10-Q 1 mcp930201210q.htm 10-Q MCP 9.30.2012 10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-34827
Molycorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware 
(State or other jurisdiction of
incorporation or organization)
27-2301797 
(I.R.S. Employer
Identification No.)
5619 Denver Tech Center Parkway, Suite 1000 
Greenwood Village, Colorado 
(Address of principal executive offices)
80111 
(Zip Code)
(303) 843-8040
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x


Accelerated filer ¨


Non-accelerated filer ¨
(Do not check if a 
smaller reporting company)
Smaller reporting company ¨


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of November 7, 2012, the registrant had 137,961,722 shares of common stock, par value $0.001 per share, outstanding.




MOLYCORP, INC.
INDEX
 
PAGE
 
 
 


2




Part I. FINANCIAL INFORMATION



Item 1. Financial Statements

MOLYCORP, INC.

Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share and per share amounts)


September 30, 2012
 
December 31, 2011
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
436,025

 
$
418,855

Trade accounts receivable, net (Note 4)
88,471

 
70,679

Inventory (Note 5)
281,133

 
111,943

Deferred charges (Note 15)
12,517

 
7,318

Deferred tax assets (Note 15)
17,402

 

Income tax receivable
38,933

 
10,514

Prepaid expenses and other current assets
48,711

 
19,735

Total current assets
923,192

 
639,044

Non-current assets:
 
 
 
Deposits (Note 6)
23,287

 
23,286

Property, plant and equipment, net (Note 7)
1,363,444

 
561,628

Inventory (Note 5)
9,601

 
4,362

Intangible assets, net (Note 9)
479,173

 
3,072

Investments
68,006

 
20,000

Deferred tax assets (Note 15)
10,298

 

Goodwill (Note 11)
505,003

 
3,432

Other non-current assets
5,322

 
301

Total non-current assets
2,464,134

 
616,081

Total assets    
$
3,387,326

 
$
1,255,125

 
 
 
 

3



September 30, 2012
 
December 31, 2011
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Trade accounts payable
$
230,255

 
$
161,587

Accrued expenses (Note 12)
66,289

 
12,898

Income tax payable
25,601

 

Deferred tax liabilities (Note 15)
128

 
1,356

Debt and capital lease obligations (Note 14)
32,935

 
1,516

Other current liabilities
2,096

 
1,266

Total current liabilities
357,304

 
178,623

Non-current liabilities:
 
 
 
Asset retirement obligation (Note 13)
20,727

 
15,145

Deferred tax liabilities (Note 15)
189,894

 
18,899

Debt and capital lease obligations (Note 14)
1,183,528

 
196,545

Derivative liability (Note 25)
8,846

 

Pension liabilities
2,855

 

Other non-current liabilities
3,020

 
683

Total non-current liabilities
1,408,870

 
231,272

Total liabilities    
$
1,766,174

 
$
409,895

Commitments and contingencies (Note 19)


 


Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; 350,000,000 shares authorized at September 30, 2012 (Note 16)
138

 
84

Preferred stock, $0.001 par value; 5,000,000 shares authorized at September 30, 2012 (Note 16)
2

 
2

Additional paid-in capital
1,686,226

 
838,547

Accumulated other comprehensive loss
(9,646
)
 
(8,481
)
(Deficit) retained earnings
(74,898
)
 
15,078

Total Molycorp stockholders’ equity
1,601,822

 
845,230

Noncontrolling interests
19,330

 

Total stockholders’ equity
1,621,152

 
845,230

Total liabilities and stockholders’ equity    
$
3,387,326

 
$
1,255,125



See accompanying notes to the condensed consolidated financial statements.

4


MOLYCORP, INC.

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
(In thousands, except share and per share amounts)
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
 
2012
 
2011
 
2012
 
2011
Sales
$
205,604

 
$
138,050

 
$
394,651

 
$
263,927

Costs of sales:
 
 
 
 
 
 
 
Costs excluding depreciation and amortization
(184,128
)
 
(50,602
)
 
(337,769
)
 
(105,670
)
Depreciation and amortization
(10,612
)
 
(5,056
)
 
(19,065
)
 
(9,588
)
Gross profit
10,864

 
82,392

 
37,817

 
148,669

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
(31,468
)
 
(12,182
)
 
(78,721
)
 
(31,465
)
Corporate development
(1,073
)
 
