.S. GAAP.
 
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. A deficiency in internal control over financial reporting exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.
 
In late 2009, we commenced remediation actions which included hiring several individuals with significant accounting, auditing and financial reporting experience and devoting significant resources to improving our system of processes and internal controls. Specifically, we hired a chief financial officer, a corporate controller and a director of financial reporting, and in early 2010, we hired an accounting manager for the Mountain Pass facility, all of whom are Certified Public Accountants. We also installed additional functionality and increased the integration of our information technology systems to increase automation and accuracy within our processes. If our actions are not effective in correcting the material weakness and we continue to experience material weaknesses, investors could lose confidence in our financial reporting, particularly if such weaknesses result in a restatement of our financial results, and our stock price could decline.
 
We will be required by Section 404 of the Sarbanes-Oxley Act to evaluate the effectiveness of our internal controls. If we are unable to achieve and maintain effective internal controls, particularly in a period of anticipated rapid growth, our operating results and financial condition could be harmed.
 
We will be required to comply with Section 404 of the Sarbanes-Oxley Act beginning with the year ending December 31, 2011. Section 404 requires that we evaluate our internal control over financial reporting to enable management to report on the effectiveness of those controls. Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements in accordance with U.S. GAAP. While we have begun the comprehensive process of evaluating our internal controls, we are in the early phases of our review and we cannot predict the outcome of our review at this time. During the course of the review, we may identify additional control deficiencies of varying degrees of severity, in addition to the material weakness discussed above.
 
We have taken steps to improve our internal control over financial reporting, including identification of deficiencies in the knowledge and expertise of personnel required in the accounting and finance functions of a public company. We have incurred significant costs to remediate our material weakness and deficiencies and improve our internal controls, and will incur additional expense as we undertake the modernization and expansion of the Mountain Pass facility. As we implement this modernization and expansion plan, the resulting growth in our business will require us to implement additional internal controls. To comply with Sarbanes-Oxley requirements, especially during this period of anticipated rapid growth, we will need to further upgrade our systems, including information technology, implement additional financial and management controls, reporting systems and procedures and hire additional accounting, finance and legal staff. If we are unable to upgrade our systems and procedures or hire the necessary additional personnel in a timely and effective fashion, we may not be able to comply with our financial reporting requirements and other rules that apply to public companies.


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As a public company, we are required to report internal control deficiencies that constitute material weaknesses in our internal control over financial reporting. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Internal Controls.” If we qualify as an “accelerated filer” or a “large accelerated filer” under Rule 12b-2 of the Securities Exchange Act of 1934, or the Exchange Act, we will also be required to obtain an audit report from our independent registered public accounting firm beginning in 2011 regarding the effectiveness of our internal control over financial reporting. If we fail to implement the requirements of Section 404 in a timely manner, if we or, to the extent applicable, our independent registered public accounting firm are unable to conclude that our internal control over financial reporting is effective, or if we fail to comply with our financial reporting requirements, investors may lose confidence in the accuracy and completeness of our financial reports.


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Rare Earth Industry Overview” and “Business,” contains forward-looking statements that represent our beliefs, projections and predictions about future events or our future performance. You can identify forward-looking statements by terminology such as “may,” “will,” “would,” “could,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or the negative of these terms or other similar expressions or phrases. These forward-looking statements are necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements or industry results to differ materially from any future results, performance or achievement described in or implied by such statements.
 
Factors that may cause actual results to differ materially from expected results described in forward-looking statements include, but are not limited to:
 
  •  our ability to secure sufficient capital to implement our business plans, including our ability to enter into definitive agreements with Sumitomo to consummate the $100 million issuance of common stock and $30 million debt financing;
 
  •  our ability to complete our initial modernization and expansion plan, as well as our capacity expansion plan, and reach full planned production rates for rare earth oxides and other planned downstream products;
 
  •  uncertainties associated with our reserve estimates and non-reserve deposit information;
 
  •  uncertainties regarding global supply and demand for rare earth materials;
 
  •  our ability to maintain appropriate relations with unions and employees;
 
  •  our ability to successfully implement our “mine-to-magnets” strategy;
 
  •  commercial acceptance of our new products, such as XSORBX®;
 
  •  environmental laws, regulations and permits affecting our business, directly and indirectly, including, among others, those relating to mine reclamation and restoration, climate change, emissions to the air and water and human exposure to hazardous substances used, released or disposed of by us; and
 
  •  uncertainties associated with unanticipated geological conditions related to mining.
 
See “Risk Factors” for a more complete discussion of these risks and uncertainties and for other risks and uncertainties. Any forward-looking statement you read in this prospectus reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, operating results, growth strategy and liquidity. You should not place undue reliance on these forward-looking statements because such statements speak only as to the date when made. We assume no obligation to publicly update or revise these forward-looking statements for any reason, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future, except as otherwise required by applicable law.
 
This prospectus also contains statistical data and estimates we obtained from industry publications and reports generated by third parties. Although we believe that the publications and reports are reliable, we have not independently verified their data.


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USE OF PROCEEDS
 
We will not receive any proceeds from the sale of shares in the concurrent offering of common stock by the selling stockholders. See “Principal and Selling Stockholders.”
 
We estimate that we will receive net proceeds of approximately $173.1 million from our offering of mandatory convertible preferred stock (or $199.2 million if the underwriters in the mandatory convertible preferred stock offering exercise their over-allotment option in full), after deducting underwriting discounts and commissions and estimated offering expenses that we must pay in this offering and the concurrent offering of common stock by the selling stockholders.
 
Under our current business plan, we intend to spend approximately $531 million through 2012 to restart mining operations, construct and refurbish processing facilities and other infrastructure at the Mountain Pass facility in connection with our initial modernization and expansion plan and expand into metals and alloys production. In addition, we expect to incur approximately $250 million in additional capital costs to build additional production capacity by the end of 2013 in connection with our capacity expansion plan. Our estimated capital expenditures of $781 million do not include corporate, selling, general and administrative expenses, which we estimate to be an additional $20 million to $25 million per year.
 
We presently intend to use the net proceeds from our offering of mandatory convertible preferred stock to fund our initial modernization and expansion plan and our capacity expansion plan. We anticipate that the remainder of the costs associated with our capacity expansion plan will be funded through traditional debt financing, project financing, additional public or private equity offerings, including our potential issuance of common stock to Sumitomo, and/or government programs, including the U.S. Department of Energy loan guarantee program. Because the costs associated with our initial modernization and expansion plan and our capacity expansion plan will be expended through 2012 and 2013, respectively, we may choose to pursue alternative funding for these plans, including other sources from our financing plan, in which case any remaining net proceeds from our offering of mandatory convertible preferred stock may be used for general corporate purposes, including, without limitation, to fund our working capital requirements and to develop new products, processes and technologies, both through acquisitions and capital programs.
 
Pending the use of our net proceeds from our offering of mandatory convertible preferred stock as described above, we plan to invest the proceeds in a variety of capital preservation investments, including short-term interest-bearing obligations, investment-grade instruments, certificates of deposit and direct guaranteed obligations of the United States.


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COMMON STOCK PRICE RANGE
 
Our common stock is listed on The New York Stock Exchange under the symbol “MCP.” Our initial public offering was priced at $14.00 per share on July 29, 2010. The following table sets forth, for the periods indicated, the high and low sales prices for our common stock as reported on The New York Stock Exchange.
 
                 
    Low     High  
 
Year ending December 31, 2011
               
First Quarter (through February 10, 2011)
  $ 42.50     $ 62.80  
Year ended December 31, 2010
               
Fourth Quarter
  $ 26.76     $ 51.99  
Third Quarter (from July 29, 2010)
  $ 12.34     $ 29.08  
 
The last reported sales price for our common stock on February 10, 2011 was $51.15 per share. As of February 3, 2011, there were approximately 89 holders of record of our common stock.


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CAPITALIZATION
 
The following table sets forth our consolidated cash and cash equivalents and our capitalization as of September 30, 2010:
 
  •  on an actual basis; and
 
  •  on a pro forma basis to give effect to the issuance and sale by us of 1,800,000 shares of mandatory convertible preferred stock at a public offering price of $100.00 per share and the receipt of the net proceeds by us, after deducting underwriting discounts and commissions and estimated offering expenses payable by us for this offering and the concurrent offering of common stock by the selling stockholders.
 
The information in this table should be read in conjunction with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes included elsewhere in this prospectus.
 
                 
    September 30, 2010
 
    (unaudited)  
    Actual     Pro Forma  
    (In thousands, except share amounts)  
 
Cash and cash equivalents
  $ 351,472     $ 524,566  
                 
Long-term debt
  $     $  
Stockholders’ equity:
               
Preferred stock, $0.001 par value; 5,000,000 shares authorized and 0 shares issued and outstanding, actual; 5,000,000 shares authorized and 1,800,000 shares issued and outstanding, as adjusted(1)
          173,094  
Common stock, $0.001 par value; 350,000,000 shares authorized and 82,253,700 shares issued and outstanding, actual and as adjusted
    82       82  
Additional paid-in capital
    532,787       532,787  
Deficit accumulated during the development stage
    (83,846 )     (83,846 )
                 
Total equity (deficit)
    449,023       622,117  
                 
Total capitalization
  $ 449,023     $ 622,117  
                 
 
 
(1) Although a final determination cannot be made until issuance, we currently believe the mandatory convertible preferred stock will be classified as permanent equity.


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DIVIDEND POLICY
 
Since our inception, we have not paid any cash dividends. For the foreseeable future, we intend to retain any earnings to finance the development of our business. We do not anticipate paying any cash dividends on our common stock. Any future determination to pay dividends, including on our mandatory convertible preferred stock, will be at the discretion of our board of directors and will depend upon then-existing conditions, including our operating results and our financial condition, capital requirements, contractual restrictions, business prospects and other factors that our board of directors may deem relevant. So long as any share of our mandatory convertible preferred stock remains outstanding, no dividend or distribution may be declared or paid on our common stock unless all accrued and unpaid dividends have been paid on our mandatory convertible preferred stock, subject to exceptions, such as dividends on our common stock payable solely in shares of our common stock.


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SELECTED CONSOLIDATED FINANCIAL DATA
 
Upon the formation of Molycorp, LLC on September 9, 2009, all members of Molycorp Minerals, LLC contributed their member interests to Molycorp, LLC in exchange for member interests in Molycorp, LLC. That exchange was treated as a reorganization of entities under common control and Molycorp Minerals, LLC is the predecessor to Molycorp, LLC. Accordingly, all financial information of Molycorp, LLC for periods prior to its formation is the historical financial information of Molycorp Minerals, LLC. Molycorp Minerals, LLC acquired the Mountain Pass, California rare earth deposit and associated assets from Chevron Mining Inc., a subsidiary of Chevron Corporation, on September 30, 2008.
 
The selected consolidated financial data as of December 31, 2009 and 2008, and for the year ended December 31, 2009 and for the period from June 12, 2008 (Inception) through December 31, 2008 has been derived from Molycorp, LLC’s audited consolidated financial statements and the related notes included elsewhere in this prospectus. The summary consolidated financial data as of September 30, 2010, for the nine months ended September 30, 2010 and 2009 and cumulatively for the period from June 12, 2008 (Inception) through September 30, 2010 have been derived from Molycorp, Inc.’s unaudited condensed consolidated financial statements and the related notes included elsewhere in this prospectus.
 
Molycorp, Inc. was formed on March 4, 2010 for the purpose of continuing the business of Molycorp, LLC in corporate form. On April 15, 2010, the members of Molycorp, LLC contributed either (a) all of their member interests in Molycorp, LLC or (b) all of their equity interests in entities that hold member interests in Molycorp, LLC (and no other assets or liabilities) to Molycorp, Inc. in exchange for shares of Molycorp, Inc., and, as a result, Molycorp, LLC became a wholly owned subsidiary of Molycorp, Inc. Accordingly, all financial information of Molycorp, Inc. for periods prior to the corporate reorganization is the historical financial information of Molycorp, LLC.
 
As a limited liability company, the taxable income and losses of Molycorp, LLC were reported on the income tax returns of its members. Molycorp, Inc. is subject to federal and state income taxes and will file consolidated income tax returns. If the corporate reorganization had been effective as of January 1, 2009, our net loss of $28.6 million for the year ended December 31, 2009 would have generated an unaudited pro forma deferred income tax benefit of $11.3 million for the year ended December 31, 2009 assuming a combined federal and state statutory income tax rate. However, as realization of such tax benefit would not have been assured, we would have also established a valuation allowance of $11.3 million to eliminate such pro forma tax benefit.
 
The unaudited pro forma balance sheet data as of September 30, 2010 has been prepared to give effect to the consummation of our offering of mandatory convertible preferred stock, as if it had occurred on September 30, 2010. The unaudited pro forma balance sheet data is for informational purposes only and does not purport to indicate balance sheet information as of any future date.
 
The selected consolidated financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the notes thereto included elsewhere in this prospectus.
 


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                      June 12, 2008
    June 12, 2008
 
    Nine Months Ended     Year Ended
    (Inception)
    (Inception)
 
    September 30,
    September 30,
    December 31,
    Through
    through
 
Statement of Operations Data
  2010     2009     2009     December 31, 2008     September 30, 2010  
    (Unaudited)                 (Unaudited)  
    (In thousands, except share and per share data)  
 
Net sales
  $ 13,176     $ 4,889     $ 7,093     $ 2,137     $ 22,406  
Cost of goods sold(1)
    (18,989 )     (14,896 )     (21,785 )     (13,027 )     (53,801 )
Selling, general and administrative expense
    (12,851 )     (8,380 )     (12,444 )     (2,979 )     (28,274 )
Stock-based compensation
    (21,660 )     (241 )     (241 )           (21,901 )
Depreciation and amortization expense
    (239 )     (123 )     (191 )     (19 )     (449 )
Accretion expense
    (695 )     (755 )     (1,006 )     (250 )     (1,951 )
Operating loss
    (41,258 )     (19,506 )     (28,574 )     (14,138 )     (83,970 )
Net loss
  $ (41,185 )   $ (19,492 )   $ (28,587 )   $ (14,074 )   $ (83,846 )
Weighted average shares outstanding (Common shares)(2):
                                       
Basic
    56,027,460       38,831,232       38,921,015       38,234,354       44,721,664  
Diluted
    56,027,460       38,831,232       38,921,015       38,234,354       44,721,664  
Loss per share of common stock(2):
                                       
Basic
  $ (0.74 )   $ (0.50 )   $ (0.73 )   $ (0.37 )   $ (1.87 )
Diluted
  $ (0.74 )   $ (0.50 )   $ (0.73 )   $ (0.37 )   $ (1.87 )
 
                                 
    Pro Forma
                   
    September 30,
    September 30,
    December 31,
    December 31,
 
Balance Sheet Data
  2010     2010     2009     2008  
    (Unaudited)     (Unaudited)              
    (In thousands)  
 
Cash and cash equivalents
  $ 524,566     $ 351,472     $ 6,929     $ 2,189  
Total current assets
    544,462       371,368       18,520       8,710  
Total assets
    649,582       476,488       97,666       95,355  
Total non-current liabilities
    11,394       11,394       13,509       13,196  
Total liabilities
    27,465       27,465       23,051       17,279  
Members’ equity
                74,615       78,076  
Stockholders’ equity(3)
    622,117       449,023              
 
                                         
                      June 12, 2008
    June 12, 2008
 
    Nine Months Ended     Year Ended
    (Inception)
    (Inception)
 
    September 30,
    September 30,
    December 31,
    Through
    Through
 
Other Financial Data
  2010     2009     2009     December 31, 2008     September 30, 2010  
    (Unaudited)                 (Unaudited)  
    (In thousands)  
 
Capital expenditures(4)
  $ 12,965     $ 5,365     $ 7,285     $ 321     $ 20,571  
 
 
(1) Cost of goods sold includes write-downs of inventory to estimated net realizable value of $1.6 million, $7.5 million, $9.0 million, $9.5 million and $20.1 million for the nine months ended September 30, 2010 and 2009, for the year ended December 31, 2009, for the period from June 12, 2008 (Inception) through December 31, 2008 and cumulatively for the period from June 12, 2008 (Inception) through September 30, 2010, respectively.

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(2) Weighted average shares outstanding gives retroactive effect to the corporate reorganization, the conversion of all of our Class A common stock and Class B common stock into shares of common stock and the consummation of our initial public offering, and the 38.23435373-for-one stock split completed by Molycorp, Inc. on July 9, 2010 as if such events had occurred on June 12, 2008.
 
(3) Although a final determination cannot be made until issuance, we currently believe the mandatory convertible preferred stock will be classified as permanent equity and included in stockholders’ equity.
 
(4) Reflected in cash flows from investing activities in our consolidated statements of cash flows.


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RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
 
                         
    June 12, 2008
       
    (Inception)
       
    Through
  Year Ended
  Nine Months Ended
    December 31, 2008   December 31, 2009   September 30, 2010
 
Ratio of earnings to fixed charges
                 
Ratios of earnings to combined fixed charges and preferred stock dividends
                 
 
Fixed charges are equal to interest expense, plus the portion of rent expense estimated to represent interest. Total earnings for the period from June 12, 2008 (Inception) through December 31, 2008, for the year ended December 31, 2009 and for the nine months ended September 30, 2010 were insufficient to cover fixed charges by $14.1 million, $28.8 million and $41.3 million, respectively. There were no differences between the calculation of fixed charges and combined fixed charges. The insufficient earnings were primarily due to our net operating losses for each of the periods presented. Accordingly, such ratios are not presented.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates and beliefs and involves risks and uncertainties. Our actual results could differ materially from those discussed in these forward-looking statements as a result of various factors, including those discussed below, under the headings “Risk Factors” and “Special Note Regarding Forward-Looking Statements” and in other parts of this prospectus.
 
Overview
 
Presentation
 
Molycorp Minerals, LLC, a Delaware limited liability company formerly known as Rare Earth Acquisition, LLC, was formed on June 12, 2008 to purchase the Mountain Pass, California rare earth deposits and associated assets, or the Mountain Pass facility, from Chevron Mining Inc., a subsidiary of Chevron Corporation, on September 30, 2008. Molycorp, LLC, a Delaware limited liability company, which was the parent of Molycorp Minerals, was formed on September 9, 2009. Molycorp, Inc. was formed on March 4, 2010 as a new Delaware corporation that did not, prior to the date of the consummation of its initial public offering, conduct any material activities.
 
On April 15, 2010, the members of Molycorp, LLC contributed either (a) all of their member interests in Molycorp, LLC or (b) all of their equity interests in entities that hold member interests in Molycorp, LLC (and no other assets or liabilities) to Molycorp, Inc. in exchange for shares of Molycorp, Inc. Class A common stock. Additionally, all of the holders of profits interests in Molycorp Minerals, which were represented by incentive shares, contributed all of their incentive shares to Molycorp, Inc. in exchange for shares of Molycorp, Inc. Class B common stock. As a result, Molycorp, LLC and Molycorp Minerals became subsidiaries of Molycorp, Inc. On June 15, 2010, Molycorp, LLC was merged with and into Molycorp Minerals.
 
On July 9, 2010, Molycorp, Inc. completed a 38.23435373-for-one stock split, which has been retroactively reflected in the historical financial data for all periods presented. On August 3, 2010, Molycorp, Inc. completed its initial public offering of common stock. In connection with its initial public offering, Molycorp, Inc. issued 29,128,700 shares of common stock at $14.00 per share (including 1,003,700 shares of Molycorp common stock issued in connection with the underwriters’ option to purchase additional shares). Total net proceeds of the offering were approximately $378.6 million after underwriting discounts and commissions and offering expenses payable by Molycorp, Inc. Immediately prior to the consummation of Molycorp, Inc.’s initial public offering, all of the shares of Class A common stock and Class B common stock were converted into shares of common stock.
 
Our Business
 
We are the only REO producer in the Western hemisphere, and we own one of the world’s largest, most fully developed rare earth projects outside of China. Following the execution of our “mine-to-magnets” strategy and completion of our modernization and expansion efforts, we expect to be one of the world’s most integrated producers of rare earth products, including oxides, metals, alloys and magnets. Our rare earths are critical inputs in many existing and emerging applications including: clean energy technologies, such as hybrid and electric vehicles and wind power turbines; multiple high-tech uses, including fiber optics, lasers and hard disk drives; numerous defense applications, such as guidance and control systems and global positioning systems; and advanced water treatment technology for use in industrial, military and outdoor recreation applications. Global demand for REEs is projected to steadily increase both due to continuing growth in existing applications and increased innovation and development of new end uses.


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Our goals are to:
 
  •  develop innovative rare earth technologies and products vital to green energy, high-tech, defense and industrial applications;
 
  •  be commercially sustainable, globally competitive, profitable and environmentally superior;
 
  •  act as a responsible steward of our rare earth resources; and
 
  •  use our technology to improve the daily lives of people throughout the world.
 
We have made significant investments, and expect to continue to invest, in developing technologically advanced and proprietary applications for individual REEs. We are in the process of modernizing and expanding our production capabilities at our Mountain Pass, California facility in order to integrate the rare earths supply chain: mining; oxide processing; production of metals and alloys; and, as part of our “mine-to-magnets” strategy, the production of rare earth-based magnets.
 
Our vision is to be the rare earth products and technology company recognized for its “ETHICS” — Excellence, Trust, Honesty, Integrity, Creativity and Safety. Since July 2005, the Mountain Pass facility has not had a lost-time accident and has received the coveted “Sentinels of Safety” award from the MSHA for three of the last six years.
 
Our Mine Process and Development Plans
 
We recommenced mining operations in December 2010 and are preparing to recommence milling operations, which we expect to occur in the first quarter of 2012. Recommencement of mining and milling operations is coincident with our initial modernization and expansion plan, which will give us the capacity to efficiently produce at a rate of approximately 19,050 mt of REO per year by the end of 2012. Additionally, upon the completion of our capacity expansion plan, we expect to have the ability to produce up to approximately 40,000 mt of REO per year by the end of 2013. Prior to the expected completion of our initial modernization and expansion efforts, we expect to produce approximately 3,000 mt per year in the aggregate of cerium products, lanthanum concentrate, didymium oxide and heavy rare earth concentrates from stockpiled feedstock.
 
Our modernization and expansion plans envision adding facilities and equipment for metal conversion and alloy production at the Mountain Pass facility or an off-site property. In November 2009, we entered into a non-binding letter of intent to acquire a third-party producer of rare earth metals and alloys in the United States. Discussions with this third party had previously ceased. Although we have recently resumed discussions with this third party, we cannot assure you that we will be able to execute a definitive agreement to acquire this third party. If we add another off-site facility to produce rare earth metals and alloys, instead of adding such facilities and equipment at Mountain Pass, we would transport cerium, lanthanum, neodymium, praseodymium, dysprosium, terbium and samarium oxide products from our Mountain Pass facility to that off-site location to produce rare earth metals and alloys.
 
In December 2010, we entered into a non-binding letter of intent with Hitachi to form joint ventures for the production of rare earth alloys and magnets in the United States. Additionally, we have entered into a non-binding letter of intent with Neo Material that, among other things, contemplates a technology transfer agreement pursuant to which Neo Material may provide us with technical assistance and know-how with respect to the production of rare earth metals, alloys and magnets.
 
Our proposed joint ventures with Hitachi would provide us with access to the technology, people and facilities to convert our rare earth materials into rare earth alloys and high-performance permanent rare earth magnets required for production of hybrid and electric vehicles, wind power turbines, high-tech applications and numerous advanced defense systems on which the U.S. economy and national security depend. The consummation of such joint ventures, in conjunction with our current modernization plans and the potential technology transfer agreement with Neo Material, is expected to provide us with the capability to mine, process, separate and alloy individual REEs and manufacture them into NdFeB magnets. This downstream


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integration would make us the only fully integrated producer of NdFeB magnets outside of China, helping to secure a rare earth supply chain for the Rest of World.
 
We anticipate the cost of restarting mining operations, the modernization and expansion of our Mountain Pass facility in connection with our initial modernization and expansion plan and the addition of rare earth metal and alloy production capabilities to be approximately $531 million. In addition, we expect to incur approximately $250 million in additional capital costs to build additional production capacity in connection with our capacity expansion plan prior to the end of 2013. Our estimated capital expenditures of $781 million do not include corporate, selling, general and administrative expenses, which we estimate to be an additional $20 million to $25 million per year. We expect to finance these expenditures, as well as our working capital requirements, with the $360.4 million in net proceeds from our initial public offering (after giving effect to our use of $18.2 million of net proceeds for surety bonds), net proceeds from our offering of mandatory convertible preferred stock, anticipated revenue from operations and traditional debt financing, project financing, additional equity offerings and/or government programs, including the U.S. Department of Energy loan guarantee program for which we have submitted an application in June 2010. On July 18, 2010, the U.S. Department of Energy notified us that our Part I submission under the loan guarantee program had been reviewed and deemed eligible for submission of a Part II application. Our Part II application was submitted on December 31, 2010. We also engaged BNP Paribas to explore other financing options in the debt capital markets. The engagement letter expired on January 31, 2011, however, we are continuing to work with BNP Paribas to arrange debt financing. On December 10, 2010, we entered into a memorandum of understanding with Sumitomo, pursuant to which Sumitomo agreed to, among other things, purchase $100 million of our common stock and arrange for a $30 million debt financing. The consummation of these transactions with Sumitomo is subject to numerous conditions and finalization of definitive agreements.
 
Our Products and Markets
 
Since our acquisition of the Mountain Pass facility, we have been producing and selling small quantities of certain rare earth products from our pilot processes using stockpiled feedstocks. The purpose of this effort has been to significantly improve our solvent extraction technology and to develop other key technologies that will be utilized in the new process. We recently completed processing stockpiled lanthanum rich feedstock to produce didymium oxide (a combination of neodymium and praseodymium) and a higher purity lanthanum concentrate than we previously produced. Lanthanum concentrate produced from the stockpiled material, which we sell to customers in the fluid catalytic cracking industry, has been our primary source of revenue to date.
 
We commenced a second pilot processing campaign in the second quarter of 2010 in an effort to commercially demonstrate our new cracking technology and to further optimize our processing technologies and improve recovery rates compared to historical operations at the Mountain Pass facility. Due to the success of this effort, we are producing cerium and lanthanum products, as well as didymium oxide from bastnasite concentrate stockpiles. With these products, we have begun expanding and diversifying our product mix and our customer base. In July 2010, we began selling our didymium oxide primarily to customers in the magnet industry. In addition, in the third quarter of 2010, we began selling our cerium products to customers in the automobile emissions catalyst production industry and we completed our initial sale of XSORBX® to the water treatment industry.
 
Key Industry Factors
 
Demand for Rare Earth Products
 
Global consumption of REEs is projected to steadily increase due to continuing growth in existing applications and increased innovation and development of new end uses. For example, the integration of rare earth permanent magnet drives into wind power turbines has substantially reduced the need for gearboxes, which increases overall efficiency and reliability. If Mountain Pass and other rare earth projects do not commence production when anticipated, there will continue to be a gap between current and forecasted demand and supply. We believe that this anticipated market dynamic will underpin continued strong pricing.


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As a result of the global economic crisis, rare earth product prices declined by approximately 50% during 2008 and through the third quarter of 2009. According to Metal-Pages, from October 2009 through December 2010, prices for rare earths have risen by approximately 780% on average. Furthermore, over the same period, prices for some of the most common rare earths (cerium oxide, lanthanum oxide, neodymium oxide, and rare earth carbonate) have risen by more than 1000% on average.
 
Supply of Rare Earth Products
 
China has dominated the global supply of REOs for the last ten years and, according to IMCOA, it is estimated that China accounted for approximately 96% of global REO production in 2008. Even with our planned production, global supply is expected by analysts to remain tight due to the combined effects of growing demand and actions taken by the Chinese government to restrict exports. The Chinese government heightened international supply concerns beginning in August 2009 when China’s Interior Ministry first signaled that it would further restrict exports of Chinese rare earth resources. Citing the importance of REE availability to internal industries and the desire to conserve resources, the Chinese government has announced export quotas, increased export tariffs and introduced a “mining quotas policy” that, in addition to imposing export quotas and export tariffs, also imposes production quotas and limits the issuance of new licenses for rare earth exploration. On July 8, 2010, China’s Ministry of Industry and Information Technology issued the export quota for the second half of 2010, which reduced exports by 72% compared with the second half of 2009 and 40% for the year ended December 31, 2010 as compared to the year ended December 31, 2009. On December 28, 2010, China’s Ministry of Industry and Information Technology further reduced the export quota for the first half of 2011, reducing exports by 35% compared with the first half of 2010 and 20% for the twelve months ended June 30, 2011 as compared to the twelve months ended June 30, 2010. China’s internal consumption of rare earths is expected to continue to grow, leaving the Rest of World with less supply during a period of increasing global demand. China also dominates the manufacture of rare earth metals, producing substantially all of the world’s supply, and the manufacture of NdFeB magnets, producing approximately 80% of the world’s supply. Neither capability currently exists in the United States.
 
China has announced a national stockpile program, as has South Korea. Additionally, Japan has increased its national stockpile program. In December 2010, the U.S. Department of Energy released a study concluding that five rare earth metals, including dysprosium, neodymium, terbium, europium and yttrium, are critical to clean energy technologies in the short term due to their importance to the clean energy economy and risk of supply disruption. The report emphasizes that diversified global supply chains for these critical materials are essential, and calls for steps to be taken to facilitate extraction, processing and manufacturing in the United States. Additionally, the U.S. Department of Defense is conducting a study to determine its rare earth requirements and supply chain vulnerabilities and whether to build a strategic stockpile. These stockpile programs will likely accelerate the pace of the current and projected global REE supply deficit.
 
As a result of the internal industrial development, as well as economic, environmental and regulatory factors in China, there is uncertainty with respect to the availability of rare earth products from China. Although Chinese production of rare earth materials is increasing, export quotas imposed by the Chinese government are decreasing, thus reducing the amount of rare earth materials that China may export to the rest of the world. This reduction is occurring at a time when the demand for REEs is growing significantly.
 
Factors Affecting Our Results
 
Modernization and Expansion of Mountain Pass Facility
 
We anticipate a dramatic change in our business and results of operations upon the completion of our planned modernization and expansion of our Mountain Pass facility in connection with our initial modernization and expansion plan and the commencement of metal, alloy, and magnet production in 2012. For example, we expect to produce and sell a significantly expanded slate of products, including specialty cerium products for water treatment, neodymium and praseodymium metal, neodymium iron boron and samarium cobalt alloys for magnets, europium, gadolinium, and terbium oxides for phosphors, and dysprosium and terbium for magnets.


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We acquired the Mountain Pass facility on September 30, 2008 from Chevron Mining Inc., which became the owner of the Mountain Pass facility in 2005 after Unocal Corporation merged with Chevron Corporation. Unocal Corporation had suspended most operations at the Mountain Pass facility by 2002 and, except for pilot processing activities, they remained suspended under Chevron Mining Inc.’s ownership. Additionally, significant reclamation work was completed at the Mountain Pass facility under Chevron Mining Inc.’s ownership.
 
We plan to utilize the assets we acquired from Chevron Mining Inc. as a foundation to build an integrated rare earth products and technology company, which requires considerable additional capital investment. We believe the application of improved technologies, along with the capital investment, will allow us to create a sustainable business by cost effectively producing high purity rare earth products. Between now and the start-up of the new processing facility, we anticipate further diversifying our product line through the production of samarium/europium/gadolinium concentrate from bastnasite concentrate stockpiles. Upon completion of the modernization and expansion of the Mountain Pass facility, we expect to produce lanthanum, cerium, praseodymium, neodymium, samarium, europium, gadolinium, terbium and dysprosium in various chemical compounds and/or metal forms, including alloys. In addition to the modernization and expansion of the Mountain Pass facility, we expect to significantly broaden our operations through the addition of a number of downstream activities and products, including rare earth metal production and NdFeB and samarium cobalt alloys. We intend to use some of the NdFeB alloy and dysprosium metal product in a magnet production facility, which we anticipate developing through a joint venture arrangement. Accordingly, upon full implementation of our “mine-to-magnets” strategy, we expect our new products to have significantly more applications and a broader market base than our current products.
 
Revenues
 
In the second quarter of 2010, we commenced a second pilot processing campaign to commercially demonstrate our new cracking technology and to further optimize our processing technologies and improve our recovery rates compared to historical operations at the Mountain Pass facility. Due to the success of this second pilot processing campaign, we are producing cerium and lanthanum products as well as didymium oxide from bastnasite concentrate stockpiles. The addition of these new products has significantly increased the diversity of our product mix. The following is a summary of the percentage of revenue by significant product line for the three-month and nine-month periods ended September 30, 2010 and the corresponding sales volumes for the three-month and nine-month periods ended September 30, 2009.
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2010     2009     2010     2009  
 
Didymium Oxide
    31 %     0 %     20 %     0 %
Lanthanum Oxide
    18 %     4 %     18 %     12 %
Ceric Hydrate
    18 %     0 %     11 %     0 %
Lanthanum Chlorohydrate
    15 %     0 %     9 %     0 %
Lanthanum Concentrate
    8 %     85 %     32 %     78 %
 
Our prices and product mix are determined by a combination of global and regional supply and demand factors. Our revenue increased significantly for the three and nine months ended September 30, 2010 as compared to the three and nine months ended September 30, 2009 due to the combination of a general increase in the market prices of REOs, production of ceric hydrate and commencement of didymium oxide sales, which have significantly higher values than the lanthanum products we produced in 2009. Sales for the nine months ended September 30, 2010 included 2.72 million pounds of REOs at an average price of $4.88 per pound compared to sales of 1.84 million pounds of REO at an average price of $2.66 per pound for the nine months ended September 30, 2009. The quantities we sell are determined by the production capabilities of the Mountain Pass facility and by demand for our product, which is also influenced by the level of purity and consistency we are able to achieve. Our revenue also includes sales of finished products acquired as part of our acquisition of the Mountain Pass facility.


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Prices for lanthanum we sold to our two largest customers were previously based primarily on fixed-price contracts. Our contract with one of these customers expired on December 31, 2009 and our contract with the other customer expired in April 2010. Pursuant to our first contract with Grace, we have agreed to supply Grace with a significant amount of REOs, primarily lanthanum oxide, through mid-2012 at market-based prices subject to a ceiling based on market prices at June 1, 2010, and a floor. Pursuant to our second contract with Grace, we have agreed to supply Grace with up to 75 percent of our lanthanum product production per year (based on our initial planned capacity) at market-based prices subject to a floor for a three-year period commencing upon the achievement of expected annual production rates under our initial modernization and expansion plan, which may be extended at Grace’s option for an additional three-year period. Upon execution of definitive agreements with Sumitomo, we also expect to provide Sumitomo with approximately 1,500 mt per year (and following completion of our initial modernization and expansion plan, approximately 1,750 mt per year) of cerium and lanthanum-based products and 250 mt per year of didymium oxide for a period ending five years after the completion of our initial modernization and expansion of the Mountain Pass facility, at market-based prices subject to a floor. Although prices for REOs have generally increased since October 2009, this increase followed a period of generally lower prices corresponding with the global financial crisis beginning in 2008. Many factors influence the market prices for REOs and, in the absence of established pricing in customer contracts, our sales revenue will fluctuate based upon changes in the prevailing prices for REOs. We use various industry sources, including certain publications, in evaluating prevailing market prices and establishing prices for our products because there are no published indices for rare earth products, including alloys or magnets.
 
Cost of Goods Sold
 
Our cost of goods sold reflects the cost allocated to our inventory acquired as part of our acquisition of the Mountain Pass facility and, with respect to our recent sales of lanthanum and cerium products and didymium oxide, the subsequent processing costs incurred to produce the product. Because many of our costs are fixed costs as opposed to variable costs, as our production increases or decreases, our average cost per ton decreases or increases, respectively. Primary production costs include direct labor and benefits, maintenance, natural gas, electricity, operating supplies, chemicals, depreciation and amortization and other plant overhead expenses.
 
Currently, our most significant variable costs are chemicals and electricity. In the future, we intend to produce more of our chemicals at a plant on-site, which will reduce our variable chemical costs. We also intend to build a co-generation facility to provide power. Following such steps, natural gas will replace electricity and become our most significant variable cost.
 
We expect our labor and benefit costs to increase through 2013 due to the addition of personnel and consultants required to increase production to a rate of approximately 19,050 mt of REO per year by the end of 2012 in connection with out initial modernization and expansion plan and up to approximately 40,000 mt of REO per year by the end of 2013 in connection with our capacity expansion plan. In addition to volume fluctuations, our variable costs, such as electricity, operating supplies and chemicals, are influenced by general economic conditions that are beyond our control. Other events outside our control, such as power outages, have in the past interrupted our operations and increased our total production costs, and we may experience similar events in the future.
 
Selling, General and Administrative Expenses
 
Our selling, general and administrative expenses consist primarily of: personnel and related costs; legal, accounting and other professional fees; occupancy costs; and information technology costs. We continue to experience increased selling, general and administrative expenses as we expand our business and operate as a publicly traded company. These expenses include increasing our staffing as we prepare to start construction of our new facilities and other business development activities in January 2011 to execute our “mine-to-magnets” business plan. We have also experienced additional legal, compliance and corporate governance expenses, as well as additional accounting and audit expenses, stock exchange listing fees, transfer agent and other stockholder-related fees and increased premiums for certain insurance policies, among others.


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Share-based Compensation
 
Our share-based compensation is primarily associated with incentive shares granted November 1, 2009 which, on the grant date, were classified as a liability and valued at zero dollars using the intrinsic value method prior to the completion of our initial public offering on August 3, 2010. In connection with the corporate reorganization and upon completion of our initial public offering, these shares were ultimately converted into 2,232,740 shares of restricted common stock, 744,247 of which vested immediately with the remaining 1,488,493 scheduled to vest one-half in September 2010 and one-half upon the six-month anniversary of our initial public offering.
 
On November 4, 2010, the Compensation Committee of the Board of Directors approved a grant of 37,500 shares of restricted stock, with a three-year vesting period, to certain of our executive officers and a director.
 
Although we anticipate additional share-based awards in 2011, we expect share-based compensation to decrease through 2011 as the final vesting period of the incentive shares will be completed on February 3, 2011.
 
Income Taxes
 
Prior to our corporate reorganization, we operated entirely within limited liability companies, which were not directly liable for the payment of federal or state income taxes and our taxable income or loss was included in the state and federal tax returns of Molycorp, LLC’s members. Molycorp, Inc. is subject to U.S. federal and state income taxes. For the nine months ended September 30, 2010, we have placed a 100% reserve on our deferred tax assets.
 
Environmental
 
Our operations are subject to numerous and detailed federal, state and local environmental laws, regulations and permits, including those pertaining to employee health and safety, environmental permitting and licensing, air quality standards, GHG emissions, water usage and pollution, waste management, plant and wildlife protection, including the protection of endangered species, handling and disposal of radioactive substances, remediation of soil and groundwater contamination, land use, reclamation and restoration of properties, the discharge of materials into the environment and groundwater quality and availability.
 
We retain, both within Molycorp and outside Molycorp, the services of reclamation and environmental, health and safety, or EHS, professionals to review our operations and assist with environmental compliance, including with respect to product management, solid and hazardous waste management and disposal, water and air quality, asbestos abatement, drinking water quality, reclamation requirements, radiation control and other EHS issues.
 
We have spent, and anticipate that we will continue to spend, financial and managerial resources to comply with environmental requirements. The majority of these resources will be expended through our capital investment budget. We expect to spend approximately $187 million on environmentally-driven capital projects during 2011 and 2012 on our modernization and expansion project. We have contracted to acquire air emission offset credits at a cost of approximately $3.1 million in connection with our initial modernization and expansion plan and our capacity expansion plan. However, we may need to purchase additional credits in the future. In addition, in the nine-month period ended September 30, 2010 and 2009, we incurred operating expenses of approximately $1.2 million and $1.5 million, respectively, associated with environmental compliance requirements. The costs expected to be incurred as part of our on-going remediation, which is expected to continue throughout the Mountain Pass facility’s operating, closure and post-closure periods, are included as part of our asset retirement obligations. See “— Critical Accounting Policies and Estimates — Reclamation.”
 
We cannot predict the impact of new or changed laws, regulations or permit requirements, including the matters discussed below, or changes in the way such laws, regulations or permit requirements are enforced, interpreted or administered. Environmental laws and regulations are complex, change frequently and have tended to become more stringent over time. It is possible that greater than anticipated environmental expenditures will be required in 2011 or in the future. We expect continued government and public emphasis


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on environmental issues will result in increased future investment for environmental controls at our operations. Additionally, with increased attention paid to emissions of GHGs, including carbon dioxide, current and future regulations are expected to affect our operations. We will continue to monitor developments in these various programs and assess their potential impacts on our operations.
 
Violations of environmental laws, regulations and permits can result in substantial penalties, court orders to install pollution-control equipment, civil and criminal sanctions, permit revocations, facility shutdowns and other sanctions. In addition, environmental laws and regulations may impose joint and several liability, without regard to fault, for costs relating to environmental contamination at our facility or from wastes disposed of at third-party waste facilities. The proposed expansion of our operations is also conditioned upon securing the necessary environmental and other permits and approvals. In certain cases, as a condition to procuring such permits and approvals, we are required to comply with financial assurance requirements. The purpose of these requirements is to assure the government that sufficient company funds will be available for the ultimate closure, post-closure care and/or reclamation at our facilities. We typically obtain bonds as financial assurance for these obligations and, as of September 30, 2010, we had placed $27.4 million of surety bonds with California state and regional agencies. These bonds are collateralized by $18.2 million in cash, which we have placed in an escrow account. These bonds require annual payment and renewal. The EPA has announced its intention to establish a new financial assurance program for hardrock mining, extraction and processing facilities under the Federal Comprehensive Environmental Response Compensation and Liability Act, known as CERCLA, or the “Superfund” law, which may require us to establish additional bonds or other sureties. We cannot predict the effect of any such requirements on our operations at this time.
 
Impact of Inflation
 
The cost estimates associated with the modernization and expansion of the Mountain Pass facility described under the heading “— Liquidity and Capital Resources — Capital Expenditures” have not been adjusted for inflation. In the event of significant inflation, the funds required to execute our business plan over the next few years could increase proportionately. This could delay or preclude our business expansion efforts, or require us to raise additional capital. In addition, historical inflation rates have been used to estimate the future liability associated with our future remediation and reclamation obligations as reflected in the asset retirement obligations in our consolidated financial statements included elsewhere in this prospectus. If inflation rates significantly exceed the historical inflation rates, our future obligations could significantly increase.
 