(573
)
 
(19,379
)
 
(3,889
)
Depreciation, amortization and accretion
(9,723
)
 
(544
)
 
(12,361
)
 
(1,384
)
Research and development
(8,929
)
 
(2,148
)
 
(18,628
)
 
(5,165
)
Operating (loss) income
(40,329
)
 
66,945

 
(91,272
)
 
106,766

Other (expense) income:
 
 
 
 
 
 
 
Other expense
(57
)
 
(117
)
 
(37,615
)
 
(152
)
Foreign exchange gains (losses), net
1,910

 
(2,000
)
 
724

 
(1,850
)
Interest expense, net
(5,269
)
 
(671
)
 
(14,989
)
 
(461
)
 
(3,416
)
 
(2,788
)
 
(51,880
)
 
(2,463
)
(Loss) income before income taxes and equity earnings
(43,745
)
 
64,157

 
(143,152
)
 
104,303

Income tax benefit (expense)
28,956

 
(19,056
)
 
58,442

 
(12,643
)
Equity in results of affiliates
(662
)
 

 
(1,146
)
 

Net (loss) income
(15,451
)
 
45,101

 
(85,856
)
 
91,660

Net (income) loss attributable to noncontrolling interest
(3,440
)
 
255

 
(4,120
)
 
(713
)
Net (loss) income attributable to Molycorp stockholders
$
(18,891
)
 
$
45,356

 
$
(89,976
)
 
$
90,947

 
 
 
 
 
 
 
 
Net (loss) income
$
(15,451
)
 
$
45,101

 
$
(85,856
)
 
$
91,660

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
526

 
(5,564
)
 
(1,165
)
 
(4,240
)
Comprehensive (loss) income
$
(14,925
)
 
$
39,537

 
$
(87,021
)
 
$
87,420

Comprehensive (loss) income attributable to:
 
 
 
 
 
 
 
Molycorp stockholders
(11,485
)
 
40,346

 
(82,901
)
 
87,130

Noncontrolling interest
(3,440
)
 
(809
)
 
(4,120
)
 
290

 
$
(14,925
)
 
$
39,537

 
$
(87,021
)
 
$
87,420

 (Loss) income per share of common stock (Note 17):
 
 
 
 
 
 
 
Basic
$
(0.19
)
 
$
0.51

 
$
(0.97
)
 
$
1.01

Diluted
$
(0.19
)
 
$
0.49

 
$
(0.97
)
 
$
1.00



See accompanying notes to the condensed consolidated financial statements.


5



MOLYCORP, INC.

Condensed Consolidated Statement of Stockholders’ Equity (Unaudited)
(In thousands, except share and per share amounts)

 
Common Stock
 
Series A
Mandatory
Convertible
Preferred
Stock
 
Additional
Paid-In Capital
 
Accumulated
Other
Comprehensive Loss
 
Retained Earnings
 
Total
Molycorp Stockholders' Equity
 
Non
controlling interests
 
Total Stockholders' Equity
 
Shares
 
$
 
Shares
 
$
 
 
 
 
 
 
Balance at December 31, 2011
83,896,043

 
$
84

 
2,070,000

 
$
2

 
$
838,547

 
$
(8,481
)
 
$
15,078

 
$
845,230

 
$

 
$
845,230

Stock-based compensation (Note 18)
(601
)
 

 

 

 
3,764

 

 

 
3,764

 

 
3,764

Issuance of shares for investment from Molymet, net of stock issuance costs (Note 16)
12,500,000

 
12

 

 

 
390,081

 

 

 
390,093

 

 
390,093

Issuance of shares for interest in Molycorp Canada (Note 16)
13,862,286

 
14

 

 

 
284,130

 

 

 
284,144

 
15,761

 
299,905

Component of convertible debt (Note 14)

 

 

 

 
71,801

 

 

 
71,801

 

 
71,801

Deferred taxes on component of convertible debt

 

 

 

 
(27,106
)
 

 

 
(27,106
)
 

 
(27,106
)
Issuance of shares for conversion of Debentures (Note 14)
99,723

 

 

 

 
1,421

 

 

 
1,421

 

 
1,421

Issuance of Primary Shares (Note 16)
13,800,000

 
14

 

 

 
132,116

 

 

 
132,130

 

 
132,130

Issuance of Borrowed Shares (Note 16)
13,800,000

 
14

 