Foreign Currency Fluctuations
 
Substantially all of our product sales are denominated in U.S. dollars, so we have minimal exposure to fluctuations in foreign currency exchange rates. Our results are indirectly influenced by currency fluctuations, as the relative cost of our exports for a foreign buyer will increase as the U.S. dollar strengthens and decrease as the U.S. dollar softens in comparison to the applicable foreign currency.


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Results of Operations
 
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
 
                         
    Three Months Ended September 30,  
(In thousands)   2010     2009     Change  
 
Net sales
  $ 8,410     $ 1,960     $ 6,450  
Cost of goods sold
    (7,619 )     (5,272 )     (2,347 )
Selling, general and administrative expenses
    (4,117 )     (3,172 )     (945 )
Share-based compensation
    (6,527 )           (6,527 )
Depreciation and amortization expense
    (83 )     (60 )     (23 )
Accretion expense
    (216 )     (252 )     (36 )
                         
Operating loss
    (10,152 )     (6,796 )     (3,356 )
Other income (expense):
                       
Other income
    14       19       (5 )
Interest (expense) income
    (7 )     (126 )     119  
                         
Net loss
  $ (10,145 )   $ (6,903 )   $ (3,242 )
                         
 
Revenues
 
For the three months ended September 30, 2010 and 2009, our revenues were approximately $8.4 million and $2.0 million, respectively. This significant increase in revenue is due to the combination of a general increase in the prices of REO products and our diversification into new products, such as cerium hydrate and didymium oxide, which have much higher sales prices per pound than the lanthanum products we produced and sold in 2009. The following is a summary of the revenue percentages by significant product for the three months ended September 30, 2010 and the corresponding sales volumes for the three months ended September 30, 2009.
 
                 
    Three Months Ended
 
    September 30,  
    2010     2009  
 
Didymium Oxide
    31 %     0 %
Lanthanum Oxide
    18 %     4 %
Ceric Hydrate
    18 %     0 %
Lanthanum Chlorohydrate
    15 %     0 %
Lanthanum Concentrate
    8 %     85 %
 
Didymium oxide, which has a relatively high sales price per pound as compared to our other products, accounted for 31% of our total revenue for the three months ended September 30, 2010 compared to zero for the three months ended September 30, 2009. Conversely, lanthanum concentrate, which has a relatively low sales price per pound as compared to our other products, accounted for 8% of our total revenue for the three months ended September 30, 2010 as compared to 85% of total revenue for the three months ended September 30, 2009. In addition, we commenced sales of XSORBX® in the third quarter of 2010. In total, for the three months ended September 30, 2010, we sold approximately 1.15 million pounds of REO products at an average sales price of roughly $7.31 per pound compared to sales of approximately 0.80 million pounds of REO products at an average sales price of $2.45 per pound for the three months ended September 30, 2009. We anticipate cerium products, including XSORBX®, lanthanum products and didymium oxide to make up a significant percentage of our total sales until we complete the modernization and expansion of the Mountain Pass facility.
 
With the commencement of our second pilot processing campaign in April 2010, we began production of ceric hydrate and XSORBX®, which accounted for roughly 18% and 0.1% of our total revenue, respectively,


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for the three months ended September 30, 2010. We anticipate these products will become a more significant percentage of our total revenue in future periods.
 
We expect increased revenue in the last quarter of 2010, primarily attributable to an improved product mix from the new products we are producing during our second pilot processing campaign. In addition, we estimate that generally higher REE prices in 2010, as compared to 2009, will contribute to our increased revenue for the remainder of 2010 and into 2011.
 
Cost of Goods Sold
 
Our cost of goods sold for the three months ended September 30, 2010 and 2009 totaled approximately $7.6 million and $5.3 million, respectively. Included in the cost of goods sold for the three months ended September 30, 2010 and 2009 are write-downs of inventory to estimated net realizable value of $0.6 million and $2.3 million, respectively. Lower of cost or market write-downs were higher during the third quarter of 2009 compared to the same period in 2010 due to lower market prices for certain products in 2009. Over the first three quarters of 2010, we have seen a steady increase in market prices for our primary products. Our principal production costs include chemicals, direct labor and employee benefits, maintenance labor and materials, contract labor, operating supplies, depreciation, utilities and plant overhead expenses.
 
The following is a summary of the production quantity in pounds by significant product for the three months ended September 30, 2010 and the corresponding production volumes for the three months ended September 30, 2009 (in thousands of pounds).
 
                 
    Three Months Ended
 
    September 30,  
    2010     2009  
 
Didymium Oxide
    176       317  
Ceric Hydrate
    319        
Lanthanum Chlorohydrate
    651        
Lanthanum Concentrate
          927  
 
Since the commencement of our second pilot processing campaign in April 2010, our production volumes have been steadily increasing as we continue to refine and improve our production process. As a result of the second pilot processing campaign, our production costs have also increased due to the addition of more employees and the increased volume of chemicals and other materials being used throughout the production process. Total production costs charged to inventory were $6.0 million and $5.8 million for the three months ended September 30, 2010 and 2009, respectively. Inventory purchases were $1.4 million and less than $0.1 million for the three months ended September 30, 2010 and 2009, respectively. We primarily purchase lanthanum oxide, cerium oxide and praseodymium oxide that undergo further processing either at our facility or at an off-site location.
 
Our chemical costs were $1.3 million and $1.1 million for the three months ended September 30, 2010 and 2009, respectively. Chemical costs are highly correlated to production volumes and are primarily driven by the market price of the chemicals being used. For the three months ended September 30, 2010 and 2009, the most significant chemical cost was for hydrochloric acid, which represented approximately 47% and 49% of total reagent costs, respectively.
 
Labor costs, including related employee benefits, allocated to production were approximately $2.3 million and $2.1 million for the three months ended September 30, 2010 and 2009, respectively. As of September 30, 2010, we had a total of 139 employees compared to 116 employees at September 30, 2009, which led to higher wage and employee related benefit expenses. During the third quarter of 2010, we also experienced increase in labor costs as compared to the third quarter of 2009, due to the annual wage increase required under our union contract in March 2010.
 
Maintenance costs, including maintenance labor and supplies, were $0.7 million and $0.5 million for the three months ended September 30, 2010 and 2009, respectively. Utility charges, which primarily include electricity, were $0.7 million and $0.6 million in the respective periods.


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Other costs allocated to production include depreciation of $1.4 million and $0.9 million for the three months ended September 30, 2010 and 2009, respectively. Depreciation allocated to products is primarily related to buildings, equipment and machinery used in the production process. Depreciation expense allocated to production was significantly higher during the third quarter of 2010 as compared to the third quarter of 2009, due to depreciation on over $7.0 million of production equipment and other assets related to the commencement of our second pilot processing campaign, which were capitalized over the nine months ended September 30, 2010. These assets are being depreciated over a 32-month period as they will be decommissioned with the full restart of the mine at the end of 2012.
 
Selling, General and Administrative Expenses
 
Our selling, general and administrative expenses for the three months ended September 30, 2010 and 2009 totaled approximately $4.1 million and $3.2 million, respectively. The higher general and administrative expenses for the third quarter of 2010 as compared to the same period of 2009 are primarily due to increasing our staffing as we prepare to start construction of our new facilities and other business development activities in January 2011 to execute our “mine-to-magnets” business plan. We have also experienced higher accounting, legal and other professional services fees due to increased business development activities. We also paid employee bonuses totaling $0.6 million in the third quarter of 2010, $0.4 million of which was allocated to general and administrative expenses.
 
In addition, we recognized approximately $6.5 million and $0 in share-based compensation in the three months ended September 30, 2010 and 2009, respectively.
 
Share-based Compensation
 
For the three months ended September 30, 2010 and 2009, our share-based compensation was $6.5 million and $0.0 million, respectively. The share-based compensation is associated with incentive shares that ultimately converted into 2,232,740 shares of restricted common stock at $14.00 per share in connection with our corporate reorganization and upon completion of our initial public offering, 744,247 of which vested immediately with the remaining 1,488,493 scheduled to vest one-half in September 2010 and one-half upon the six-month anniversary of our initial public offering.
 
Operating Losses
 
Since our inception and our acquisition of the Mountain Pass facility, we have incurred significant operating losses. Our operating losses for the three months ended September 30, 2010 and 2009 were approximately $9.9 million and $6.9 million, respectively.
 
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
 
                         
    Nine Months Ended September 30,  
(In thousands)   2010     2009     Change  
 
Net sales
  $ 13,176     $ 4,889     $ 8,287  
Cost of goods sold
    (18,989 )     (14,896 )     (4,093 )
Selling, general and administrative expenses
    (12,851 )     (8,380 )     (4,471 )
Share-based compensation
    (21,660 )     (241 )     (21,419 )
Depreciation and amortization expense
    (239 )     (123 )     (116 )
Accretion expense
    (695 )     (755 )     60  
                         
Operating loss
    (41,258 )     (19,506 )     (21,752 )
Other income (expense):
                       
Other income
    80       124       (44 )
Interest (expense) income
    (7 )     (110 )     103  
                         
Net loss
  $ (41,185 )   $ (19,492 )   $ (21,693 )
                         


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Revenues
 
Net sales were approximately $13.2 million and $4.9 million for the nine months ended September 30, 2010 and 2009, respectively. The increased revenue for the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009 is due to the combination of a general increase in the price of REO products, as well as our diversification into new products, such as ceric hydrate and the commencement of didymium oxide sales, which have much higher sale prices per pound than the lanthanum products we produced in 2009. The following is a summary of the revenue percentages by significant products for the nine months ended September 30, 2010 and the corresponding sales volumes for the nine months ended September 30, 2009.
 
                 
    Nine Months Ended
 
    September 30,  
    2010     2009  
 
Didymium Oxide
    20 %     0 %
Lanthanum Oxide
    18 %     12 %
Ceric Hydrate
    11 %     0 %
Lanthanum Chlorohydrate
    9 %     0 %
Lanthanum Concentrate
    32 %     78 %
 
Didymium oxide, which has a relatively high sales price per pound as compared to our other products, accounted for 20% of our total revenue for the nine months ended September 30, 2010 as compared to 0% for the nine months ended September 30, 2009. Conversely, lanthanum concentrate, which has a relatively low sales price per pound as compared to our other products, accounted for 32% of our total revenue for the nine months ended September 30, 2010 as compared to 78% of total revenue for the nine months ended September 30, 2009. With the commencement of our second pilot processing campaign, the production of lanthanum concentrate has ceased and been replaced by lanthanum chlorohydrate, which is a more marketable product. In total, for the nine months ended September 30, 2010, we sold approximately 2.72 million pounds of REO products at an average sales price of approximately $4.88 per pound compared to sales of approximately 1.84 million pounds of REO products at an average sales price of approximately $2.66 per pound for the nine months ended September 30, 2009. We anticipate cerium products, including XSORBX®, lanthanum products and didymium oxide to make up a significant percentage of our total revenue until we complete the modernization and expansion of the Mountain Pass facility.
 
Cost of Goods Sold
 
Our cost of goods sold was approximately $18.9 million and $14.9 million for the nine months ended September 30, 2010 and 2009, respectively. The higher costs for the nine months ended September 30, 2010 compared to the same period for 2009 were due to higher sales and higher production costs, including costs associated with the transition to our second pilot processing campaign. These increased costs were partially offset by a decrease in our lower of cost or market inventory write-downs from approximately $7.5 million for the nine months ended September 30, 2009 to $1.6 million for the nine months ended September 30, 2010. Lower of cost or market write-downs were higher for the nine months ended September 30, 2009 as compared to the same period in 2010, due to lower market prices for certain products in 2009. Our processing facility was shut down during March 2010 due to high water levels in our evaporation ponds. In April and May 2010, operations were limited in preparation for the start up of our second pilot processing campaign, which decreased production volumes during the first and second quarters of 2010. As a result of the shut down, labor, maintenance and other costs, such as depreciation expense, normally charged to inventory were expensed as period costs and are reflected in our higher cost of sales for the nine months ended September 30, 2010 compared to the same period in 2009.
 
Total production costs charged to inventory were $10.5 million and $16.9 million for the nine months ended September 30, 2010 and 2009, respectively. The following is a summary of the production quantity in pounds by significant product for the nine months ended September 30, 2010 and the corresponding production volumes for the nine months ended September 30, 2009 (in thousands of pounds).
 


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    Nine Months Ended
 
    September 30,  
    2010     2009  
 
Didymium Oxide
    353       944  
Ceric Hydrate
    457        
Lanthanum Chlorohydrate
    795        
Lanthanum Concentrate
    584       2,378  
 
Production costs charged to inventory were lower during the nine months ended September 30, 2010 as compared to the same period in 2009, due to the plant shut-down and start-up of the second pilot processing campaign, as discussed above. We expensed $7.7 million of production-related costs that would have otherwise been charged to inventory if we maintained normal production levels during this time period. We expect to attain increased production levels in the fourth quarter of 2010.
 
Inventory purchases were $2.2 million and $0.1 million for the nine months ended September 30, 2010 and 2009. The primary products we purchased during those periods were lanthanum oxide, cerium oxide and praseodymium oxide.
 
Chemical costs charged to production were $2.4 million and $3.3 million for the nine months ended September 30, 2010 and 2009, respectively. Chemical costs in the nine months ended September 30, 2010 were lower compared to the same period in 2009 due to lower production levels primarily during the first and second quarters and improved processing techniques that reduced chemical usage. Labor costs and related benefits charged to production were $6.3 million and $5.9 million for the nine months ended September 30, 2010 and 2009, respectively. During the nine months ended September 30, 2009, labor costs include an accrual of $1.3 million for a completion bonus paid in March 2010 to employees who worked on the NFL pilot processing development project. In the third quarter of 2010, union workers and other employees at our Mountain Pass facility received bonuses totaling approximately $0.2 million. Higher labor costs during the nine months ended September 30, 2010 were primarily attributable to wage increases established under our union agreement, which took effect in March 2010, and the addition of 17 new employees under the collective bargaining agreement as well as the addition of several salaried employees in 2010, resulting in higher labor costs during the nine months ended September 30, 2010 as compared to the same period in 2009.
 
Other costs charged to production include: maintenance expenses of $1.5 million and $1.4 million; depreciation expense of $3.8 million and $2.8 million; and utility charges of $1.5 million and $1.5 million for the nine months ended September 30, 2010 and 2009, respectively. The significant increase in depreciation expense is due to the addition of over $7.0 million of assets related to the second pilot processing campaign.
 
In March 2010, we also began blending our existing didymium oxide inventory, which, prior to blending, contained varying percentages of neodymium and praseodymium, to create a more consistent content which better meets customer specifications. As of September 30, 2010, over 1.0 million pounds were blended. Blended inventory is reclassified from work in process to finished goods. We began selling the blended didymium oxide inventory in August 2010. In addition, we began shipments of didymium oxide inventory to an off-site processing facility to be converted into metal. Sales of didymium metal commenced in the fourth quarter of 2010.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses were $12.9 million and $8.4 million for the nine months ended September 30, 2010 and 2009, respectively. Beginning in the first quarter of 2010, we experienced a significant increase in professional fees primarily due to increasing our staffing as we prepare to start construction of our new facilities and other business development activities in January 2011 to execute our “mine-to-magnets” business plan. We have also experienced increased spending for accounting, information technology consulting and engineering services.

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Share-based Compensation
 
For the nine months ended September 30, 2010 and 2009, our share-based compensation was $21.7 million and $0.2 million, respectively. The share-based compensation for the nine months ended September 30, 2010 is associated with incentive shares that ultimately converted into 2,232,740 shares of common stock at $14.00 per share in connection with our corporate reorganization and upon completion of our initial public offering, 744,247 of which vested immediately with the remaining 1,488,493 scheduled to vest one-half in September 2010 and one-half upon the six-month anniversary of our initial public offering. The share-based compensation for the nine months ended September 30, 2009 is associated with options issued to our Chief Executive Officer.
 
Capital Expenditures
 
Our capital expenditures, on an accrual basis, totaled $15.6 million and $5.1 million for the nine months ended September 30, 2010 and 2009, respectively. Most of the capitalized costs incurred during the nine months ended September 30, 2010 are related to our second pilot processing campaign, which commenced in April 2010, and the startup of our modernization and expansion project at the Mountain Pass facility. These costs were primarily associated with engineering and consulting fees.
 
We are continuing with the design phase of the plant modernization and expansion process. We have begun the bidding process of pre-construction services and soil testing in preparation to commence construction. We will also be entering into a number of construction contracts associated with the modernization and expansion of our Mountain Pass facility through the remainder of the year.
 
Year Ended December 31, 2009 Compared to Period from June 12, 2008 (Inception) to December 31, 2008
 
Due to the timing of our formation on June 12, 2008 and completion of the acquisition of the Mountain Pass, California rare earth deposit and associated assets from Chevron Mining Inc. on September 30, 2008, the results of our operations for the year ended December 31, 2009 are not directly comparable to our results of operations for the period from our inception on June 12, 2008 to December 31, 2008, which we refer to as the period ended December 31, 2008. We did not have any revenue or cost of goods sold until the fourth quarter of 2008. Accordingly, the following discussion focuses on significant trends in our revenues, cost of sales and other operating expenses.
 
                         
          June 12, 2008
    June 12, 2008
 
          (Inception)
    (Inception)
 
    Year Ended
    Through
    Through
 
(In thousands)   December 31, 2009     December 31, 2008     December 31, 2009  
 
Net sales
  $ 7,093     $ 2,137     $ 9,230  
Cost of goods sold
    (21,785 )     (13,027 )     (34,812 )
Selling, general and administrative expenses
    (12,685 )     (2,979 )     (15,664 )
Depreciation and amortization expense
    (191 )     (19 )     (210 )
Accretion expense
    (1,006 )     (250 )     (1,256 )
                         
Operating loss
    (28,574 )     (14,138 )     (42,712 )
Other income (expense):
                       
Interest (expense) income
    (194 )     10       (184 )
Other income
    181       54       235  
                         
Net loss
  $ (28,587 )   $ (14,074 )   $ (42,661 )
                         
 
Revenues
 
For the year ended December 31, 2009 and for the period ended December 31, 2008, our revenues were approximately $7.1 million and $2.1 million, respectively. Sales of lanthanum accounted for 82% and 72% of our sales for the year ended December 31, 2009 and the period ended December 31, 2008, respectively. There is a limited market for our lanthanum and two customers together comprised 82% and 72% of our total product revenue for the year ended December 31, 2009 and the period ended December 31, 2008, respectively.


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We anticipate lanthanum and didymium oxide to make up a significant percentage of our total sales until we complete the modernization and expansion of the Mountain Pass facility, at which time we will no longer manufacture those products. We sell 100% of our lanthanum to customers in the United States.
 
Upon completion of the modernization and expansion of the Mountain Pass facility and the full implementation of our “mine-to-magnets” strategy, we expect to produce cerium, lanthanum, neodymium, praseodymium, samarium, dysprosium and terbium oxide and metal products, europium and gadolinium oxide products and NdFeB and samarium cobalt alloys. We intend to use some of the NdFeB alloy and dysprosium metal product in our magnet production plant. Our new products are expected to have significantly more applications than our current products, exposing us to a larger population of potential customers.
 
Cost of Goods Sold
 
Our cost of goods sold for the year ended December 31, 2009 and for the period ended December 31, 2008 totaled approximately $21.8 million and $13.0 million, respectively. Included in the cost of sales for the year ended December 31, 2009 and the period ended December 31, 2008 are write-downs of inventory to estimated net realizable value of $9.0 million and $9.5 million, respectively. Our principal production costs include chemicals, direct labor and employee benefits, maintenance labor and materials, contract labor, operating supplies, depreciation, utilities and plant overhead expenses.
 
Total production costs charged to inventory were $23.4 million and $5.5 million for the year ended December 31, 2009 and the period ended December 31, 2008, respectively. We produced 3.4 million pounds of lanthanum and 1.2 million pounds of didymium oxide in 2009 and 0.8 million pounds of lanthanum and 0.1 million pounds of didymium oxide in the period ended December 31, 2008. Inventory purchases were $0.2 million and $0.7 million for the respective periods. We primarily purchase lanthanum oxide, cerium oxide and praseodymium oxide that undergo further processing either at our facility or at an off-site location.
 
Our chemical costs were $6.7 million and $1.9 million for the year ended December 31, 2009 and for the period ended December 31, 2008, respectively. Unit chemical costs do not vary significantly based on production volumes and are primarily driven by market prices. In 2008, the most significant chemical cost related to caustic soda, representing approximately 57% of total reagent costs. We launched a program in 2009 that has allowed us to lower the quantity and costs associated with the use of caustic soda in our production process.
 
Labor costs, including related employee benefits, allocated to production were $9.2 million and $2.0 million for the year ended December 31, 2009 and the period ended December 31, 2008, respectively. Included in the labor costs is a bonus, which was granted to all union employees for working on our NFL pilot processing project, of $0.8 million and $0.3 million for the year ended December 31, 2009 and the period ended December 31, 2008, respectively. The bonus was paid out in March 2010.
 
Maintenance costs, including maintenance labor and supplies, were $1.9 million and $0.5 million for the year ended December 31, 2009 and the period ended December 31, 2008, respectively. Maintenance costs remained consistent throughout this time period.
 