 

 
11

 

 

 
25

 

 
25

Net (loss) income

 

 

 

 

 

 
(89,976
)
 
(89,976
)
 
4,120

 
(85,856
)
Preferred dividends

 

 

 

 
(8,539
)
 

 

 
(8,539
)
 

 
(8,539
)
Distribution to noncontrolling interests

 

 

 

 

 

 

 

 
(551
)
 
(551
)
Other comprehensive loss

 

 

 

 

 
(1,165
)
 

 
(1,165
)
 

 
(1,165
)
Balance at September 30, 2012
137,957,451

 
$
138

 
2,070,000

 
$
2

 
$
1,686,226

 
$
(9,646
)
 
$
(74,898
)
 
$
1,601,822

 
$
19,330

 
$
1,621,152



See accompanying notes to the condensed consolidated financial statements.








6





 
Common Stock
 
Series A
Mandatory
Convertible
Preferred
Stock
 
Additional
Paid-In Capital
 
Accumulated
Other
Comprehensive Loss
 
Retained Earnings
 
Total
Molycorp Stockholders' Equity
 
Non
controlling interests
 
Total Stockholders' Equity
 
Shares
 
$
 
Shares
 
$
 
 
 
 
 
 
Balance at December 31, 2010
82,291,200

 
$
82

 

 
$

 
$
539,866

 
$

 
$
(93,435
)
 
$
446,513

 
$

 
$
446,513

Sale of Series A mandatory convertible preferred stock at $100.00 per share, net of underwriting fees and other offering costs

 

 
2,070,000

 
2

 
199,640

 

 

 
199,642

 

 
199,642

Stock-based compensation
11,570

 

 

 

 
4,042

 

 

 
4,042

 

 
4,042

Issuance of shares for interest in Molycorp Silmet
1,593,419

 
2

 

 

 
72,653

 

 

 
72,655

 
8,820

 
81,475

Component of convertible debt

 

 

 

 
36,227

 

 

 
36,227

 

 
36,227

Deferred taxes on component of convertible debt

 

 

 

 
13,437

 

 

 
13,437

 

 
13,437

Net income

 

 

 

 

 

 
90,947

 
90,947

 
713

 
91,660

Preferred dividends

 

 

 

 

 

 
(6,167
)
 
(6,167
)
 

 
(6,167
)
Other comprehensive loss

 

 

 

 

 
(3,817
)
 

 
(3,817
)
 
(423
)
 
(4,240
)
Balance at September 30, 2011
83,896,189

 
$
84

 
2,070,000

 
$
2

 
$
865,865

 
$
(3,817
)
 
$
(8,655
)
 
$
853,479

 
$
9,110

 
$
862,589



See accompanying notes to the condensed consolidated financial statements.


7


MOLYCORP, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
Nine months ended
 
September 30,
2012
 
September 30,
2011
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(85,856
)
 
$
91,660

Adjustments to reconcile net (loss) income to net cash from operating activities:
 
 
 
Depreciation, amortization and accretion
31,426

 
10,972

Deferred income tax benefit
(35,179
)
 
(4,544
)
Inventory write-downs
41,082

 
1,585

Release of inventory step-up value
26,428

 
10,200

Stock-based compensation expense
3,179

 
4,042

Amortization of debt discount
1,257

 
1,037

Allowance for doubtful accounts
2,500

 

Other operating adjustments
56

 
2,461

Net change in operating assets and liabilities (Note 22)
(32,081
)
 
(88,689
)
Net cash (used in) provided by operating activities
(47,188
)
 
28,724

Cash flows from investing activities:
 
 
 
Cash paid in connection with acquisitions, net of cash acquired
(591,011
)
 
(20,021
)
Investment in joint venture
(28,130
)
 

Deposits
(516
)
 
2,946

Cash paid to acquire non-marketable securities

 
(20,000
)
Capital expenditures
(644,683
)
 
(160,917
)
Other investing activities
4,953

 
19

Net cash used in investing activities
(1,259,387
)
 
(197,973
)
Cash flows from financing activities:
 
 
 
Capital contributions
390,225

 

Repayments of short-term borrowings—related party

 
(2,343
)
Repayments of debt
(228,431
)
 
(5,447
)
Net proceeds from sale of preferred stock

 
199,642

Net proceeds from sale of common stock
132,471

 

Issuance of 10% Senior Secured Notes
635,373

 

Issuance of 6.00% Convertible Notes
395,712

 

Issuance of 3.25% Convertible Notes

 
223,100

Payments of preferred dividends
(8,539
)
 
(6,167
)
Proceeds from debt
9,456

 
6,337

Other financing activities
(3,331
)
 

Net cash provided by financing activities
1,322,936

 
415,122

Effect of exchange rate changes on cash
809

 
(348
)
Net change in cash and cash equivalents
17,170

 
245,525

Cash and cash equivalents at beginning of the period
418,855

 
316,430

Cash and cash equivalents at end of period
$
436,025

 
$
561,955


See accompanying notes to the condensed consolidated financial statements.

8


MOLYCORP, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2012
(Unaudited)
(1)
Basis of Presentation
Molycorp, Inc. (“Molycorp” or the “Company”) is one of the world's leading rare earth products and rare metals companies. Molycorp owns: a world-class rare earth mine and processing facilities at Mountain Pass, California (the "Molycorp Mountain Pass facility"); Molycorp Silmet, one of the largest rare earth oxide ("REO") and rare metal producers in Europe; and the only producer of rare earth alloys in the United States, Molycorp Metals and Alloys ("MMA"). Following the acquisition of Neo Material Technologies, Inc. (formerly referred to as “Neo” and now Molycorp Minerals Canada ULC or “Molycorp Canada”) on June 11, 2012, Molycorp is currently a leading global producer of neodymium-iron-boron (“NdFeB”) magnetic powders (“Neo Powders”), which are used to manufacture bonded NdFeB permanent rare earth magnets, and a leading global manufacturer and distributor of rare earths and zirconium-based engineered materials and applications, and other rare metals and their compounds.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and Regulation S-X promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”). While the December 31, 2011 balance sheet information was derived from the Company’s audited financial statements, for interim periods, GAAP and Regulation S-X do not require all information and related disclosures that are required in the annual financial statements, and all disclosures required by GAAP for annual financial statements have not been included. Therefore, the accompanying unaudited condensed consolidated financial statements should be read in conjunction with Molycorp’s consolidated financial statements and related notes for the year ended December 31, 2011, included in Molycorp's Current Report on Form 8-K filed on August 16, 2012.
The accompanying unaudited condensed consolidated financial statements reflect all adjustments, which are normal and recurring in nature, and which, in the opinion of management, are necessary for the fair presentation of Molycorp’s financial position, results of operations and cash flows at September 30, 2012, and for all periods presented. The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
The preparation of the financial statements, in accordance with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on the Company’s historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ significantly from these estimates under different assumptions and conditions. Significant estimates made by management in the accompanying financial statements include the collectability of accounts receivable, the recoverability of inventory, the useful lives and recoverability of long-lived assets such as property, plant and equipment, intangible assets and investments, capital leases, uncertain tax positions, the fair values of assets acquired and liabilities assumed, including business combinations, and the adequacy of the Company’s asset retirement obligations.
As discussed in Note 15 of Molycorp’s Current Report on Form 8-K filed on August 16, 2012, the Company revised its previously reported results of operations for the third quarter of 2011 to correct an error in the elimination of intercompany sales in that interim period.
In addition, certain prior period amounts have been reclassified to conform to the current period presentation. Such reclassifications did not affect results of operations.
(2)
Capital Requirements
Cash expenditures for the Molycorp Mountain Pass facility plant modernization and expansion efforts, including achieving an annual production capacity of 19,050 mt (“Project Phoenix Phase 1”), the second phase capacity expansion plan to 40,000 mt (“Project Phoenix Phase 2”) and other remaining 2012 capital projects related to operations at the Molycorp Mountain Pass facility are expected to total approximately $170.0 million for the fourth quarter of 2012, and approximately $305.0 million in the first half of 2013, respectively.