Other costs allocated to production include depreciation charges of $3.7 million and $0.9 million for the year ended December 31, 2009 and the period ended December 31, 2008, respectively. Depreciation allocated to products is primarily related to buildings, equipment and machinery used in the production process. We also accrued waste disposal charges of $1.5 million as of December 31, 2009 for disposal of by-products of production that are potentially hazardous.
 
Selling, General and Administrative Expenses
 
Our selling, general and administrative expenses for the year ended December 31, 2009 and for the period ended December 31, 2008 totaled approximately $12.7 million and $3.0 million, respectively. Legal and accounting fees were approximately $1.8 million and $0.5 million, respectively. Other consulting expenses, primarily related to engineering and technical consultants were $1.6 million and $0.5 million. These costs related primarily to engineering and resource studies as well as process development projects. Costs associated with research and development projects were $1.5 million and $0.4 million and primarily are attributed to labor costs and materials and supplies.


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Management salaries and related benefits not capitalizable in inventory were $2.5 million and $0.9 million for the respective periods.
 
Operating Losses
 
Since our inception and our acquisition of the Mountain Pass facility, we have incurred significant operating losses. Our operating losses for the year ended December 31, 2009 and for the period ended December 31, 2008 were $28.6 million and $14.1 million, respectively. We have funded these operating losses entirely with proceeds from equity contributions from our initial investors.
 
Capital Investments
 
We expect to make significant capital expenditures under our plan to modernize and expand our Mountain Pass facility, as well as consistent expenditures to replace assets necessary to sustain safe and reliable production. Most of the facilities and equipment acquired in connection with the acquisition of the Mountain Pass facility are at least 20 years old. We have developed an accelerated modernization plan that includes the refurbishment of the Mountain Pass mine and related processing facilities beginning in 2010 through 2012 in order to increase REO production. We expect to incur approximately $531 million in capital costs in connection with our initial modernization and expansion plan prior to December 31, 2012, and up to an additional $250 million in capital costs to build additional production capacity in connection with our capacity expansion plan, prior to December 31, 2013.
 
All of the amounts for future capital spending described above are initial estimates that are subject to change as the projects are further developed. Total capital spending in 2010 is expected to be approximately $28 million, of which approximately $3 million will be prepayments on contracts.
 
Liquidity and Capital Resources
 
Under our current business plan, we intend to spend approximately $531 million through the end of 2012, including approximately $245 million in 2011, to restart mining operations, construct and refurbish processing facilities and other infrastructure at the Mountain Pass facility and expand into metal, alloy and magnet production in connection with our initial modernization and expansion plan. In addition, we expect to spend approximately $250 million through the end of 2013, including approximately $50 million to $100 million in 2011, to build additional production capacity and approximately $20 million in 2011 for other capital projects. We expect to finance these expenditures, as well as our working capital requirements, with approximately $360.4 million of net proceeds from our initial public offering (after giving effect to our use of $18.2 million of net proceeds for surety bonds), net proceeds from our offering of mandatory convertible preferred stock and anticipated funds from operations, traditional debt financing, equity financing, project financing and/or government programs, including the U.S. Department of Energy loan guarantee program for which we submitted an application in June 2010. On July 21, 2010, the U.S. Department of Energy notified us that our Part I submission under the loan guarantee program had been reviewed and deemed eligible for submission of a Part II application. Our Part II application was submitted on December 31, 2010. We also engaged BNP Paribas to explore other financing options in the debt capital markets. The engagement letter expired on January 31, 2011; however, we are continuing to work with BNP Paribas to arrange debt financing. On December 10, 2010, we entered into a memorandum of understanding with Sumitomo, pursuant to which Sumitomo agreed to, among other things, purchase $100 million of our common stock and arrange for a $30 million debt financing. The consummation of these transactions with Sumitomo is subject to numerous conditions and finalization of definitive agreements. Our estimated capital expenditure of $781 million does not include corporate, selling, general and administrative expenses, which we estimate to be an additional $20 million to $25 million per year.


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Contractual Obligations
 
As of December 31, 2009, we had the following contractual obligations:
 
                                         
    Payments Due by Period  
Contractual Obligations
  Total     Less Than 1 Year     1-3 Years     4-5 Years     More Than 5 Years  
(In thousands)                              
 
Operating lease obligations(1)
  $ 281     $ 153     $ 128     $     $  
Purchase obligations(2)
                             
Employee bonus obligations(3)
    1,400       1,400                    
Asset retirement obligations(4)
    29,247       639       4,191       1,597       22,820  
                                         
Total
  $ 30,928     $ 2,192     $ 4,319     $ 1,597     $ 22,820  
 
 
(1) Represents all operating lease payments for office space, land and office equipment.
 
(2) Represents non-cancelable contractual commitments for the purchase of materials and services from vendors.
 
(3) Represents payments due to employees as a result of our NFL pilot processing campaign.
 
(4) Under applicable environmental laws and regulations, we are subject to reclamation and remediation obligations resulting from our operations. The amounts presented above represent our estimated future undiscounted cash flows required to satisfy the obligations currently known to us.
 
At December 31, 2010, there was an accrual of $554,000 relating to employee bonus obligations outstanding, and the asset retirement obligation was reduced based on an updated analysis.
 
On July 19, 2010, we entered into a lease agreement for additional office space. As a result, our lease obligation for the Denver office location will be roughly $67,000 for the three months ending December 31, 2010. Our payments for the following three years will total payments of roughly $704,000 with additional payments totalling roughly $429,000 for years four and five. Remaining payments totalling roughly $196,000 will be paid in year six.
 
On September 30, 2010, we entered into a natural gas transportation lease agreement, subject to certain exceptions, with Kern River Gas Transmission Company under which we agreed to make annual payments of $5.2 million per year for 10 years beginning on the later of January 1, 2012 or the in-service date, which we anticipate to be April 2012, to Kern River Gas Transmission Company in exchange for the designing, permitting, constructing, operating, and maintaining of facilities necessary to transport natural gas to our new power generation facility. Assuming an in-service date of April 1, 2012, our payments for years one to three will total roughly $9.04 million with additional payments totalling roughly $10.31 million in years four and five and payments totalling roughly $32.22 million will be paid in following periods.
 
As of November 19, 2010, we had entered into an engineering services agreement for $18.9 million, subject to certain exceptions, with M&K Chemical Engineering under which we agreed to make monthly estimated payments based upon completion of M&K Chemical Engineering performance of work. As a result, approximately $1.3 million had been paid during December 2010 and $17.6 million is expected to be paid during 2011.
 
As of December 15, 2010, we had entered into an engineering equipment purchase obligation with Quinn Process Equipment Co. totaling $24.2 million. As of December 31, 2010, $4.7 million of the total was recognized with expected payments of $16.7 million to be made during 2011 and $2.8 million to be made during 2012.
 
As of December 31, 2010, a down payment of 10% had been paid to Solar Turbines Inc. through a letter of intent prior to the full execution of a contract for the purchase of turbines, which is expected to finalized during January 2011, for a purchase obligation totaling $12.7 million.
 
As of December 31, 2010, we had entered into various contracts of $7.8 million related to construction purchases, $8.7 million related to engineering and design purchases and $0.8 million related to professional services.


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Off-Balance Sheet Arrangements
 
As of the date of this prospectus, our only off-balance sheet arrangements are the operating leases included in “— Contractual Obligations” above. Prior to September 13, 2010, our only off-balance sheet arrangement in addition to the operating leases included in “— Contractual Obligations” above, was our agreement to compensate our initial investors for providing collateral relating to our bonding obligations to various government agencies. In February 2009, the members of Molycorp Minerals incurred certain costs in providing letters of credit and/or cash collateral to secure surety bonds issued for the benefit of certain regulatory agencies relating to our Mountain Pass facility closure and reclamation obligations. The total amount of collateral provided by them was $18.2 million. In accordance with our agreement, we paid each stockholder a 5% annual return on the amount of collateral provided resulting in an aggregate payment of approximately $0.8 million for interest accrued through September 13, 2010.
 
Critical Accounting Policies and Estimates
 
Revenue and Costs of Goods Sold
 
Revenue is recognized when persuasive evidence of an arrangement exists, the risks and rewards of ownership have been transferred to the customer, which is generally when title passes, the selling price is fixed or determinable and collection is reasonably assured. Title generally passes upon shipment of product from our Mountain Pass facility. Prices are generally set at the time of or prior to shipment. Transportation and distribution costs are incurred only on sales for which we are responsible for delivering the product. Our reported revenues are presented net of freight and shipping costs.
 
Cost of goods sold includes the cost of production as well as inventory write-downs caused by market price declines. Primary production costs include labor, supplies, maintenance costs, depreciation and plant overhead.
 
Reclamation
 
Our asset retirement obligations, or AROs, arise from our San Bernardino County conditional use permit, approved mining plan and federal, state and local laws and regulations, which establish reclamation and closure standards for all aspects of our surface mining operation. Comprehensive environmental protection and reclamation standards require that we, upon closure of the Mountain Pass facility, restore the property in accordance with an approved reclamation plan issued in conjunction with our conditional use permit.
 
Our AROs are recorded initially at fair value, or the amount at which we estimate we could transfer our future reclamation obligations to informed and willing third parties. We use estimates of future third party costs to arrive at the AROs because the fair value of such costs generally reflects a profit component. It has been our practice, and we anticipate it will continue to be our practice, to perform a substantial portion of the reclamation work using internal resources. Hence, the estimated costs used in determining the carrying amount of our AROs may exceed the amounts that are eventually paid for reclamation costs if the reclamation work were performed using internal resources.
 
To determine our AROs, we calculate the present value of the estimated future reclamation cash flows based upon our permit requirements, which is based upon the approved mining plan, estimates of future reclamation costs and assumptions regarding the useful life of the asset to be remediated. These cash flow estimates are discounted on a credit-adjusted, risk-free interest rate based on U.S. Treasury bonds with a maturity similar to the expected life of the asset.
 
The amount initially recorded as an ARO for the Mountain Pass facility may change as a result of changes to the mine permit, and changes in the estimated costs or timing of reclamation activities. We periodically update estimates of cash expenditures associated with our ARO obligations in accordance with U.S. GAAP, which generally requires a measurement of the present value of any increase in estimated reclamation costs using the current credit-adjusted, risk-free interest rate. Adjustments to the ARO for decreases in the estimated amount of reclamation costs are measured using the credit-adjusted, risk-free interest rate as of the date of the initial recognition of the ARO.


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At September 30, 2010, our accrued ARO obligation was $11.8 million. Of this amount, approximately $4.6 million is associated with the demolition and removal of buildings and equipment, approximately $4.3 million is associated with groundwater remediation and $2.9 million is associated with the remediation of tailing ponds, removal of land improvements and revegetation.
 
Property, Plant and Equipment
 
Property, plant and equipment associated with the acquisition of the Mountain Pass facility is stated at estimated fair value as of the acquisition date. Expenditures for new property, plant and equipment and improvements that extend the useful life or functionality of the asset are capitalized. Depreciation on plant and equipment is calculated using the straight-line method over the estimated useful lives of the assets. Maintenance and repair costs are expensed as incurred.
 
Reserves, Mineral Properties and Development Costs
 
Mineral properties represent the estimated fair value of the mineral resources associated with the Mountain Pass facility as of the acquisition date. We amortize such mineral properties using the units of production basis over estimated proven and probable reserves.
 
Inventory
 
Inventories consist of work-in-process, finished goods, stockpiles of bastnasite and lanthanum concentrate and materials and supplies. Inventory cost is determined using the lower of weighted average cost or estimated net realizable value. Inventory expected to be sold in the next 12 months is classified as a current asset in the consolidated balance sheet. Cash flows related to the sale of inventory are classified as operating activities in the consolidated statements of cash flows.
 
Write-downs to estimated net realizable value are charged to cost of goods sold. Many factors influence the market prices for REOs and, in the absence of established prices contained in customer contracts, management uses Metal-Pages as an independent pricing source to evaluate market prices for REOs at the end of each quarter. Metal-Pages is a widely recognized pricing source within our industry, which collects and summarizes data from rare earth producers in China and Europe. We make appropriate modifications to the Metal-Pages prices, when applicable, to account for differences between the REO grade of our inventory and the REO grade assumed in the corresponding Metal-Pages price.
 
We evaluate the carrying value of finished goods and materials and supplies inventories each quarter giving consideration to slow-moving items, obsolescence, excessive levels and other factors and recognize related write-downs as necessary. Finished goods inventories that may not meet customer specifications or current market demand, and quantities that exceed a two year supply, generally require write-downs to estimated net realizable value.
 
We evaluate our stockpiled concentrates each quarter and recognize write-downs as necessary to adjust the carrying value to estimated net realizable value. Our analysis utilizes current market prices from Metal-Pages and estimated costs to complete the processing of our concentrates to REOs. Costs associated with the processing of concentrates through our planned modernized facilities are based on internal and external engineering estimates and primarily include labor and benefits, utilities, chemicals, operating supplies, maintenance, depreciation and amortization and plant overhead expenses. Our estimated costs per pound of REO to be produced in our modernized facilities are significantly lower than our current production costs per pound, resulting in a higher carrying value for our stockpiled concentrates. The use of new and proprietary technologies will allow us to improve our process recoveries and substantially reduce our water consumption. We will reduce our energy costs through the use of a natural gas powered co-generation power plant that will be installed as part of our modernization project. Additionally, we intend to produce our own hydrochloric acid and sodium hydroxide and recycle our acid and base, thereby reducing our cost of reagents. We estimate, based upon our current business plan and estimated future demand for the component rare earth elements to be recovered, that our inventory of stockpiled concentrates will be fully utilized in the production of our rare earth products by March 31, 2013.


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Asset Impairments
 
We account for asset impairment in accordance with ASC 360, Property Plant and Equipment. Long-lived assets such as property, plant and equipment, mineral properties and purchased intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is considered to exist if the total estimated future cash flow on an undiscounted basis is less than the carrying amount of the related assets. An impairment loss is measured and recorded based on the discounted estimated future cash flows. Changes in significant assumptions underlying future cash flow estimates or fair values of assets may have a material effect on our financial position and results of operations.
 
Factors we generally consider important in our evaluation and that could trigger an impairment review of the carrying value of long-lived assets include the following:
 
  •  significant underperformance relative to expected operating results;
 
  •  significant changes in the way assets are used;
 
  •  underutilization of our tangible assets;
 
  •  discontinuance of certain products by us or by our customers;
 
  •  a decrease in estimated mineral reserves; and
 
  •  significant negative industry or economic trends.
 
The recoverability of the carrying value of our mineral properties is dependent upon the successful development, start-up and commercial production of our mineral deposit and the related processing facilities. Our evaluation of mineral properties for potential impairment primarily includes assessing the existence or availability of required permits and evaluating changes in our mineral reserves, or the underlying estimates and assumptions, including estimated production costs. The determination of our proven and probable reserves is based on extensive drilling, sampling, mine modeling, and the economic feasibility of accessing the reserves. Assessing the economic feasibility requires certain estimates, including the prices of REOs to be produced and processing recovery rates, as well as operating and capital costs. The estimates are based on information available at the time the reserves are calculated.
 
Although we believe the carrying values of our long-lived assets were realizable as of the relevant balance sheet date, future events could cause us to conclude otherwise.
 
Recent Accounting Pronouncements
 
There are no recent accounting pronouncements that will have an impact on our consolidated financial statements.
 
Quantitative and Qualitative Disclosures about Market Risk
 
Our operations may be impacted by commodity prices, geographic concentration, changes in interest rates and foreign currency exchange rates.
 
Commodity Price Risk
 
Our principal products, including cerium, lanthanum, praseodymium, neodymium, europium, samarium, gadolinium, dysprosium, and terbium, are commodities but are not traded on any commodity exchange. As such, direct hedging of the prices for future production cannot be undertaken. We generally do not currently have any long-term sales contracts with customers, so prices typically will vary with the transaction and individual bids received. Our products are primarily marketed to manufacturer as component materials. Prices will vary based on the demand for the end products being produced with the mineral resources we mine and process.


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Our net sales and profitability are determined principally by the price of the rare earth products that we produce and, to a lesser extent by the price of natural gas and other supplies used in the production process. The prices of our rare earth products are influenced by the price and demand of the end products that our products support, including clean energy technologies. A significant decrease in the global demand for these products may have a material adverse effect on our business. We currently have no hedging contracts in place and intend to consider hedging strategies in future.
 
Our costs and capital investments are subject to market movements in other commodities such as natural gas and chemicals. We may enter into derivative contracts for a portion of the expected usage of these products, but we do not currently have any derivative contracts and we do not currently anticipate entering into derivative agreements.
 
Interest Rate Risk
 
We do not currently have any debt obligations except our inventory financing arrangement with Traxys North America, LLC in the amount of $5 million as of September 30, 2010. Our exposure to interest rate risk as a result of this agreement would result in a roughly $50,000 increase/decrease in interest rate expense for every 1% increase/decrease in the underlying interest rate. Due to our limited borrowings, we are not significantly impacted by variations in interest rates at this time. Our exposure to interest rate risk would increase if, for example, we obtain and utilize debt facilities in the future.
 
Internal Controls
 
As a public company, we are required to comply with the record keeping, financial reporting, corporate governance and other rules and regulations of the SEC, including the requirements of the Sarbanes-Oxley Act, and other regulatory bodies. These entities generally require that financial information be reported in accordance with U.S. GAAP. As a private company, we were not required to have, and until late 2009 did not have, sufficient personnel with SEC and Sarbanes-Oxley experience. In addition, we were not required to comply with the internal control design, documentation and testing requirements imposed by Sarbanes-Oxley. Following our initial public offering, we became subject to these requirements.
 
Effective internal control over financial reporting is necessary for us to provide reliable annual and interim financial reports and to prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our operating results and financial condition could be materially misstated and our reputation could be significantly harmed. A material weakness in internal control over financial reporting is defined as a deficiency, or a combination of deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of a company’s financial reporting. A deficiency in internal control over financial reporting exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.
 
During the preparation of our consolidated financial statements as of December 31, 2009 and 2008 and for the year ended December 31, 2009, the period from June 12, 2008 (Inception) through December 31, 2008, and cumulatively for the period from June 12, 2008 (Inception) through December 31, 2009, we identified deficiencies in our internal control over financial reporting which, when considered in the aggregate, represent a material weakness. If not remediated, this material weakness could result in material misstatements in our consolidated financial statements in future periods. Specifically, we did not maintain a sufficient complement of personnel with an appropriate level of accounting and financial reporting knowledge, experience and training in the application of U.S. GAAP. We also did not maintain an adequate system of processes and internal controls sufficient to support our financial reporting requirements and to produce timely and accurate consolidated financial statements in accordance with U.S. GAAP. If our efforts are not adequate to remediate this material weakness, we could experience material misstatements in our consolidated financial statements in future periods.


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In late 2009, we commenced remediation actions which included hiring several individuals with significant accounting, auditing and financial reporting experience and devoting significant resources to improving our system of processing and internal controls. Specifically, we hired a Chief Financial Officer, a Corporate Controller and a Director of Financial Reporting, and in early 2010, we hired an Accounting Manager for the Mountain Pass facility, all of whom are Certified Public Accountants. We also installed additional functionality and increased the integration of our information technology systems to increase automation and accuracy within our processes. Management has continued to refine and formalize our control procedures, including the implementation of additional and more timely review and approval procedures. We also established an Audit and Ethics Committee of our Board of Directors in conjunction with our initial public offering. Additionally, we have utilized the services of an external consulting firm to provide us with a formal risk assessment and, with their assistance, we have commenced a project to enhance our documentation of our control environment and process controls.
 
Under current requirements, our independent registered public accounting firm will not be required to evaluate and assess our internal control over financial reporting until we file our annual report on Form 10-K for the year ended December 31, 2011. Consequently, we will not be evaluated independently in respect of our controls for a substantial period of time after this offering is completed. As a result, we may not become aware of other material weaknesses or significant deficiencies in our internal controls that may be later identified by our independent registered public accounting firm as part of the evaluation.
 
The actions we have taken to date, or any future measures or actions we will take, may not remediate the material weakness mentioned above. See “Risk Factors — Risks Related to Our Business— We identified a material weakness in our internal control over financial reporting which, if not satisfactorily remediated, could result in material misstatements in our consolidated financial statements in future periods” and “— We will be required by Section 404 of the Sarbanes-Oxley Act to evaluate the effectiveness of our internal controls. If we are unable to achieve and maintain effective internal controls, particularly in a period of anticipated rapid growth, our operating results and financial condition could be harmed” included elsewhere in this prospectus.


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RARE EARTH INDUSTRY OVERVIEW
 
The Rare Earth Elements
 
The REE group includes 17 elements, namely the 15 lanthanide elements, which are cerium, lanthanum, neodymium, praseodymium, promethium (which does not occur naturally), samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium and lutetium, and two elements that have similar chemical properties to the lanthanide elements — yttrium and scandium. The oxides produced from processing REEs are collectively referred to as REOs. Light and heavy REEs are contained in all rare earth deposits, including in our deposit at Mountain Pass. Heavy REEs generally command higher sales prices on a per pound basis than light REEs because heavy REEs are not as prevalent. Cerium, lanthanum, neodymium, praseodymium and samarium are considered “light REEs” that are more predominant in bastnasite, while europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium and lutetium are considered “heavy REEs” that are more predominant in monazite. Our reserves are bastnasite, but there are also known monazite occurrences on our property that we are currently examining.
 