9


These estimated cash expenditures described above represent the estimated remaining expenditures for Project Phoenix Phase 1, Project Phoenix Phase 2 and the Company's other remaining 2012 capital projects related to operations at the Molycorp Mountain Pass facility. Including the applicable remaining expenditures, the aggregate cost of Project Phoenix Phase 1 and Project Phoenix Phase 2 is estimated to be approximately $1.25 billion for engineering, procurement and construction (“EPC”), preliminary engineering, insurance, permitting, legal, start-up, commissioning and other costs. All amounts for future capital spending are estimates that include certain discretionary amounts and are subject to change as the projects are further developed. These estimates do not include capitalized interest.
The estimated total costs for Project Phoenix Phase 1 and Project Phoenix Phase 2 include estimated additional EPC expenditures totaling up to $150.0 million for corrections resulting from certain defective engineering work, other engineering, design and scope changes and other cost increases. The Company is pursuing actions to recoup certain costs arising from defective engineering work, including making claims against applicable insurance policies, although there can be no assurance that the Company will be able to recoup all or any portion of such costs. The Company regularly monitors its capital projects to identify opportunities to reduce their total costs.
Anticipated capital expenditures at all other operating facilities of the Company are expected to be approximately $10.0 million during the fourth quarter of 2012. See Note 7.
Other cash requirements include planned contributions to Intermetallics Japan (“IMJ”), the Company's joint venture to manufacture sintered NdFeB permanent rare earth magnets. Molycorp will invest, upon achievement of certain milestones, Japanese Yen (JPY) 2.5 billion in cash, in exchange for ordinary shares of IMJ. The actual remittance amounts will vary depending on the future exchange rate between the U.S. dollar and the Japanese Yen, and the achievement of certain milestones by the joint venture. The Company invested $27.7 million (representing JPY 2.2 billion) to IMJ through September 30, 2012, and plans to invest an additional JPY 300 million (or approximately $3.8 million based on the JPY/ U.S. dollar exchange rate at September 30, 2012) in September 2013. See Note 10. The Company also anticipates making cash investments in other current and new ventures consistent with its mine-to-magnets strategy totaling approximately $8.0 million in the fourth quarter of 2012 and approximately $20.0 million in 2013.
Molycorp expects to fund the remaining capital expenditures under Project Phoenix Phase 1, Project Phoenix Phase 2 and other capital expenditures related to operations at the Molycorp Mountain Pass facility and all other operating facilities, as well as working capital and other cash requirements, with its available cash balances of $436.0 million at September 30, 2012, anticipated future cash flow from operations, and potential proceeds from revolving credit facilities or certain equipment financing that the Company is currently pursuing in its normal process of properly managing its cash and working capital requirements.
There can be no assurance that the Company will be successful in securing access to additional cash proceeds through the revolving credit facilities and lease or loan financing for certain equipment that it is currently pursuing, or other forms of financing on commercially acceptable terms, or at all. Accordingly, if necessary, the Company believes it has the ability to curtail capital expenditures and revise its current business plan to the extent necessary to preserve adequate liquidity sufficient to sustain operations.
(3)
Segment Information
In the third quarter of 2012, management reorganized the Company's operations into four new reportable segments to better reflect its primary activities as a global rare earth and magnetics enterprise: Resources; Chemicals and Oxides; Magnetic Materials and Alloys; and Rare Metals. The new composition of the Company's reportable segments is based on a combination of product lines and technologies aligned with its mine-to-magnet strategy.

The Resources segment includes: the Company's operations at its Molycorp Mountain Pass facility where it conducts rare earth minerals extraction to produce rare earth concentrates; REO, including lanthanum, cerium, didymium, neodymium, praseodymium and yttrium; heavy rare earth elements, such as samarium, europium, gadolinium, terbium, dysprosium, and others; didymium rare earth metal; and SorbXTM (formerly XSORBX), a line of proprietary rare earth-based water treatment products.

The Chemicals and Oxides segment includes: production of REO at the Company's operations in Sillamäe, Estonia; heavy rare earths from the Company's facilities in Jiangyin, Jiangsu Province, China; and production of REO, salts of rare earth elements ("REEs"), zirconium-based engineered materials and mixed rare earth/zirconium oxides from the Company's facilities in Zibo, Shandong Province, China. Rare earths products and zirconium-based engineered products are primarily supplied to

10


the automotive catalyst, electronics, ceramic, clean technology and glass industries.

The Magnetic Materials and Alloys segment includes: the production of Neo Powders through Molycorp's wholly-owned manufacturing facilities in Tianjin, China and Korat, Thailand, under the Molycorp Magnequench brand. Neo Powders are used to make bonded magnets for a variety of electronic and mechanical products such as micro motors, precision motors, sensors and other applications requiring high levels of magnetic strength, flexibility, small size and reduced weight. This operating segment also includes manufacturing of neodymium and samarium magnet alloys, other specialty alloy products and rare earth metals at the Company's facility in Tolleson, Arizona.

The Rare Metals segment comprises: Molycorp's production of gallium, indium, tantalum and rhenium from its operations in Quapaw, Oklahoma; Blanding, Utah; Peterborough, Ontario; Napanee, Ontario; Sagard, Germany; and Hyeongok Industrial Zone in South Korea. This operating segment also includes tantalum and niobium from the Company's operations in Sillamäe, Estonia. Rare metals are primarily used in the wireless, light-emitting diode, flat panel display, turbine, solar and catalyst industries.

The asset retirement obligation is recognized only within the Resources segment, and certain government grants are applicable only to the Estonian operations within the Chemicals and Oxides and Rare Metals segment. In addition, the annual profit earned from the Estonian operations are not taxed. In accordance with the Estonian Income Tax Act, only distribution of annual profit is subject to income tax in Estonia. Intersegment sales and transfers are based on similar arms-length transactions with third parties at the time of the sale.
    As noted below, some of the information for the nine months ended September 30, 2012 is actually for the period from June 12, 2012 (following the acquisition of Molycorp Canada) through September 30, 2012.



11


Three months ended September 30, 2012 (In thousands)

Resources

Chemicals and Oxides

Magnetic Materials and Alloys

Rare Metals

Eliminations(a)

Corporate and other(b)

Total Molycorp, Inc.
Sales:

 
 
 
 
 
 
 
 
 
 
 
 
 
External

$
17,150

 
$
87,820

 
$
74,789

 
$
25,845

 
$

 
 

$
205,604

Intersegment

3,745

 
11,559

 

 

 
(15,304
)
 
 


Total sales

$
20,895


$
99,379


$
74,789


$
25,845


$
(15,304
)




$
205,604

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation, amortization and accretion
 
$
(4,035
)
 
$
(5,685
)
 
$
(8,857
)
 
$
(1,715
)
 
$

 
$
(43
)
 
$
(20,335
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating (loss) income

$
(23,966
)
 
$
2,149

 
$
1,419

 
$
(3,774
)
 
$
369

 
$
(16,526
)
 
$
(40,329
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Loss) income before income taxes and equity earnings

$
(25,506
)
 
$
1,201

 
$
1,215

 
$
(3,812
)
 
$
369

 
$
(17,212
)
 
$
(43,745
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets at September 30, 2012 (d)

$
1,686,524


$
565,673


$
536,299


$
79,996


$
(161,201
)

$
178,465


$
2,885,756

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures (c)

$
187,611


$
2,597


$
1,432


$
2,837


$


$
1,387


$
195,864


Nine months ended September 30, 2012 (In thousands)

Resources
 
Chemicals and Oxides
 
Magnetic Materials and Alloys
 
Rare Metals

Eliminations(a)

Corporate and other(b)

Total Molycorp, Inc.
Sales:

 
 
 
 
 
 
 
 
 
 
 
 
 
External

$
78,162

 
$
134,158

 
$
125,277

 
$
57,054

 
$

 
 

$
394,651

Intersegment

5,977

 
15,496

 

 

 
(21,473
)
 
 


Total sales

$
84,139


$
149,654


$
125,277


$
57,054


$
(21,473
)

 

$
394,651

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation, amortization and accretion
 
$
(8,743
)
 
$
(7,419
)
 
$
(10,810
)
 
$
(4,358
)
 
$

 
$
(96
)
 
$
(31,426
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating (loss) income

$
(23,594
)
 
$
(21,863
)
 
$
(1,544
)
 
$
(1,947
)
 
$
24,480

 
$
(66,804
)
 
$
(91,272
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Loss) income before income taxes and equity earnings

$
(25,044
)
 
$
(23,663
)
 
$
(2,381
)
 
$
(2,998
)
 
$
24,480

 
$
(113,546
)
 
$
(143,152
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures (c)