(LINE GRAPH)
 
Global Rare Earth Market
 
REEs have unique properties that make them critical materials to many existing applications upon which society has become dependent as well as many emerging applications. Examples include:
 
  •  Clean-Energy Technologies:  hybrid and electric vehicles, wind power turbines and compact fluorescent lighting;
 
  •  High-Technology Applications:  miniaturization of cell phones, personal digital assistant devices, digital music players, hard disk drives used in computers, computing devices, “ear bud” speakers and microphones, as well as fiber optics, lasers and optical temperature sensors;
 
  •  Critical Defense Applications:  guidance and control systems, communications, global positioning systems, radar and sonar; and
 
  •  Advanced Water Treatment:  industrial, military, homeland security and domestic and foreign aid applications.
 
Rechargeable Batteries
 
One of the most effective rechargeable batteries is the NiMH battery, which is used in nearly all hybrid and electric vehicles and many other electronic products. A mixed rare earth metal alloy is used as the anode in the NiMH battery. Cerium and lanthanum are the main REEs used in the NiMH battery.
 
Magnets
 
REEs are critical elements in the world’s strongest permanent magnets. These magnets are utilized in electric motors, a key component of all motor vehicles, especially hybrid and electric vehicles. A new and rapidly expanding use of rare earth permanent magnets is in wind turbine permanent magnet generators. Owing to the high power-to-weight ratio of the magnets, less material is required, permitting engines and generators to be considerably more powerful while at the same time smaller and lighter. The powerful REE-


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based magnets have made possible the miniaturization of hard disk drives used in computers and many other electrical devices such as personal digital assistant devices and digital music players. Neodymium, praseodymium, samarium, and dysprosium are critical to the permanent magnet industry due to their unique magnetic properties. Based on estimates by IMCOA, by 2015, global demand for rare earths used in magnets is estimated at 40,000 mt of REO, excluding demand from the wind energy sector. The wind energy sector could consume up to an additional 9,000 mt of REO, 1,350 mt of which is estimated solely for the United States. According to IMCOA, the wind energy sector in the United States alone could lead to a 3% to 4% increase in global demand for REOs used in magnets. If China succeeds with its current target, then this could lead to additional consumption of REOs used in magnets of 8% to 10% by 2014. Today, nearly all magnetic rare earth products are produced from Chinese-sourced REOs, and there is no U.S. domestic manufacturer of NdFeB magnets, as confirmed by the April 2010 U.S. GAO briefing.
 
Catalysts
 
REEs are commonly used as a form of catalyst, referred to as a fluid bed cracking catalyst. Fluid bed cracking catalysts are being used increasingly in the oil industry because they enhance the efficiency of separating various fractions from crude oil during the refining process. Lanthanum is the main REE used in fluid bed cracking catalysts.
 
REEs are also used in another form of catalyst in vehicles. A catalytic converter is a device fitted to the exhaust system of a combustion engine that reduces the toxicity of emissions. Recent technological advances have seen the emergence of the three-way catalytic converter. This device reduces toxic nitrogen oxides to more benign nitrogen and oxygen, oxidizes toxic carbon monoxide to carbon dioxide and oxidizes unburnt hydrocarbons. Cerium is the REE used in catalytic converters, where it forms part of the catalyst. Increasingly stringent vehicle emission laws are being introduced throughout the world, and, according to the Manufacturers of Emission Controls Association, 100% of new vehicles sold in the United States are equipped with three-way catalytic converters while many developing nations are also mandating that new passenger cars be equipped with three-way catalytic converters.
 
Water Treatment
 
We have developed XSORBX®, a proprietary product and process, primarily consisting of cerium, that removes arsenic and other heavy metals from industrial processing streams and will allow our customers to more safely sequester arsenic and increase their production. XSORBX® is protected by over 100 issued and pending U.S. and foreign patents and patent applications. This product, which we have proven to be effective in removing arsenic and other contaminants from water, is applicable to a broad range of applications. There are several opportunities for us to commercialize this technology in the industrial, defense, foreign aid and outdoor enthusiast sectors. For example, we have applied the technology in the mining and smelting industries as a means to improve management of arsenic-laden process streams and have also developed a portable drinking water filtration system for U.S. defense applications and for the outdoor recreation industry. We have begun to sell XSORBX® for commercial use in the wastewater, recreation, pool and spa, industrial process and other water treatment markets.
 
Demand for Rare Earth Products
 
The lack of available substitutes makes REEs essential for existing and emerging technologies. According to IMCOA, global demand in 2010 is estimated to have been approximately 125,000 mt of REO, roughly equivalent to the 2008 demand level.


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Global demand for rare earths by market (mt of REO): 2010E & 2015E
 
(LINE GRAPH)
 
Source: IMCOA (January 2011)
 
Factors that could influence upward demand for rare earth products include:
 
  •  the use of neodymium, praseodymium and dysprosium in high-strength NdFeB magnets that are critical to hybrid and electric vehicles and the increased construction of wind power generation facilities, particularly off-shore installations;
 
  •  the use of lanthanum and cerium for NiMH batteries that are utilized in hybrid and electric vehicles;
 
  •  the use of europium, terbium and yttrium in the production of compact fluorescent light bulbs;
 
  •  the use of high-strength NdFeB magnets in the miniaturization of electronic products;
 
  •  the use of lanthanum by refineries processing lower quality crude oil that consumes greater quantities of fluid cracking catalysts;
 
  •  the increased use of REEs in the drive to improve energy efficiency and reduce GHGs by the United States and the European Union;
 
  •  the use of cerium in advanced water filtration applications; and
 
  •  continued research and commercialization of new applications for rare earths products.
 
Global consumption of REEs is projected to steadily increase due to continuing growth in existing applications and increased innovation and development of new end uses. For example, the integration of rare earth permanent magnet drives into wind power turbines has substantially reduced the need for gearboxes, which increases overall efficiency and reliability. According to IMCOA, total demand for rare earths outside of China is expected to increase at a compound annual growth rate, or CAGR, of approximately 7% between 2010 and 2015. In addition, according to IMCOA, global demand for rare earths used in magnets is expected to grow at a CAGR of approximately 13% over the same period. IMCOA estimates that total global demand for rare earths is expected to increase from 125,000 mt in 2010 to 185,000 mt in 2015, which results in a CAGR of approximately 8% for that period.
 
Supply for Rare Earth Products
 
China has dominated the global supply of REOs for the last ten years and, according to Roskill, accounted for approximately 96% of global REO production in 2008. Even with our planned production, global supply is expected by analysts to remain tight due to the combined effects of growing demand and actions taken by the Chinese government to restrict exports. The Chinese government heightened international supply concerns beginning in August 2009 when China’s Interior Ministry first signaled that it would further restrict exports of Chinese rare earth resources. Citing the importance of REE availability to internal industries and the desire to conserve resources, the Chinese government has announced export quotas, increased export tariffs and introduced a “mining quotas policy” that, in addition to imposing export quotas and export tariffs, also imposes production quotas and limits the issuance of new licenses for rare earth exploration. According to IMCOA, China’s export quotas have decreased from approximately 65,600 mt of REO in 2004 to approximately 50,000 mt of REO in 2009. On July 8, 2010, China’s Ministry of Industry and Information Technology issued the export quota for the second half of 2010, which reduced exports by 72% compared with the second half of 2009 and 40% for the year ended December 31, 2010 as compared to the year ended


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December 31, 2009. On December 28, 2010, China’s Ministry of Industry and Information Technology further reduced the export quota for the first half of 2011, reducing exports by 35% compared with the first half of 2010 and 20% for the twelve months ended June 30, 2011 as compared to the twelve months ended June 30, 2010. In 2008, according to IMCOA, China imposed export taxes of up to 25% on selected REOs (primarily heavy REOs) and up to 15% for all other REOs (primarily light REOs). In addition, according to IMCOA, China’s Ministry of Industry and Information Technology issued a plan in 2009 to reduce the production of separated rare earths by 7% to 110,700 mt of REO in 2009.
 
China’s internal consumption of rare earths is expected to continue to grow, leaving the Rest of World with less supply during a period of projected increasing global demand. China also dominates the manufacture of rare earth metals, producing substantially all of the world’s supply, and the manufacture of NdFeB magnets, producing approximately 80% of the world’s supply. Neither capability currently exists in the United States, as confirmed by the April 2010 U.S. GAO briefing.
 
China has announced a national stockpile program, as has South Korea. Additionally, Japan has increased its national stockpile program. In December 2010, the U.S. Department of Energy released a study concluding that five rare earth metals, dysprosium, neodymium, terbium, europium and yttrium, are critical to clean energy technologies in the short term and medium term due to their importance to the clean energy economy and risk of supply disruption. The report emphasizes that diversified global supply chains for these critical materials are essential, and calls for steps to be taken to facilitate extraction, processing and manufacturing in the United States. Additionally, the U.S. Department of Defense is conducting a study to determine its rare earth requirements and supply chain vulnerabilities and whether to build a strategic stockpile. These stockpile programs will likely accelerate the pace of the current and projected global REE supply deficit.
 
According to the April 2010 U.S. GAO briefing:
 
  •  the Mountain Pass mine is the largest non-Chinese rare earth deposit in the world;
 
  •  other U.S. rare earth deposits exist, but these deposits are still in early exploratory stages of development;
 
  •  officials emphasized the significance of the widespread use of commercial-off-the-shelf products in defense systems that include rare earth materials, such as computer hard drives;
 
  •  heavy REEs, such as dysprosium, which provide much of the heat-resistant qualities of permanent magnets used in many industry and defense applications, are considered to be important;
 
  •  government and industry officials told the U.S. GAO that where rare earth materials are used in defense systems, the materials are responsible for the functionality of the component and would be difficult to replace without losing performance;
 
  •  a 2009 National Defense Stockpile configuration report identified lanthanum, cerium, europium and gadolinium as having already caused some kind of weapon system production delay and recommended further study to determine the severity of the delays; and
 
  •  defense systems will likely continue to depend on rare earth materials, based on their life cycles and lack of effective substitutes.
 
The forecasted demand by IMCOA set forth in the graph below assumes Mountain Pass and other rare earth projects commence production and account for a significant portion of the forecasted increase in supply. If these projects do not commence production when anticipated, there will be a gap between forecasted demand and forecasted supply. IMCOA expects that this anticipated market dynamic will underpin continued strong pricing.


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Global Rare Earths Supply & Demand, 2005-2020 (mt REO)
 
(LINE GRAPH)
Source: IMCOA (January 2011)(1)
 
 
  (1)  Does not reflect our potential to increase production to 40,000 mt of REO per year following the completion of our capacity expansion plan, but instead reflects our production of 19,050 mt of REO per year beginning in 2013.
 
As a result of the global economic crisis, rare earth product prices declined by approximately 50% during 2008 and through the third quarter of 2009. According to Metal-Pages, from October 2009 through December 2010, prices for rare earths have risen by approximately 780% on average. Furthermore, over the same period, prices for some of the most common rare earths (cerium oxide, lanthanum oxide, neodymium oxide, and rare earth carbonate) have risen by more than 1000% on average.
 
In 2008, global production of rare earths was estimated at approximately 129,000 mt of REO according to Roskill. According to IMCOA, China accounted for approximately 96% of this total. As a result of economic, environmental and regulatory factors in China, as well as internal industrial development, there is uncertainty with respect to the availability of rare earth products from China. Although Chinese production of rare earth materials is increasing, export quotas imposed by the Chinese government are decreasing, thus reducing the amount of rare earth materials that China may export for the rest of the world. This reduction is occurring at a time when the demand for REEs is growing significantly.
 
In expectation of increasing demand, there are a limited number of rare earth projects outside of China that are in various stages of development. The success of any other rare earth projects depends on a number of factors, including:
 
  •  REO grade;
 
  •  obtaining and maintaining operating and environmental permits;
 
  •  acceptance in the marketplace as a long-term viable alternative to Chinese production;
 
  •  the amount of recoverable high-value REEs contained in ore (such as neodymium, praseodymium, europium and dysprosium);
 
  •  reserve life;
 
  •  the ability to separate and concentrate rare earth minerals;
 
  •  the ability to economically crack rare earth mineral concentrates and produce high yields;
 
  •  the ability to separate REEs and manufacture finished products;
 
  •  natural radioactive material content of the ore and the ability to responsibly and economically manage radioactive waste;
 
  •  the cost of bringing the property into production; and
 
  •  access to critical infrastructure, including electricity, fuel and transportation.


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BUSINESS
 
Our Business
 
We are the only REO producer in the Western hemisphere, and we own one of the world’s largest, most fully developed rare earth projects outside of China. Furthermore, following the execution of our “mine-to-magnets” strategy and completion of our initial modernization and expansion plan, we expect to be one of the world’s most integrated producers of rare earth products, including oxides, metals, alloys and magnets. In light of strong industry fundamentals, including reduced Chinese supply and strong pricing increases, our Board of Directors recently approved a second-phase capacity expansion plan in addition to our initial modernization and expansion plan, which we expect to result in the ability to produce approximately double the amount of REO that we will be able to produce upon completion of our initial modernization and expansion plan.
 
Our rare earths are critical inputs in many existing and emerging applications including: clean energy technologies, such as hybrid and electric vehicles and wind power turbines; multiple high-tech uses, including fiber optics, lasers and hard disk drives; numerous defense applications, such as guidance and control systems and global positioning systems; and advanced water treatment technology for use in industrial, military and outdoor recreation applications. Global demand for REEs is projected to steadily increase due to continuing growth in existing applications and increased innovation and development of new end uses. We have made significant investments, and expect to continue to invest, in developing technologically advanced applications and proprietary applications for individual REEs.
 
For the year ended December 31, 2009 and for the nine months ended September 30, 2010, we generated approximately $7.1 million and $13.2 million of revenue, respectively, from sales of products manufactured from stockpiled feedstocks, although these levels of revenue are not representative of our planned level of operations after we complete our initial modernization and expansion plan and capacity expansion plan.
 
Our Mine Process and Development Plans
 
We and SRK Consulting estimated total proven reserves as of February 6, 2010 of 88.0 million pounds of REO contained in 0.480 million tons of ore, with an average ore grade of 9.38%, and probable reserves of 2.12 billion pounds of REO contained in 13.108 million tons of ore, with an average ore grade of 8.20%, in each case using a cut-off grade of 5.0%, at our Mountain Pass mine. Upon the completion of our initial modernization and expansion plan, which we expect to be completed by the end of 2012, we will have the ability to produce approximately 19,050 mt of REO per year at our Mountain Pass facility. Upon the completion of our recently approved capacity expansion plan, by the end of 2013, we expect to have the ability to produce up to approximately 40,000 mt of REO per year at our Mountain Pass facility, or approximately double the amount we will be able to produce upon completion of our initial plan. Based on our estimated reserves and an expected annual production rate of approximately 19,050 mt of REO under our initial modernization and expansion plan, our expected mine life is in excess of 30 years (SRK Consulting has preliminarily indicated, however, that doubling the amount of production pursuant to the second-phase capacity expansion plan would reduce the current mine life by half, assuming no additional exploration, no realization of anticipated improvements in recoveries, and all other factors remain constant.) According to Roskill, global REO production in 2008 was approximately 129,000 mt, of which only approximately 4,220 mt originated from outside of China, with Molycorp producing approximately 1,700 mt from its stockpiles and Russian producers producing approximately 2,500 mt. This contrasts with total demand outside of China in 2008 of approximately 56,000 mt, according to IMCOA, with rapid growth expected by industry analysts.
 
Mine-to-Oxides
 
At our Mountain Pass facility, we have the ability to mine, crush, mill and separate rare earth ore to produce individual REEs. We hold a mine plan permit and an associated environmental impact report, which currently allow continued operations of our Mountain Pass facility through 2034 and which we expect will be extended to allow continued operations through 2042. Since our acquisition of the Mountain Pass facility, we have been producing and selling REOs from stockpiled feedstocks to significantly improve our solvent extraction technologies and capabilities. We are now achieving greater than 98% recovery in our solvent


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extraction units at commercial scale for cerium, lanthanum and didymium, which we believe is one of the highest recovery rates in the world. We have also developed the expertise to produce the following REEs in many usable forms: bastnasite concentrate; cerium; lanthanum; neodymium; praseodymium; europium; samarium; gadolinium; dysprosium; and terbium. When used to describe the current recovery rate for our solvent extraction units, the term “commercial scale” means that the solvent extraction units are operating at such a production rate that the scale-up factor required to achieve the desired production rate is less than 10 times the current production rate.
 
Processing at our Mountain Pass facility entails mining the bastnasite ore followed by crushing and milling it to a fine powder. Milled bastnasite ore is then processed by flotation whereby the bastnasite, which is a mineral containing light and heavy rare earth elements, floats to the surface and is separated from the waste material, which sinks in a series of flotation cells. The resultant bastnasite concentrate is then processed by leaching with strong acid solutions followed by a series of solvent-extraction separation steps that produce various individual REO minerals, generally in a high purity (greater than 99%) oxide form. In the second quarter of 2010, we began processing bastnasite concentrate from our stockpiles in an effort to commercially demonstrate our new cracking technology while at the same time continue to further optimize our processing technologies and improve recovery rates compared to historical operations at the Mountain Pass facility.
 
(LINE GRAPH)
 
We recommenced mining operations in December 2010 and are preparing to recommence milling operations, which we expect to occur in the first quarter of 2012. Recommencement of mining and milling operations is coincident with our initial modernization and expansion plan, which will give us the capacity to efficiently produce at a rate of approximately 19,050 mt of REO per year by the end of 2012. Additionally, upon the completion of our capacity expansion plan, we expect to have the ability to produce up to approximately 40,000 mt of REO per year by the end of 2013. In the April 2010 U.S. GAO briefing, government and industry officials stated that, for a typical exploration-stage mine, once a company has secured the necessary capital to start a mine, it can take from seven to 15 years to bring a property fully online, largely due to the time it takes to comply with multiple state and federal regulations. Since our Mountain Pass facility is not an early stage rare earth project, we believe we have a significant timeline advantage as we have a well-defined ore body, an existing open pit with over 50 years of production history, an existing mine and reclamation plan, proven reserves, substantial permitting, and all necessary technology to successfully process and separate the rare earth elements at a commercial scale.
 
Oxides-To-Metals/Alloys
 
We expect to sell and transport a portion of the REOs we produce to customers for use in their particular applications. The remainder of the REOs will be processed into rare earth metals. A portion of these metals will be sold to end-users and we expect to process the rest into rare earth alloys. These rare earth alloys can be used in a variety of applications, including but not limited to: electrodes for nickel metal hydride, or NiMH, battery production; samarium cobalt magnet production; and neodymium iron boron, or NdFeB, magnet production. A portion of these rare earth alloys will be manufactured into NdFeB magnets as part of our alloy and magnet production joint ventures, described below, and we expect to sell the rest to end-users.
 
Our modernization and expansion plans envision adding facilities and equipment for metal conversion and alloy production at the Mountain Pass facility or an off-site property. If we are able to add an off-site facility to produce rare earth metals and alloys instead of adding such facilities and equipment at Mountain Pass, we would transport cerium, lanthanum, neodymium, praseodymium, dysprosium, terbium and samarium oxide products from our Mountain Pass facility to that off-site location to produce rare earth metals and alloys. In


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December 2010, we entered into a non-binding letter of intent with Hitachi, a leading manufacturer of NdFeB alloys and magnets, to form joint ventures for the production of rare earth alloys and magnets in the United States. Additionally, we have entered into a non-binding letter of intent with Neo Material that, among other things, contemplates a technology transfer agreement pursuant to which Neo Material may provide us with technical assistance and know-how with respect to the production of rare earth metals, alloys and magnets.
 
Alloy and Magnet Production Joint Ventures
 
NdFeB magnets, which are critical components in “green” technologies and the miniaturization of electronics, are primarily manufactured in China (approximately 80%) and Japan (approximately 20%). Our proposed joint ventures with Hitachi would provide us with access to the technology, people and facilities to convert our rare earth materials into rare earth alloys and high-performance permanent rare earth magnets required for production of hybrid and electric vehicles, wind power turbines, high-tech applications and numerous advanced defense systems on which the U.S. economy and national security depend. The consummation of such joint ventures, in conjunction with our current modernization plans and the potential technology transfer agreement with Neo Material, is expected to provide us with the capability to mine, process, separate and alloy individual REEs and manufacture them into NdFeB magnets. This downstream integration, which we refer to as our “mine-to-magnets” strategy, would make us the only fully integrated producer of NdFeB magnets outside of China, helping to secure a rare earth supply chain for the Rest of World. In addition to the foregoing, we continue to explore additional joint ventures or other arrangements with third parties for the production of NdFeB alloys and/or magnets.
 
Rare earth “mine-to-magnets” production supply chain
 
(LINE GRAPH)
 
Our Strengths
 
We believe that we possess a number of competitive strengths that position the Mountain Pass facility to regain its role as one of the leading global suppliers of REOs.
 
We have a proven source of REOs with high-grade ore and long reserve life.
 