$
675,836


$
6,615


$
1,612


$
6,955


$


$
1,733


$
692,751

________________________
(a)
The net elimination in operating results includes cost of sales elimination of $15,673 for three months ended September 30, 2012, and $45,952 for the nine months ended September 30, 2012. The cost of sales elimination consists of the intercompany gross profits as well as elimination of lower of cost or market adjustments related to intercompany inventory. The $161,201 of total assets elimination is comprised of $159,009 of intercompany investments and $2,192 of intercompany accounts receivable and profits in inventory.
(b)
Corporate loss before income taxes and equity earnings includes business development costs, personnel and related costs, including stock-based compensation expense, accounting and legal fees, occupancy expense, information technology costs and interest expense. Other consists of nominal expenses incurred by the sales office in Tokyo, Japan. Total corporate assets is comprised primarily of cash and cash equivalents.
(c)
On an accrual basis excluding capitalized interest.
(d)
Excludes goodwill of $501.6 million arising on the Molycorp Canada acquisition which has not been allocated to its operating segments.

In prior periods, the basis of segmentation of the Company's activities was the location of its operations. As a result of the changes in the composition of the Company's reportable segments discussed above, the prior period operating segments presentation has been revised for comparative purposes. Some of the information under Chemicals and Oxides and Rare Metals for the nine months ended September 30, 2011 is actually for the period from April 1, 2011 (the beginning of the reporting period of Molycorp Silmet) through September 30, 2011. Some of the information under Magnetic Materials and Alloys for the nine months ended September 30, 2011 is actually for the period from April 15, 2011(the beginning of the reporting period of MMA) through September 30, 2011.

12



Three months ended September 30, 2011 (In thousands)
 
Resources
 
Chemicals and Oxides
 
Magnetic Materials and Alloys
 
Rare Metals
 
Eliminations(e)
 
Corporate and other(b)
 
Total Molycorp, Inc.
Sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
 
$
94,342

 
$
15,927

 
$
14,449

 
$
13,332

 
$

 
 
 
$
138,050

Intersegment
 
30,535

 
6,652

 

 

 
(37,187
)
 
 
 

Total sales
 
$
124,877

 
$
22,579

 
$
14,449

 
$
13,332

 
$
(37,187
)
 

 
$
138,050

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation, amortization and accretion
 
$
(2,715
)
 
$
(1,627
)
 
$
128

 
$
(1,386
)
 
$

 
$

 
$
(5,600
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)
 
$
101,727

 
$
2,682

 
$
610

 
$
(3,148
)
 
$
(22,329
)
 
$
(12,597
)
 
$
66,945

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
$
101,606

 
$
1,559

 
$
614

 
$
(4,121
)
 
$
(22,329
)
 
$
(13,172
)
 
$
64,157

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets at September 30, 2011
 
$
632,098

 
$
52,955

 
$
33,032

 
$
69,361

 
$
(154,710
)
 
$
552,706

 
$
1,185,442

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures (c)
 
$
106,162

 
$
2,300

 
$

 
$

 
$

 
$

 
$
108,462


(e)
The total assets elimination of $154,710 is comprised of $102,357 of intercompany investments and $52,353 of intercompany accounts receivable and profits in inventory.


Nine months ended September 30, 2011 (In thousands)
 
Resources
 
Chemicals and Oxides
 
Magnetic Materials and Alloys
 
Rare Metals
 
Eliminations
 
Corporate and other(b)
 
Total Molycorp, Inc.
Sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
 
$
180,951

 
$
31,419

 
$
24,699

 
$
26,858

 
$

 
 
 
$
263,927

Intersegment
 
46,482

 
10,290

 

 

 
(56,772
)
 
 
 

Total sales
 
$
227,433

 
$
41,709

 
$
24,699

 
$
26,858

 
$
(56,772
)
 


 
$
263,927

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation, amortization and accretion
 
$
(7,538
)
 
$
(1,707
)
 
$
(271
)
 
$
(1,456
)
 
$

 
$

 
$
(10,972
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)
 
$
163,392

 
$
10,333

 
$
(586
)
 
$
(175
)
 
$
(31,514
)
 
$
(34,684
)
 
$
106,766

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
$
163,234

 
$
9,232

 
$
(580
)
 
$
(1,124
)
 
$
(31,514
)
 
$
(34,945
)
 
$
104,303

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures (c)
 
$
218,128

 
$
4,672

 
$

 
$

 
$

 
$

 
$
222,800




13


(4)
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company reviews the need for an allowance for doubtful accounts on a quarterly basis. At September 30, 2012 and December 31, 2011, the allowance for doubtful accounts was $2.6 million and $0, respectively.
(5)
Inventory
At September 30, 2012 and December 31, 2011, inventory consisted of the following (in thousands):