Prior to the end of the last mining campaign at the Mountain Pass facility in 2002, the mine had been in continuous operation for over 50 years. Since our acquisition of the Mountain Pass facility, we have been processing stockpiled feedstocks as part of our ongoing effort to significantly improve our solvent extraction technologies and other processing capabilities. Today, based on estimated total proven reserves of 88.0 million pounds of REO contained in 0.480 million tons of ore, with an average ore grade of 9.38%, and probable reserves of 2.12 billion pounds of REO contained in 13.108 million tons of ore, with an average ore grade of 8.20%, in each case using a cut-off grade of 5.0%, the Mountain Pass mine has a life in excess of 30 years at an annual production rate of approximately 19,050 mt of REO. Our leadership team is committed to the continuous and sustainable manufacture of rare earth products at the Mountain Pass facility using advanced milling and processing technologies that will significantly increase the life of the known ore body at the Mountain Pass facility. Additionally, in 2010, we expanded our on-site exploratory drilling program to confirm the existence and extent of bastnasite, monazite and other rare earth phosphate mineral occurrences in unexplored areas of the Mountain Pass facility. This program will also help to establish whether our measured, indicated and inferred resources can become proven or probable reserves.
 
We expect to be well-positioned to capitalize on the tightening balance of global supply and demand of rare earth products.
 
As worldwide demand for rare earth products increases, the supply of REOs remains limited by available production capacity, which is currently concentrated in China. According to IMCOA, China accounted for


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approximately 96% of global REO production in 2008. China also dominates the manufacture of metals and NdFeB magnets from rare earths, capabilities that are not currently found in the United States.
 
Chinese government policies will also impact the supply and demand of REOs and rare earth products. We believe that the Chinese government intends to increase wind generated power to at least 150 gigawatts by 2020. The Chinese government has proposed a package of over $29 billion to fund hybrid and electric vehicle production, placing additional strain on the REE supply chain. Citing the importance of REE availability to internal industries and the desire to conserve resources, the Chinese government has also announced export quotas, increased export tariffs and introduced a “mining quotas policy” that, in addition to imposing export quotas and export tariffs, also imposes production quotas and limits the issuance of new licenses for rare earth exploration.
 
According to IMCOA, China’s export quotas have decreased from approximately 65,600 mt of REO in 2004 to approximately 50,000 mt of REO in 2009. On July 8, 2010, China’s Ministry of Industry and Information Technology issued the export quota for the second half of 2010, which reduced exports by 72% compared with the second half of 2009 and 40% for the year ended December 31, 2010 as compared to the year ended December 31, 2009. On December 28, 2010, China’s Ministry of Industry and Information Technology further reduced the export quota for the first half of 2011, reducing exports by 35% compared with the first half of 2010 and 20% for the twelve months ended June 30, 2011 as compared to the twelve months ended June 30, 2010. In 2008, according to IMCOA, China imposed export taxes of up to 25% on selected REOs (primarily heavy REOs) and up to 15% for all other REOs (primarily light REOs). In addition, according to IMCOA, China’s Ministry of Industry and Information Technology issued a plan in 2009 to reduce the production of separated rare earths by 7% to 110,700 mt of REO in 2009.
 
IMCOA estimates there is a currently a global deficit in REO supply, which anticipated to continue without the advent of production from new projects, such as Mountain Pass. Limits on rare earth exports from China and the lack of available substitutes make the development of new sources of REEs essential to meet the growing demand for existing and emerging technologies, such as hybrid and electric vehicles, wind power turbines, compact fluorescent light bulbs, hard disk drives and dual use electronics.
 
China has announced a national stockpile program, as has South Korea. Additionally, Japan has increased its national stockpile program. In December 2010, the U.S. Department of Energy released a study concluding that five rare earth metals, dysprosium, neodymium, terbium, europium and yttrium, are critical to clean energy technologies in the short term and medium term due to their importance to the clean energy economy and risk of supply disruption. The report emphasizes that diversified global supply chains for these critical materials are essential, and calls for steps to be taken to facilitate extraction, processing and manufacturing in the United States. Additionally, the U.S. Department of Defense is conducting a study to determine its rare earth requirements and supply chain vulnerabilities and whether to build a strategic stockpile. These stockpile programs will likely accelerate the pace of the current and projected global REE supply deficit.
 
U.S. federal government investments and policies may materially increase end-market demand for our rare earth products. For example, the U.S. federal government approved $45 billion in grant funding and loan guarantees directed toward wind power generation projects and hybrid and electric vehicles. Pending energy legislation may also increase demand for clean technology applications, which use rare earth products.
 
Upon reaching a full planned production rate of approximately 19,050 mt of REO per year by the end of 2012 under our initial modernization and expansion plan, we expect to be in a position to supply a substantial portion of the U.S. demand and also sell to export markets. In addition, under our capacity expansion plan, we expect to have the ability to produce up to approximately 40,000 mt of REO per year by the end of 2013.
 
We have a highly experienced and qualified management team.
 
Our President and Chief Executive Officer has over 29 years of experience, over 24 of which are associated with the Mountain Pass facility. In addition, our Chief Technology Officer, General Counsel and Chief Financial Officer have over 75 years of combined technical, operational, legal, financial and management experience. Many of our key employees have worked with the Mountain Pass facility for over 20 years each. We also have a proven technology and product development group and as of February 3, 2011, held 73 issued and pending U.S. patents and patent applications, and 173 issued and pending foreign patents and patent applications. Management has also created a work environment that prioritizes safety. Since July


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2005, the Mountain Pass facility has not had a lost-time accident and has received the coveted “Sentinels of Safety” award from the Mine Safety and Health Administration, or MSHA, for three of the last six years.
 
Our Business Strategy
 
Our business strategy is to:
 
Build the largest, most advanced and efficient fully integrated REO processing facility in the world.
 
We intend to replace existing equipment at the Mountain Pass facility in connection with our modernization and expansion efforts. We also intend to build the largest, most advanced and efficient fully integrated REO processing facility in the world to support our anticipated production requirements. Following the purchase, delivery, installation and start-up of new equipment, our fully integrated facility will allow us to reach full production, utilizing our newly optimized and commercially proven REO processing operations. Additionally, we expect that our proprietary production technology and our planned new paste tailings operation will reduce our environmental footprint and set the standard in the industry for environmental stewardship.
 
Successfully complete modernization and expansion efforts and reach full planned production rates for REOs at the Mountain Pass facility.
 
After reaching full planned production rates for REOs at the Mountain Pass facility under our initial modernization and expansion plan, we expect to produce approximately 19,050 mt of REO per year by the end of 2012. Additionally, under our capacity expansion plan, we expect to have the ability to produce up to approximately 40,000 mt of REO per year by the end of 2013. We operate the Mountain Pass facility pursuant to a conditional use permit that allows us to feed ore to the mill at a rate of 2,400 tons per day. While the Mountain Pass facility historically required 2,000 tons of mill feed per day to manufacture approximately 19,050 mt of REO per year, we expect that new proprietary technologies we developed will allow us to extract the same 19,050 mt of REO per year while only using approximately 1,100 to 1,200 tons of mill feed per day, thus allowing us to increase annual REO production from our initial plan of 19,050 mt of REO per year to up to 40,000 mt of REO per year without any change in the permit limit. These estimates are based on results achieved at the Mountain Pass facility in full scale mill test runs from 2001 to 2002. In addition, we have improved cracking technology at commercial scale (2,000 to 3,000 mt per year production rate) from 2009 to date and improved performance of our solvent extraction at commercial scale (2,000 to 3,000 mt per year production rate) as demonstrated from 2007 to 2009.
 
Improve our operating efficiencies with technically advanced manufacturing techniques.
 
We intend to continue to improve the efficiency of our operations through the creation and use of technically advanced manufacturing processes for production of rare earth products, which will allow us to deliver high-quality rare earth products at globally competitive prices. We have already invested significant resources towards perfecting our REO processing operations and developing new and proprietary applications for individual REEs. We expect that by advancing all of these technologies, we will continue to lower our operating costs.
 
Manage our costs to be cost competitive.
 
The success of our business will depend on our ability to manage our costs. We will manage these costs through the use of new production technologies that have been developed by our research and development group, which will use less energy and raw materials and will result in a reduced environmental footprint. These production technologies will substantially reduce the amount of water consumption and waste water generation. We plan to use our proprietary technology to maximize our process recoveries and maximize REO concentrate production per unit of extracted ore. We plan to install a natural gas powered co-generation power plant as part of our modernization and expansion of the Mountain Pass facility to reduce energy consumption and costs as well as minimize or eliminate our reliance on the regional electric power grid. As part of our modernization and expansion of the Mountain Pass facility, we also intend to produce our own hydrochloric acid and sodium hydroxide at the Mountain Pass facility and recycle our acid and base, thereby reducing our reliance on external sources of reagents. After completion of our modernization and expansion efforts, we anticipate our most significant cash operating costs will consist of natural gas and labor.


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Secure customer commitments to provide a stable revenue stream.
 
We are working to establish stable revenue streams for the rare earth minerals and products we produce at the Mountain Pass facility. Upon reaching full planned production rates for REOs at the Mountain Pass facility under our initial modernization and expansion plan, we expect to produce approximately 19,050 mt of REO per year. Additionally, under our capacity expansion plan, we expect to have the ability to produce up to approximately 40,000 mt of REO per year by the end of 2013. Pursuant to our first contract with Grace, we have agreed to supply Grace with a significant amount of REOs, primarily lanthanum oxide, through mid-2012 at market-based prices subject to a ceiling based on market prices at June 1, 2010, and a floor. Pursuant to our second contract with Grace, we have agreed to supply Grace with up to 75 percent of our lanthanum product production per year (based on our initial planned capacity) at market-based prices subject to a floor for a three-year period commencing upon the achievement of expected annual production rates under our initial modernization and expansion plan, which may be extended at Grace’s option for an additional three-year period. Upon execution of definitive agreements with Sumitomo, we also expect to provide Sumitomo with approximately 1,500 mt per year (and following completion of our initial modernization and expansion plan, approximately 1,750 mt per year) of cerium and lanthanum-based products and 250 mt per year of didymium oxide for a period ending five years after the completion of our initial modernization and expansion of the Mountain Pass facility, at market-based prices subject to a floor. As of January 1, 2011, we also had 20 non-binding letters of intent to sell our rare earth products. These letters of intent, together with our second contract with Grace and memorandum of understanding with Sumitomo, represent approximately 158% of our anticipated production of approximately 19,050 mt of REO for 2013 under our initial modernization and expansion plan, and our non-binding letter of intent with Neo Material also contemplates the sale of certain rare earth products. Prior to commencing anticipated production of approximately 19,050 mt of REO year, we intend to enter into short- and long-term sales contracts with existing and new customers for amounts not in excess of our actual planned production. In addition, we are in discussions with multiple large, globally diversified mining companies regarding the sale of XSORBX®, which will expand demand for cerium in times when it is in surplus and low priced. XSORBX® is a proprietary product and process, primarily consisting of cerium, that removes arsenic and other heavy metals from industrial processing streams and will allow our customers to more safely sequester arsenic and increase their production. XSORBX® is protected by over 100 issued and pending U.S. and foreign patents and patent applications. We have begun to sell XSORBX® for commercial use in the wastewater, recreation, pool and spa, industrial process and other water treatment markets.
 
The following table compares the volume under our second contract with Grace, our memorandum of understanding with Sumitomo and our 20 non-binding letters of intent to our anticipated production of approximately 19,050 mt of REO for 2013 (in mt):
 
                                         
                            Percent of
 
    Anticipated
    Volume Under
                Anticipated
 
    2013
    Letters of
    Contracted
    Uncommitted
    2013
 
Product Type
  Production(1)(2)     Intent(1)(2)     Volume(8)     Volume(9)     Production(10)  
 
Lanthanum oxide or other form
    3,098       4,641       4,535             296 %
Lanthanum metal
    2,502       700             1,802       28 %
Cerium non-metal
    9,663       11,265 (3)                 117 %
Cerium metal
          200                    
Neodymium oxide or other form
          50                    
Didymium oxide or other form
          1,545                    
Neodymium or NdPr metal
    312       3,806 (4)                 1,220 %
Praseodymium metal
    116       60 (4)           56       52 %
Europium oxide
    19       7 (5)           12       37 %
Samarium oxide
          40                    
Samarium metal(6)
    191       30             161       16 %
NdPr metal in NdFeB alloy
    1,960       1,103 (7)           857       56 %
NdPr metal in NdFeB magnets
          290 (7)                  
                                         
TOTAL
    17,860       23,737       4,535       2,888       158 %


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(1) Alloy and magnet production and letter of intent volume are reported on a rare earth metal basis. Three of our non-binding letters of intent contain a volume range; these letters cover lanthanum oxide, cerium non-metal and NdPr metal in NdFeB alloy. With respect to these non-binding letters of intent, the table above reflects the high end of the range provided for in each letter. In addition, certain of our non-binding letters of intent provide for a certain volume of rare earth metals or alloys but do not allocate that volume among specific rare earth metals or alloys. In those instances, we have allocated the volume in those letters based on management’s estimates of the needs of those customers and their specific applications. The table above includes anticipated sales of cerium and lanthanum-based products and didymium oxide to Sumitomo, subject to execution of definitive agreements. The table above does not include any sales of any products under either of the agreements we have entered into with Traxys North America LLC, which we refer to as Traxys. See “Certain Relationships and Related-Party Transactions — Inventory Financing and Resale Agreements.” Additionally, pursuant to the terms of our non-binding letter of intent with Neo Material, Neo Material may agree to purchase 3,000 to 5,000 mt of mixed rare earth carbonate and 300 to 500 mt of neodymium oxide and praseodymium oxide per year, which amounts are included in the table above.
 
(2) With respect to our metal products, there is a 14.2% loss of mass when REOs are converted to rare earth metal due to oxygen evolution, which accounts for most of the difference between the 17,898 mt total 2013 production rate and our anticipated production rate of approximately 19,050 mt of REO per year in 2013.
 
(3) Volume shown is used in traditional glass or catalyst market segments and represents only a very small fraction of cerium buyers. Although IMCOA predicts that there will be a surplus of cerium in the future, we anticipate most of our production will serve the new, proprietary XSORBX® market segment if a surplus develops. At current prices, we would seek to sell cerium for other uses instead. This segment alone is expected to consume many times more cerium units than we can produce. We believe the new segment negates the need for additional letters of intent at this time.
 
(4) We anticipate most of our metal production will be consumed internally for downstream NdFeB alloy/magnet production.
 
(5) We expect to receive non-binding letters of intent from a number of phosphor producers, which will easily consume our europium production. At this time, we are the only producer outside of China for this element, which enables energy efficient, compact fluorescent lights and straight tube T-8 lamps.
 
(6) IMCOA estimates that there is a surplus of samarium metal.
 
(7) This represents the estimated NdPr metal contained in the non-binding letter of intent volume for NdFeB alloy and magnets.
 
(8) Represents volume under our second contract with Grace.
 
(9) Represents volume not committed under contract or covered by non-binding letters of intent.
 
(10) Represents volume under non-binding letters of intent and contracted volume as a percentage of anticipated 2013 production. Upon completion of our second phase capacity expansion plan, our production capacity will double to approximately 40,000 mt of REO per year, and we will need to secure additional off-take agreements.
 
Integrate downstream to profitably capture the full value chain.
 
We intend to utilize vertical integration through further downstream processing of our REOs into rare earth metals, alloys and finished magnets. Our initial modernization and expansion plan envisions adding facilities and equipment for metal conversion and alloy production at the Mountain Pass facility or an off-site property. If we add an off-site facility to produce rare earth metals and alloys instead of adding such facilities and equipment at Mountain Pass, we would transport cerium, lanthanum, neodymium, praseodymium, dysprosium, terbium and samarium oxide products from our Mountain Pass facility to that off-site location to produce rare earth metals and alloys. In December 2010, we entered into a non-binding letter of intent with Hitachi to form joint ventures for the production of rare earth alloys and magnets in the United States. Additionally, we have entered into a non-binding letter of intent with Neo Material that, among other things, contemplates a technology transfer agreement pursuant to which Neo Material may provide us with technical assistance and know-how with respect to the production of rare earth metals, alloys and magnets. This “mine-to-magnets” strategy, if successfully implemented, would make us the first fully integrated supplier of


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NdFeB magnets in the world and the only producer of NdFeB magnets in the United States. In addition, we are working to identify and develop new downstream opportunities for the REOs, rare earth metals and alloys and rare earth products we will manufacture.
 
Develop new higher margin products.
 
We intend to develop new higher margin products and processes for REEs that historically have had lower demand. For example, cerium is used primarily for glass polishing and has typically sold at prices lower than those for other REEs. However, we have developed XSORBX®, a proprietary product and process, primarily consisting of cerium, that we have proven to be effective in removing arsenic and other heavy metals from industrial processing streams. This will allow our customers to more safely sequester arsenic and increase their production. We believe this product is applicable to a broad range of applications with higher margins. For example, in addition to removing arsenic and other contaminants from industrial waste water, XSORBX® can also be used to treat drinking water, which we believe is an application with a higher margin as compared to cerium spot prices. We have begun to sell XSORBX® for commercial use in the wastewater, recreation, pool and spa, industrial process and other water treatment markets. We are continuing to seek additional letters of intent and sales contracts with existing and new customers for sales of XSORBX®. XSORBX® is protected by over 100 issued and pending U.S. and foreign patents and patent applications. We will continue to focus on establishing proprietary markets for low-demand REEs to provide us with an opportunity to sell these REEs as higher margin products.
 
Our Corporate History and Structure
 
Molycorp Minerals, LLC, a Delaware limited liability company formerly known as Rare Earth Acquisitions LLC, was formed on June 12, 2008 to purchase the Mountain Pass, California rare earth deposit and associated assets from Chevron Mining Inc., a subsidiary of Chevron Corporation. Prior to the acquisition, the Mountain Pass facility was owned by Chevron Mining Inc. and, before 2005, by Unocal Corporation. Molycorp, LLC, which was the parent of Molycorp Minerals, LLC, was formed on September 9, 2009 as a Delaware limited liability company. Molycorp, Inc. was formed on March 4, 2010 as a new Delaware corporation and was not, prior to the date of the consummation of its initial public offering, conducting any material activities.
 
The members of Molycorp, LLC contributed either (a) all of their member interests in Molycorp, LLC or (b) all of their equity interests in entities that hold member interests in Molycorp, LLC (and no other assets or liabilities) to Molycorp, Inc. in exchange for shares of Molycorp, Inc. Class A common stock. Additionally, all of the holders of profits interests in Molycorp Minerals, LLC, which were represented by incentive shares, contributed all of their incentive shares to Molycorp, Inc. in exchange for shares of Molycorp, Inc. Class B common stock. Accordingly, Molycorp, LLC and Molycorp Minerals, LLC became subsidiaries of Molycorp, Inc. Following the corporate reorganization, Molycorp, LLC was merged with and into Molycorp Minerals, LLC. Immediately prior to the consummation of Molycorp, Inc.’s initial public offering, all of the shares of Class A common stock and Class B common stock were converted into shares of common stock.
 
The Mountain Pass Facility
 
At the Mountain Pass facility, we own an open-pit mine containing one of the world’s most fully developed rare earth deposits outside of China. In addition to the mine, the Mountain Pass facility includes associated crushing, milling, flotation and separation facilities. These facilities are not currently in full operation, and will need to be modernized or refurbished before we can recommence mining operations. The Mountain Pass facility is located approximately 60 miles southwest of Las Vegas, Nevada near Mountain Pass, San Bernardino County, California. The Mountain Pass facility straddles Interstate 15 and may be accessed by


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existing hard-surface roads, which we use to transport products from the Mountain Pass facility to our customers using commercial vehicles.
 
(LINE GRAPH)
 
The Mountain Pass facility represents the only developed commercial source of rare earth material in the Western hemisphere. Molybdenum Corporation of America began REO mining operations at the Mountain Pass facility in 1952. REO production at the Mountain Pass facility, as well as milling and separation processes, continued under Unocal Corporation, which purchased Molybdenum Corporation of America in 1977, until 1998. In 1998, all chemical processing operations were suspended, primarily due to leaks in a wastewater pipeline that transported waste salt water to evaporation ponds on the Ivanpah dry lake bed. The leaks resulted in the release of wastewater containing elevated levels of sodium chloride, along with minor concentrations of dissolved rare earths and radionuclides. We did not acquire the wastewater pipeline or the evaporation ponds in the acquisition of the Mountain Pass facility from Chevron Mining Inc. in 2008, and Chevron Mining Inc. is obligated to remove the remaining pipeline and remediate the impacted soils. See “Business — Environmental, Health and Safety Matters.” Mining and milling operations continued until 2002 when those operations were also placed on standby due to softening prices for REOs, a lack of additional tailings disposal capacity and delays in obtaining permits required for the new paste tailings storage facility. Unocal Corporation thereafter sold or otherwise disposed of substantially all of the mining equipment at the Mountain Pass facility (e.g., shovels, haul trucks, etc.) prior to being acquired by Chevron Corporation in 2005. Operations at the Mountain Pass facility remained suspended until September 2007 when Chevron Mining Inc., a wholly-owned subsidiary of Chevron Corporation, commenced a NFL pilot processing campaign. Under the NFL campaign, lanthanum, which was produced prior to suspending activities in 1998 and held in lanthanum pond stockpiles at the Mountain Pass facility, was processed in order to recover the related neodymium and praseodymium. The NFL campaign did not constitute the restart of fully integrated operations at the Mountain Pass facility and was used as an opportunity to improve processing technologies and generate very modest revenue. On September 30, 2008, we acquired the Mountain Pass, California rare earth deposit and associated assets from Chevron Mining Inc. through Rare Earth Acquisitions LLC (which was later renamed Molycorp Minerals, LLC). The acquisition by us excluded certain assets and liabilities, including certain liabilities related to environmental and employment matters, that were retained by Chevron


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Corporation. As part of the acquisition, we also acquired the services of approximately 100 employees from Chevron Mining, including 43 non-union employees and 57 union employees. Under the terms of the asset purchase agreement, we agreed to maintain all acquired employees’ salaries at their previous levels for a period of 12 months, provide comparable 401(k) and health benefits and to honor all vacation days accrued prior to the asset purchase.
 
We currently hold a mine plan permit and an associated environmental impact report, which currently allow continued operations of our Mountain Pass facility through 2034 and which we expect will be extended to allow continued operations through 2042. Since our acquisition of the Mountain Pass facility, we have been processing and selling REOs from stockpiled feedstocks to significantly improve our solvent extraction technologies and capabilities. We are now achieving greater than 98% recovery in our solvent extraction units at commercial scale for cerium, lanthanum and didymium, which we believe is one of the highest recovery rates in the world. We have also developed the expertise to produce the following REEs in many usable forms: bastnasite concentrate; cerium; lanthanum; neodymium; praseodymium; europium; samarium; gadolinium; dysprosium; and terbium.
 
We recommenced mining operations in December 2010 and are preparing to recommence milling operations, which we expect to occur in the first quarter of 2012. Prior to the expected completion of our initial modernization and expansion efforts, we expect to produce approximately 3,000 mt per year in the aggregate of cerium products, lanthanum concentrate, didymium oxide and heavy rare earth concentrates from stockpiled feedstock. Recommencement of mining and milling operations is coincident with modernization of our processing capabilities in order to efficiently produce approximately 19,050 mt of REO per year by the end of 2012. In addition, upon completion of our capacity expansion plan, we expect to have the ability to produce up to approximately 40,000 mt of REO per year by the end of 2013. We are also positioning our company to move further downstream into metal, alloy and magnet production through our “mine-to-magnets” strategy. In addition, we are exploring new downstream markets for rare earths and rare earth products.
 
The Mountain Pass facility consists of approximately 2,222 acres of fee land, of which approximately 770 acres are currently in use (e.g., existing buildings, infrastructure or active disturbance). The lands surrounding the Mountain Pass facility are mostly public lands managed by the Bureau of Land Management and the National Park Service. In addition to the 2,222 acres we hold in fee, we also hold 55 patented claims that are 100% owned by Molycorp and 489 unpatented lode and mineral mining claims and mill sites under the provisions of The Mining Law of 1872. We acquired our mineral rights at the Mountain Pass facility with the purchase of the Mountain Pass, California rare earth deposit and associated assets from Chevron Mining Inc. in 2008. Our mineral rights, surface rights and mining claims are not subject to royalties or encumbrances, although we are responsible for making annual maintenance and tax payments on our unpatented mill sites. These mining claims and mill sites provide land for mining, ancillary facilities and expansion capacity around the Mountain Pass facility.
 
The Mountain Pass facility includes an open-pit mine, overburden stockpiles, a crusher and mill/flotation plant, a separation plant, a mineral recovery plant tailings storage areas and on-site evaporation ponds, as well as laboratory facilities to support research and development activities, offices, warehouses and support buildings. The majority of the physical plant and equipment at the Mountain Pass facility is over 20 years old, substantially all of which will be replaced as part of our modernization effort. We expect to expand the open-pit mine both laterally to the west, southwest and north as well as deepening vertically. In addition to the existing overburden stockpile located west of the pit, which will serve as the initial overburden stockpile when mining recommences, we will need to construct additional overburden stockpiles to the north or east of the pit to provide additional storage capacity sufficient to accommodate the remaining overburden material for the existing permitted life of the mine.
 
In connection with our modernization and expansion efforts at the Mountain Pass facility, we expect to build new facilities, including the construction of a control lab, additional warehousing and raw material storage facilities. We plan to add facilities and equipment for metal conversion and alloy production. We also have decided to build a new mill instead of refurbishing our existing mill. The new mill will be sized for daily production of up to 2,000 mt. All the new design changes are allowed under our current operating permits. In November 2009, we entered into a non-binding letter of intent to acquire a third-party producer of rare earth


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metals and alloys in the United States. Discussions with this third party had previously ceased. Although we have recently resumed discussions with this third party, we cannot assure you that we will be able to execute a definitive agreement to acquire this third party. If we are able to acquire another third-party producer of rare earth metals and alloys or add another off-site facility to produce rare earth metals and alloys, instead of adding such facilities and equipment at Mountain Pass, we would transport cerium, lanthanum, neodymium, praseodymium, dysprosium, terbium and samarium oxide products from our Mountain Pass facility to that off-site location to produce rare earth metals and alloys.
 
We also expect to build a new paste tailings operation and new roads at the Mountain Pass facility. The construction of the paste tailings operation, which consists of a paste tailings filter plant and paste tailings storage facility, is authorized by our San Bernardino County conditional use permit, and we began its construction during the second quarter of 2010. The capital cost for the paste tailings operation, which is included in the estimated capital expenditure for the expansion of the separation plant, is estimated to be $10 million. Although the operating cost of the paste tailings operation is expected to be greater than it would be for a tailings pond, which is the method prior owners used at the Mountain Pass facility, we expect that the increased water recycling and reduced environmental risks associated with the paste tailings facility will ultimately mitigate that additional cost.
 
In addition, we intend to produce hydrochloric acid and sodium hydroxide at our own chlor-alkali plant at the Mountain Pass facility, thereby reducing our reliance on external sources of reagents. While the production of our own hydrochloric acid and sodium hydroxide will utilize proven technologies, these technologies have not yet been implemented in the rare earth industry. Not only would the chlor-alkali plant reduce our need for external sources of reagents, but it would also reduce our production of waste salt water. Previous owners of the Mountain Pass facility disposed of waste salt water in evaporation ponds on the Ivanpah dry lake bed by using a pipeline. When we acquired the Mountain Pass facility from Chevron Mining Inc. in 2008, we did not acquire the ponds or the wastewater pipeline that ran from the Mountain Pass facility to the Ivanpah lake bed. Because of this decision, and Chevron Mining Inc.’s ongoing removal of the wastewater pipeline, use of these ponds is no longer an available option for the Mountain Pass facility. Accordingly, wastewater must be dealt with in a different manner. We intend to utilize our chlor-alkali plant to convert waste salt water to hydrochloric acid and sodium hydroxide, which will be recycled into the process. Through this process, approximately 913 million pounds of water and 101 million pounds of salt would be recycled back to the chlor-alkali plant per year in order to achieve the annual production rate of 19,050 mt of REO anticipated following the completion of our initial modernization and expansion plan. We expect these amounts to double if our annual production rate is increased to 40,000 mt of REO per year in connection with our capacity expansion plan. This process would avoid the need for disposal of waste salt water in evaporation ponds. Additionally, because the water is internally recycled, the need for fresh water from our two water supply well fields to run the Mountain Pass processing facilities would be dramatically reduced.
 
Following the completion of our initial modernization and expansion efforts, we expect to have the ability to mine, crush, mill and separate 2,000 tons of rare earth ore per day to produce individual REOs that meet or exceed industry standards for purity. However, we will only need to process 1,100 to 1,200 tons of rare earth ore per day to meet the annual production goal of 19,050 mt of REO under our initial modernization and expansion plan. If we increase our annual production rate to 40,000 mt of REO in connection with our capacity expansion plan, we will need to process approximately 2,200 to 2,400 tons of rare earth ore per day. Our modernization and expansion plans envision adding facilities and equipment for metal conversion and alloy production at the Mountain Pass facility or an off-site property. If we add an off-site facility to produce rare earth metals and alloys instead of adding such facilities and equipment at Mountain Pass, we would transport cerium, lanthanum, neodymium, praseodymium, dysprosium, terbium and samarium oxide products from our Mountain Pass facility to that off-site location to produce rare earth metals and alloys. In December 2010, we entered into a non-binding letter of intent with Hitachi to form joint ventures for the production of rare earth alloys and magnets in the United States. Additionally, we have entered into a non-binding letter of intent with Neo Material that, among other things, contemplates a technology transfer agreement pursuant to which Neo Material may provide us with technical assistance and know-how with respect to the production of rare earth metals, alloys and magnets. This “mine-to-magnets” strategy, if successfully implemented, would make us the first fully integrated supplier of NdFeB magnets in the world and the only producer of NdFeB


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magnets in the United States. In addition, we are working to identify and develop new downstream opportunities for the REOs, rare earth metals and alloys and rare earth products we will manufacture.
 
Our proposed joint ventures with Hitachi would provide us with access to the technology, people and facilities to convert our rare earth materials into rare earth alloys and high-performance permanent rare earth magnets required for production of hybrid and electric vehicles, wind power turbines, high-tech applications and numerous advanced defense systems on which the U.S. economy and national security depend. The consummation of such joint ventures, in conjunction with our current modernization plans and the potential technology transfer agreement with Neo Material, is expected to provide us with the capability to mine, process, separate and alloy individual REEs and manufacture them into NdFeB magnets.
 
Our facilities currently rely on electricity provided by Southern California Edison. Due to its position on the regional electric grid, the Mountain Pass facility can experience power shortages during peak periods. Instability in electrical supply in past years has caused sporadic outages and brownouts. Such outages and brownouts have had a negative impact on our production. In connection with our initial modernization and expansion efforts at the Mountain Pass facility, we expect to build a new 24 megawatt co-generation power plant that will use natural gas to provide reliable electricity and steam to our facilities to allow us to achieve our anticipated annual production rate of approximately 19,050 mt of REO. The completion of the co-generation power plant is dependent on several factors, including obtaining the permits required to build and operate the co-generation power plant. Following the completion of the co-generation power plant, we expect it to provide 100% of our production power requirements to achieve an annual production rate of 19,050 mt of REO and 83% of our overall power requirements. In connection with our capacity expansion plan, we will add two additional turbines to the co-generation power plan to increase the plant’s capacity to 49 megawatts, which will allow us to achieve an annual production rate of approximately 40,000 mt of REO. At an annual production rate of 40,000 mt of REO per year, we expect the co-generation power plant to provide 100% of our production power requirements and 91% of our overall power requirements.
 
We have secured all permits necessary to allow construction to start on the Mountain Pass facility modernization and expansion project. Numerous other governmental permits and approvals are required in order for us to proceed with our modernization and expansion efforts. These include air permits, various building permits and permits related to the use and storage of radioactive or hazardous materials. See


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“— Environmental, Health and Safety Matters” for a detailed discussion of certain of the permits, licenses and approvals we will be required to obtain or maintain.
 
(LINE GRAPH)
 
The bastnasite ore body at the Mountain Pass facility has been mined as a principal source of REEs for over 50 years. The Mountain Pass REE deposit is located within an uplifted block of Precambrian metamorphic and igneous rocks that are bounded to the south and east by basin-fill deposits in California’s Ivanpah Valley. The two main groups of rocks in the Mountain Pass area are Early Proterozoic high-grade metamorphic rocks and Middle Proterozoic ultrapotassic rocks and monazitic carbonatites, which carbonatites are associated with higher levels of REEs. The currently defined zone of REE mineralization exhibits a strike length of approximately 2,750 feet in a north-northwest direction and extends for approximately 7,000 feet down dip from surface. The true thickness of the greater than 3.0% REO zone ranges from 15 feet to 250 feet. The percentage of each rare earth material contained in the Mountain Pass facility bastnasite ore is estimated to be as follows:
 
         
    Estimated
 
    Percentage of
 
Element
  Bastnasite Ore  
 
Cerium
    48.8 %
Lanthanum
    34.0 %
Neodymium
    11.7 %
Praseodymium
    4.2 %
Samarium
    0.79 %
Gadolinium
    0.21 %
Europium
    0.13 %
Dysprosium
    0.05 %
Other REE (including Terbium)
    0.12 %


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Rare Earth Reserves and Non-Reserve Deposits
 
As of February 6, 2010, SRK Consulting, an independent consulting firm that we have retained to assess our reserves, estimated total proven reserves of 88.0 million pounds of REO contained in 0.480 million tons of ore, with an average ore grade of 9.38%, and probable reserves based on historic and estimated recoveries of 2.12 billion pounds of REO contained in 13.108 million tons or ore, with an average ore grade of 8.20%, in each case using a cutoff grade of 5.0% REO.
 
SEC Guidelines
 
The SEC has established guidelines contained in Industry Guide to assist registered companies as they estimate ore reserves. These guidelines set forth technical, legal and economic criteria for determining whether our ore reserves can be classified as proven and probable.
 
“Reserves” are defined by the SEC Industry Guide 7 as that part of a mineral deposit that could be economically and legally extracted or produced at the time of the reserve determination. SEC Industry Guide 7 divides reserves between “proven reserves” and “probable reserves,” which are defined as follows:
 
  •  “Proven reserves” are reserves for which:
 
  •  quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling; and
 
  •  the sites for inspection sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established.
 
  •  “Probable reserves” are reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.
 
Methodology
 
We have recently expanded our on-site exploratory drilling program to confirm the existence and extent of bastnasite, monazite and other rare earth phosphate mineral occurrences in unexplored areas of the Mountain Pass facility. When estimating proven and probable reserves, however, we currently rely on the interpretations made during prior mining campaigns at our Mountain Pass facility, the U.S. Geological Survey and various consulting companies, including SRK Consulting, to identify the regional and mine area geology and hydrogeology, regional and local structure, deposit geology, current pit slope stability conditions and REE recoveries.
 
Proven Reserves.  SRK Consulting compiled a drillhole database from prior drilling at the Mountain Pass site that includes a total of 137 drillholes with a cumulative length of 79,453.3 feet. Individual drillholes range in length from 56 feet to 2,012 feet, and averaged 580 feet. The majority of core samples in the deposit area analyzed by SRK Consulting range from 50 feet to 250 feet along the strike of the ore body and 150 feet to 350 feet down dip. The sample data for proven ore reserves consists of survey data, lithologic data and assay results.
 
Based on the review of historic sample preparation and analytical procedures, SRK Consulting initiated a sample check assay program of 1% of the assay database. The material remaining from previous drilling programs consisted of split core stored at the Mountain Pass facility. SRK Consulting examined the existing split core using third-party preparation and analytical laboratories. SRK Consulting determined that the overall results of the sample check assay program indicated that our historic data was acceptable for use in preparing their report. While we believe that a cut off grade below 5.0% is economically viable, SRK Consulting decided to base the mining cut-off calculation on a grade of 5.0% REO given historical performance at the Mountain Pass mine.
 
Probable Reserves.  Probable ore reserves are based on longer projections and the maximum distance between drill holes is 200 feet. Statistical modeling and the established continuity of the bastnasite ore body as determined from results of over 50 years of mining activity to date support our technical confidence in


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estimates of tonnage and grade over this projection distance. Where appropriate, projections for the probable ore reserve determination are constrained by any known or anticipated restrictive geologic features. SRK Consulting generated a resource estimate based on composites derived from drillhole sample assay results. Grade interpolation was based on the geology, drillhole spacing and geo-statistical analysis of the data. The resources were classified by their proximity to the sample locations and number of drillholes. SRK Consulting considers the resource model and resource classification to be consistent with Canadian Institute of Mining and Metallurgy guidelines.
 
The proven and probable ore reserves are then modeled as a long-term mine plan and additional factors including recoveries, metal prices, mine operating costs and capital estimates are applied to determine the overall economics of the ore reserves.
 
Results
 
Proven and probable reserves at the Mountain Pass facility as of February 6, 2010 are estimated to be approximately 88.0 million pounds of REO contained in 0.480 million tons of ore, with an average ore grade of 9.38%, and 2.12 billion pounds of REO contained in 13.108 million tons of ore, with an average ore grade of 8.20%, respectively, in each case, using a cut-off grade of 5.0%. We base our REO reserve estimates and non-reserve REO deposit information on engineering, economic and geological data assembled and analyzed by SRK Consulting, which includes various engineers and geologists. The Mountain Pass facility has been subject to extensive drilling since the beginning of mining operations in 1952, including drilling data for 152 holes totaling 83,216 feet. We also maintain detailed geologic logs, on-site assay records and databases and geologic cross-sections. Our estimates of REO reserves and non-reserve REO deposits as to both quantity and quality will be regularly updated to reflect new drilling or other data received.
 
The following table provides information as of February 6, 2010 on the amount of our proven and probable REO reserves.
 
                         
    Average Ore
    Ore
    Contained REO
 
Category of Reserves
  Grade (%)     (Millions of Tons)     (Millions of Pounds)  
 
Proven
    9.38 %     0.480       88  
Probable
    8.20 %     13.108       2,122  
 
In making the estimate above, SRK Consulting:
 
  •  assumed we have a 100% working interest in the Mountain Pass facility;
 
  •  assumed full mining recovery;
 
  •  assumed that mine reserves are fully diluted;
 
  •  assumed a historic cut-off grade of 5.0% REO within the pit design;
 
  •  assumed a metallurgical recovery factor of 65% for the mill facility and 93% for the extraction and separation facilities;
 
  •  used the 1997 surface topography for volume control of reserves;
 
  •  used the historic three-year average commodity prices set forth in table below; and
 
  •  rounded values to the nearest significant number.


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Pricing values shown in the following table were used by SRK Consulting in the estimate of our reserves. The prices reflect a combination of three-year averages for REOs and metals based on information from (i) Metal-Pages, (ii) IMCOA and Roskill market studies from 2009 and (iii) alloy pricing formulas.
 
         
Rare Earth Products
  Price  
    (US$/kg)  
 
Non-Metal Products
       
Lanthanum oxide
  $ 6.60  
Cerium oxide for glass applications
    4.09  
Cerium oxide for water filters
    13.20  
XSORBX®
    9.90  
Europium oxide
    473.00  
Metal Products
       
Lanthanum
    13.20  
Praseodymium
    37.99  
Neodymium
    37.99  
Metal Alloys
       
NdFeB
    35.20  
Samarium cobalt
    50.60  
 
Although SRK Consulting assumed pricing levels consistent with those estimated by Roskill, a 38% decrease in average REE prices from such levels, holding all other variables constant, would not materially reduce reserve estimates.
 
There are numerous uncertainties inherent in estimating quantities and qualities of REO reserves and non-reserve REO deposits and costs to mine recoverable reserves, including many factors beyond our control. We will regularly evaluate our REO reserve and non-reserve REO estimates. This will typically be done in conjunction with expanded, phased drilling programs. Cores are analyzed by geologists to determine mineral types and to identify geological anomalies. Samples along the length of the core are logged and analyzed for total rare earth content, rare earth distribution and mineralogy. This data is entered into a master database and statistically analyzed. The resulting information is used to enhance the mine plan. We also gain information from blast hole cuttings. The estimates of REO reserves and non-reserve REO deposits as to both quantity and quality will also be updated to reflect new drilling or other data received. Estimates of economically recoverable REO reserves, however, necessarily depend upon a number of variable factors and assumptions, all of which may vary considerably from actual results, such as:
 
  •  geological and mining conditions and/or effects from prior mining that may not be fully identified by available data or that may differ from experience;
 
  •  assumptions concerning future prices of rare earth products, operating costs, mining technology improvements, development costs and reclamation costs; and
 
  •  assumptions concerning future effects of regulation, including the issuance of required permits and taxes by governmental agencies.
 
Actual REO tonnage recovered from identified REO reserve and non-reserve REO deposit areas and revenues and expenditures with respect to the same may vary materially from estimates. These estimates may not accurately reflect our actual REO reserves or non-reserve REO deposits. Any inaccuracy in our estimates related to our REO reserves and non-reserve REO deposits could result in lower than expected revenues and higher than expected costs.
 
Additionally, we have recently expanded our on-site exploratory drilling program to confirm the existence and extent of bastnasite, monazite and other rare earth phosphate mineral occurrences in unexplored areas of the Mountain Pass facility. This program will also help to establish whether our measured, indicated and inferred resources can become proven or probable reserves.


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Engineering Study
 
SRK Consulting prepared an engineering study to determine, among other things, the size of the underlying ore body and a mine plan for the restart of the Mountain Pass mine and the refurbishment of the processing facilities in connection with our initial modernization and expansion plan. As originally envisioned, the restart plan includes integrated off-site facilities for production of metals and rare earth magnet alloys. Below is a summary of some of the information from the original engineering study, which does not give effect to any operational or financial benefits that are expected from our second-phase capacity expansion. SRK Consulting designed the mine plan to ensure an annual production rate of approximately 19,050 mt of REO. The assumptions regarding efficiencies and recoveries are reflected in the table below.
 
Key project data
 
     
Mine type
  Open pit
Process description
  Crushing, milling, flotation, leaching, extraction, separation
Open pit mine life
  30 years
Mill throughput
  1,300 average tons per day
Initial capital costs(1)
  $531 million
Sustaining capital costs
  $138 million
 
                         
    Average Ore
    Ore
    Contained REO
 
    Grade (%)     (Millions of Tons)     (Millions of Pounds)  
 
Contained minerals
                       
Proven
    9.38 %     0.480       88  
Probable
    8.20 %     13.108       2,122  
 
 
(1) SRK Consulting assumes capital expenditures of $550 million, which includes extra stripping costs for 2013 and 2014.
 
                                 
    Years
    Years
    Years
       
    1-5     6-10     11-30     Life-of-Mine  
 
Average annual payable minerals
                               
Ore milled (kilotons)
    427       368       424       13,692  
Average ore grade, as a percentage of REO
    7.9 %     9.3 %     8.2 %     8.2 %
Mill REO recovery percentage
    65 %     65 %     65 %     65 %
                                 
Total recovered REO (in thousands of pounds)
    43,775       44,404       44,776       1,464,272  
Chemical plant recovery percentage
    90 %     95 %     94 %     94 %
                                 
Total REO production (in thousands of pounds)
    39,532       42,044       42,044       1,372,650  
Average operating cost per pound of REO
                               
Mining
  $ 0.10     $ 0.06     $ 0.12     $ 0.11  
Oxides
    1.16       1.13       1.14       1.14  
Oxides-to-metals
    0.80       0.80       0.80       0.80  
Metals-to-alloys
    3.71       3.75       3.75       3.76  
                                 
Total REO
  $ 5.77     $ 5.74     $ 5.81     $ 5.81  
Price assumptions (Weighted average pricing of different products)
                               
Oxides
                          $ 4.55  
Metals
                          $ 7.64  
Alloys
                          $ 16.59  
                                 
Total REO
                          $ 11.97  


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    Years
    Years
    Years
       
    1-5     6-10     11-30     Life-of-Mine  
 
After tax project internal rate of return
    34 %                        
After tax net present value 8% discount (dollars in millions)(1)
  $ 1,460                          
 
 
(1) As of October 28, 2010, prices for certain rare earth products had increased from those used by SRK Consulting in its engineering study. According to SRK Consulting, using the October 28, 2010 prices set forth in the following table, which are primarily based on information from Metal-Pages and alloy pricing formulas, instead of those used in SRK Consulting’s original model would increase the after tax project internal rate of return to 115% and the after tax net present value (8% discount) to $6.76 billion:
 
         
Product
  October 28, 2010 Price  
    (US$/kg)  
 
Lanthanum Oxide
  $ 44.54  
Cerium Oxide (Glass Products)
    43.04  
Cerium — Water Filters
    33.08 (1)
Cerium Hexahydrate
    11.02 (1)
Europium Oxide
    630.52  
Lanthanum Metal
    43.66  
Neodymium/Praseodymium Metal
    84.54  
Nd-Iron-Boron Alloy
    78.32  
Samarium Cobalt Alloy
    66.15 (1)
 
 
(1) Molycorp market price estimates
 
The engineering study, as prepared by SRK Consulting, includes all mine-level capital and operational costs, but does not include corporate, selling, general and administrative expenses which we estimate to be an additional $20 million to $25 million per year.
 
Subsequent to the original engineering study, we proceeded with additional detailed engineering and process testwork for the project. While substantive elements of the engineering design remain fixed in terms of function, our ongoing testing effort through the first quarter of 2011 will finalize the operating cost estimate for oxide production. Following completion of the operating cost review, updated process costs and recoveries will be reflected in the proven and probable reserve statement. At the present time, as a result of increased REE prices, the estimated economic cut-off grade for the deposit is less than the 5% cut-off grade applied by SRK Consulting. Due to the differential between the estimated economic cut-off grade and 5.0% “hard” cut-off grade, there is a margin for operating cost variation without a material adjustment in the proven and probable reserve estimate.
 
We approved the following changes to the original engineering study. These changes are provided for clarity and do not have a material impact on the proven and probable reserve estimate:
 
  •  We conducted additional drilling and exploration work between December 2009 and April 2010 with a primary focus on in-fill drilling and a secondary focus on condemnation. We plan to conduct additional drilling and exploration work in 2011.
 
  •  As disclosed in our quarterly report on Form 10-Q for the quarterly period ended September 30, 2010, we will construct a new mill rather than refurbish the existing mill prior to the start of full-scale production. With this change, SRK Consulting revised the mine plan to reflect improved access to ore in the southwest and south portion of the open pit. Fundamental production criteria remained unchanged (e.g., 5.0% REO cut-off grade, 19,050 mt REO per year, and overall recovery of 60%); therefore, there is no material change in the mine production schedule. However, the pit layouts over time shown in the original engineering study (e.g., Figures 6.2 through 6.7) will not match the current pit layouts.
 
  •  We changed the location of the extraction and separations facilities, as well as related infrastructure, from the northwest portion of our property to immediately southeast of the existing process facilities.

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  While the location of these facilities has changed, the production process has not. Accordingly, Figure 7.8 General Facilities Arrangement for the Extraction and Separation Facilities in the original engineering study is no longer valid.
 
  •  Updated project capital costs are within 10% of the estimated capital costs in the original engineering study.
 
  •  Project planning during the development phase will be performed by us and Eichleay Engineers of California, a consulting firm specializing in project delivery.
 
We will authorize SRK Consulting to revise the engineering study and to make material adjustments, if any, to the reserve statement following completion of the updated operating cost review and testwork related to process recoveries.
 
In light of strong industry fundamentals, including reduced Chinese supply and strong pricing increases, our Board of Directors recently approved a second-phase capacity expansion plan in addition to our initial modernization plan. Upon the completion of this expansion plan, by the end of 2013, we expect to have the ability to produce up to approximately 40,000 mt of REO per year at our Mountain Pass facility, or approximately double the amount we will be able to produce upon completion of our initial modernization and expansion plan.
 
SRK Consulting prepared its engineering study in connection with our initial modernization and expansion plan, but has not yet reviewed the second-phase capacity expansion plan or prepared a revised engineering study to reflect any potential impact of the second-phase capacity expansion on capital costs, operating expenses, mine life or reserve estimates. SRK Consulting has preliminarily indicated, however, that doubling the amount of production pursuant to the second-phase capacity expansion plan would reduce the current mine life by half, assuming no additional exploration, no realization of anticipated improvements in recoveries, and all other factors remain constant.
 
Customers
 
We are working to establish stable revenue streams for the rare earth minerals and products we produce at the Mountain Pass facility. Upon reaching full planned production rates for REOs at the Mountain Pass facility under our initial modernization and expansion plan, we expect to produce approximately 19,050 mt of REO per year by the end of 2012. Additionally, under our capacity expansion plan, we expect to have the ability to produce up to approximately 40,000 mt of REO per year by the end of 2013. Pursuant to our first contract with Grace, we have agreed to supply Grace with a significant amount of REOs, primarily lanthanum oxide, through mid-2012 at market-based prices subject to a ceiling based on market prices at June 1, 2010, and a floor. Pursuant to our second contract with Grace, we have agreed to supply Grace with up to 75 percent of our lanthanum product production per year (based on our initial planned capacity) at market-based prices subject to a floor for a three-year period commencing upon the achievement of expected annual production rates under our initial modernization and expansion plan, which may be extended at Grace’s option for an additional three-year period. Upon execution of definitive agreements with Sumitomo, we also expect to provide Sumitomo with approximately 1,500 mt per year (and following completion of our initial modernization and expansion plan, approximately 1,750 mt per year) of cerium and lanthanum-based products and 250 mt per year of didymium oxide for a period ending five years after the completion of our initial modernization and expansion of the Mountain Pass facility, at market-based prices subject to a floor. As of January 1, 2011, we also had 20 non-binding letters of intent to sell our rare earth products. These letters of intent, together with our second contract with Grace and memorandum of understanding with Sumitomo, represent approximately 158% of our anticipated production for 2013 under our initial modernization and expansion plan, and our non-binding letter of intent with Neo Material also contemplates the sale of certain rare earth products. See “Business—Our Business Strategy—Secure customer commitments to provide a stable revenue stream.” for additional detail regarding our contracts, non-binding letters of intent and off-take commitments. Prior to commencing full production, we intend to enter into short- and long-term sales contracts with existing and new customers for amounts not in excess of our actual planned production under our initial modernization and expansion plan and our capacity expansion plan, respectively. For certain REEs where the market demand is high, such as europium, we do not expect to enter into letters of intent or contracts, given that


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these REEs can be easily sold. None of our existing customer relationships are from contracts we assumed from Chevron Mining Inc.
 
The letter of intent with Neo Material also contemplates the possibility of Neo Material acting as our non-exclusive sales agent and providing sales, marketing, warehousing and distribution services for some of our products. The memorandum of understanding with Sumitomo also contemplates Sumitomo acting as our non-exclusive sales agent for some of our products until the completion of our modernization and expansion of the Mountain Pass facility.
 
There is a limited market for our lanthanum. Two of our largest customers, Albemarle Corporation and Grace, comprised 82% (55% of the total corresponding to Albemarle Corporation and 27% of the total corresponding to Grace) and 72% (57% of the total corresponding to Albemarle Corporation and 15% of the total corresponding to Grace) of our total product revenue for the year ended December 31, 2009 and the period ended December 31, 2008, respectively. Four of our largest customers, Grace, Shin-Etsu Chemical Co., 3M Company and Mitsubishi Corporation Unimetals U.S.A., comprised 84% (43% of the total corresponding to Grace, 15% corresponding to each of Shin-Etsu Chemical Co. and 3M Company and 11% corresponding to Mitsubishi Corporation Unimetals U.S.A.) of our total product revenue for the nine months ended September 30, 2010.
 
In addition, we are in discussions with multiple large, globally diversified mining companies regarding the sale of XSORBX®, which will expand demand for cerium in times when it is in surplus and low priced. XSORBX® is a proprietary product and process, primarily consisting of cerium that removes arsenic and other heavy metals from industrial processing streams and will allow our customers to more safely sequester arsenic and increase their production. XSORBX® is protected by over 100 issued and pending U.S. and foreign patents and patent applications. We have begun to sell XSORBX® for commercial use in the wastewater, recreation, pool and spa, industrial process and other water treatment markets.
 
We anticipate that the location of the Mountain Pass facility, just off the Interstate 15 and along the train route leading to the Los Angeles port, will be an advantage in the transportation and delivery of our rare earth products to our customers as compared to other rare earth mining and development projects.
 
Suppliers
 
We use significant amounts of hydrochloric acid and sodium hydroxide as reagents to process REOs. We ultimately intend to produce and recycle our own hydrochloric acid and sodium hydroxide at the Mountain Pass facility, however, the technology we are developing to internally produce these reagents to significantly reduce our dependence on external supplies has not yet been implemented. Accordingly, we currently purchase hydrochloric acid and sodium hydroxide in the open market through multiple suppliers and, as a result, could be subject to significant volatility in the cost or availability of these reagents, although they are currently in ample supply. We may not be able to pass increased prices for these reagents through to our customers in the form of price increases. A significant increase in the price of these reagents, or limited availability of such materials, could materially increase our operating costs and adversely affect our profit margins from quarter to quarter.
 
Patents, Trademarks and Licenses
 
We rely on a combination of trade secret protection, nondisclosure and licensing agreements, patents and trademarks to establish and protect our proprietary intellectual property rights. We utilize trade secret protection and nondisclosure agreements to protect our proprietary rare earth technology. We also have a proven technology and product development group and as of February 3, 2011, held 73 issued and pending U.S. patents and patent applications, and 173 issued and pending foreign patents and patent applications. We intend to rely on patented products, such as XSORBX®, and related licensing agreements to establish proprietary markets for low demand REEs. These intellectual property rights may be challenged or infringed upon by third parties or we may be unable to maintain, renew or enter into new license agreements with third-party owners of intellectual property on reasonable terms. In addition, our intellectual property will be subject to infringement or other unauthorized use outside of the United States. In such case, our ability to protect our intellectual property rights by legal recourse or otherwise may be limited, particularly in countries where laws or enforcement practices are undeveloped or do not recognize or protect intellectual property rights to the


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same extent as the United States. Unauthorized use of our intellectual property rights or inability to preserve existing intellectual property rights could adversely impact our competitive position and results of operations.
 
Competition
 
According to Roskill, global production of rare earth products was approximately 129,000 mt of REO in 2008. According to IMCOA, China accounted for approximately 96% of this total. The majority of the remaining production in 2008 was from Mountain Pass and Russia. Although exploration programs for REEs exist outside of China, Russia, Mountain Pass and Australia, none of the deposits that are the subject of these programs is currently in production. In addition, the April 2010 U.S. GAO briefing stated that, for a typical exploration-stage mine, once a company has secured the necessary capital to start a mine, government and industry officials said it can take from seven to 15 years to bring a property fully online, largely due to the time it takes to comply with multiple state and federal regulations.
 
Once we reach full planned production rates for REOs and other planned downstream products, the increased competition may lead our competitors to engage in predatory pricing behavior. Any increase in the amount of rare earth products exported from other nations, and increased competition, whether legal or illegal, may result in price reductions, reduced margins and loss of potential market share, any of which could materially adversely affect our profitability. As a result of these factors, we may not be able to compete effectively against current and future competitors.
 
Research and Development
 
We have invested significant resources to improve the efficiency of our REO processing operations and the development of new applications for individual REEs. As of December, 31, 2010, our product development group consisted of 22 scientists and engineers. In addition, we spent $1.5 million for the nine months ended September 30, 2010, $1.5 million for the year ended December 31, 2009 and $0.4 million for the period ended December 31, 2008 on research and development.
 
Environmental, Health and Safety Matters
 
We are subject to numerous and detailed, federal, state and local laws, regulations and permits affecting the mining and mineral processing industry, including those pertaining to employee health and safety, environmental permitting and licensing, air quality standards, GHG emissions, water pollution, waste management, plant and wildlife protection, including the protection of endangered species, handling and disposal of radioactive substances, remediation of soil and groundwater contamination, land use, reclamation and restoration of properties, the discharge of materials into the environment and groundwater quality and availability. These laws, regulations and permits have had, and will continue to have, a significant effect on our results of operations and competitive position and have tended to become increasingly stringent over time. Future laws, regulations or permits, as well as the interpretation or enforcement of existing requirements, may require substantial increases in capital or operating costs or otherwise delay, limit or prohibit our current or future operations. Our management team and employees have a significant amount of experience working with various federal, state and local authorities to address compliance with such laws, regulations and permits. However, we cannot assure you that we have been or will be at all times in compliance with such requirements.
 
We expect that we incurred approximately $3 million in 2010, and we expect to incur approximately $3 million in 2011, for ongoing operating environmental expenditures, including salaries, monitoring, compliance, reporting and permits. In addition, we plan to invest significant capital in certain infrastructure, including iron and lead removal equipment in our processing facilities, a chlor-alkali plant, a co-generation power plant and a paste tailings plant and related storage facility. Our planned chlor-alkali plant is expected to reduce the amount of waste salt water that otherwise would be produced by our processing facilities and eliminate the need for evaporation ponds to dispose of this waste water. Our planned co-generation power plant is expected to increase the energy efficiency of our Mountain Pass facility by generating steam with waste heat from the power generation process. Our planned paste tailings plant and related storage facility are expected to increase the extent of our water recycling and present lower environmental risks than storing tailings in ponds. We expect to spend approximately $187 million on environmentally-driven capital projects during 2011 and 2012 on our modernization and expansion project. We have contracted to acquire air


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emission offset credits at a cost of approximately $3.1 million in connection with our modernization and expansion plan and our capacity expansion plan. However, we may need to purchase additional credits in the future.
 
Permits and Approvals
 
Numerous governmental permits and approvals are required for our current and future operations. We hold a mine plan permit and an associated environmental impact report, which currently allow continued operations of our Mountain Pass facility through 2034 and which we expect will be extended to allow continued operations through 2042. We hold numerous other permits and approvals, including permits to operate from the Lahontan Regional Water Quality Control Board and orders for wastewater treatment and other facilities. Our ability to build state-of-the-art processing facilities at Mountain Pass depends upon obtaining the necessary installation and operation permits from a variety of governmental entities. In connection with our planned expansion, we will be required to obtain permit modifications and additional permits for new and replacement processing facilities and utilities, including a chlor-alkali plant and co-generation power plant, and also may be required to prepare a risk management plan in connection with the storage of ammonia for use at the planned co-generation power plant. To obtain, maintain and renew these and other environmental permits, we may be required to conduct environmental studies and collect and present to governmental authorities data pertaining to the potential impact that our current or future operations may have upon the environment.
 
We may be unable to obtain permits unless we are able to avoid or mitigate those impacts, particularly impacts to desert flora and fauna. The permitting processes and development of supporting materials, including any environmental impact statements, may be costly and time consuming. Any failure to obtain, maintain or renew required permits, or other permitting delays or conditions, may delay, limit or prohibit current or future operations. Consequently, the expansion and modernization of the Mountain Pass facility may be delayed, curtailed or prevented, particularly in the event any environmental impact statement is required in connection therewith. These permit processes and requirements, and the interpretation and enforcement thereof, change frequently, and any such future changes could materially adversely affect our mining operations and results of operations.
 
We have secured all permits necessary to allow construction to start on the Mountain Pass facility modernization and expansion project. The following table presents the material permits relating to our current and future operations that we have already obtained, as well as those we have yet to obtain and our proposed filing date for such permits. We expect to obtain the air quality, building, electrical and plumbing permits included in the following table as required, on an ongoing basis, in connection with the construction and installation of buildings and equipment at the Mountain Pass facility. Other permits are also required. We cannot predict with certainty the grant date for any permit or if we will obtain such permit.
 
Material Permits — Not Yet Obtained
 
         
Permit
 
Agency
 
Status
 
Air Quality Permits
 
Mojave Desert California AQMD
  As Required
Building, Electrical and Plumbing Permits
 
San Bernardino County, California
  As Required
 
Material Permits — Already Obtained
 
         
Permit
 
Agency
 
Approval Date
 
Minor Use Permit
 
San Bernardino County, California
  November 10, 2010
Wastewater Discharge Permits
 
Lahontan Regional Water Quality Control Board
  October 10, 2010
Streambed Alteration Agreement
 
California Department of Fish and Game
  December 6, 2010
Right of Way for the Shadow Valley Fresh Water Pipeline
 
Bureau of Land Management
  August 23, 1982
San Bernardino County Domestic Water Supply Permit #36000172
 
San Bernardino County, California Department of Public Health
  December 8, 2004


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Permit
 
Agency
 
Approval Date
 
EPA Identification Number CAD009539321
 
United States Environmental Protection Agency
  October 30, 2008
Hazardous Materials Certificate of Registration
 
United States Department of Transportation
  June 23, 2010
NRC Export Licenses
 
United States Nuclear Regulatory Commission
  November 10, 2008
Conditional Use Permit 07533SM2/DN953-681N
 
San Bernardino County, California Land Use Services Department
  July 20, 2004
Annual Building, Electrical and Plumbing Permit
 
San Bernardino County, California
  July 23, 2009
CUPA Annual Permit FA0004811
 
San Bernardino County, California Fire Protection District
  August 1, 2009
LRWQCB Order 6-01-18 — Domestic Wastewater System
 
Lahontan Regional Water Quality Control Board
  April 11, 2001
LRWQCB Order 6-91-836 — Mine and Mill Site
 
Lahontan Regional Water Quality Control Board
  June 13, 1991
LRWQCB Order R6V-2005-0011 — On Site Evaporation Ponds
 
Lahontan Regional Water Quality Control Board
  April 14, 2005
Mojave Desert Air Quality Management District — Permits to Operate
 
Mojave Desert AQMD
  March 9, 2010
Industrial Stormwater Pollution Prevention Plan
 
California State Water Resources Control Board
  February 28, 2006
Right-Of-Way Lease 6375.2
 
California State Lands Commission
  January 20, 1983
Radioactive Materials License #3229-36
 
California Department of Public Health — Radiologic Health Branch
  June 17, 2010
Streambed Alteration Agreement R6-N-011-2000
 
California Department of Fish and Game
  August 25, 2000
 
Mine Health and Safety Laws
 
The Federal Mine Safety and Health Act of 1977, as amended by the Mine Improvement and New Emergency Response Act of 2006, and the regulations adopted by the California Occupational Safety and Health Administration, impose stringent health and safety standards on numerous aspects of mining operations, including training of mine personnel, mining procedures, blasting, the equipment used in mining operations and other matters. As a result of increasing scrutiny surrounding mine safety, federal and state legislatures and other regulatory authorities have imposed more stringent regulatory requirements on mining operations. In 2006, the MSHA promulgated new emergency rules on mine safety that address mine safety equipment, training and emergency reporting requirements. The U.S. Congress enacted the Mine Improvement and New Emergency Response Act of 2006, which significantly amended the Federal Mine Safety and Health Act of 1977, requiring improvements in mine safety practices, increasing criminal penalties and establishing a maximum civil penalty for non-compliance, and expanding the scope of federal oversight, inspection and enforcement activities. The MSHA published final rules implementing the Mine Improvement and New Emergency Response Act to revise both the emergency rules and the MSHA’s existing civil penalty assessment regulations, which resulted in an across-the-board increase in penalties from the existing regulations.
 
The Mountain Pass facility maintains a rigorous safety program. Our employees and contractors are required to complete 24 hours of initial training sessions, as well as annual refresher sessions, which cover all of the potential hazards that may be present at the facility. During the training, our commitment to a safe work environment is reinforced through our Stop Work Authority program, which allows any employee or contractor at the facility to stop work that they deem to be unsafe. As a direct result of this commitment to safety, the Mountain Pass facility has an exceptional safety record, which as of December 31, 2010, stood at