 
September 30,
2012
 
December 31,
2011
Current:
 
 
 
Concentrate stockpiles
$
5,666

 
$
3,704

Raw materials
93,909

 
44,770

Work in process
60,754

 
16,602

Finished goods
114,671

 
45,045

Materials and supplies
6,133

 
1,822

Total current
$
281,133

 
$
111,943

Long-term:
 
 
 
Concentrate stockpiles
$
1,322

 
$
1,144

Raw materials
8,279

 
3,186

Finished goods

 
32

Total long-term
$
9,601

 
$
4,362

Assessment of normal production levels
For the three months ended September 30, 2012 and 2011, Molycorp determined that $3.9 million and $0.8 million, respectively, of production costs would have been allocated to additional production, assuming Molycorp had been operating at normal production ranges. For the nine months ended September 30, 2012 and 2011, the Company determined that $9.8 million and $4.3 million, respectively, of production costs would have been allocated to additional production, assuming the Company had been operating at normal production ranges. As a result, these costs were excluded from inventory and instead expensed during the applicable periods. The assessment of normal production levels is judgmental and is unique to each quarter.
Write-downs of inventory
As a result of production or purchase costs in excess of net realizable value, the Company recognized write-downs of inventory of $15.0 million and $0 for the three months ended September 30, 2012 and 2011, respectively, and $41.1 million and $0.6 million for the nine months ended September 30, 2012 and 2011, respectively. In addition, the Company recognized write-downs of work-in-process and stockpile inventory totaling $0 and $0.1 million for the three months ended September 30, 2012 and 2011, respectively, and $0 and $2.3 million for the nine months ended September 30, 2012 and 2011, respectively, based on adjustments to estimated REO quantities.
(6)
Deposits
The Company had $23.3 million in deposits reported as non-current assets at September 30, 2012 and December 31, 2011, respectively. The deposits at September 30, 2012 consist of $20.6 million under an escrow arrangement for the Company’s facilities agreement with Kern River Gas Transmission Company ("Kern River"), $1.5 million related to the Company’s construction insurance program and $1.2 million comprised primarily of other deposit requirements.
(7)
Property, Plant and Equipment, net
The Company capitalized $218.1 million and $108.5 million in plant modernization and other capital costs for the three months ended September 30, 2012 and 2011, respectively, and $728.2 million and $222.8 million for the nine months

14


ended September 30, 2012 and 2011, respectively. These amounts include capitalized interest of $22.2 million and $3.1 million for the three months ended September 30, 2012 and 2011, respectively, and $35.5 million and $3.8 million for the nine months ended September 30, 2012 and 2011, respectively.
Capital expenditures under Project Phoenix Phase 1 and Project Phoenix Phase 2, and other capital projects related to operations at the Molycorp Mountain Pass facility, totaled $185.5 million and $102.2 million for the three months ended September 30, 2012 and 2011, respectively, and $664.1 million and $208.2 million for the nine months ended September 30, 2012 and 2011, respectively. These amounts are on an accrual basis and exclude capitalized interest.
At September 30, 2012 and December 31, 2011, property, plant and equipment consisted of the following (in thousands):
 
September 30,
2012
 
December 31,
2011
Land
$
12,292

 
$
11,059

Land improvements
63,268

 
15,748

Buildings and improvements
112,182

 
23,677

Plant and equipment
157,970

 
68,441

Vehicles
2,526

 
1,235

Computer software
5,067

 
3,002

Furniture and fixtures
733

 
464

Construction in progress (a)
1,006,632

 
436,547

Capital Leases
15,658

 

Mineral properties
24,399

 
24,692

Property, plant and equipment at cost
1,400,727

 
584,865

Less accumulated depreciation
(37,283
)
 
(23,237
)
Property, plant and equipment, net
$
1,363,444

 
$
561,628

(a)
Represents costs incurred for Project Phoenix Phase 1 and Project Phoenix Phase 2 and all other capital projects. See Note 2.

(8)
Mineral Properties and Development Costs
Mineral properties and development costs, which are referred to collectively as mineral properties, include acquisition costs, drilling costs, and the cost of other development work, all of which are capitalized. The Company began depleting mineral properties in 2012 using the units of production method over estimated proven and probable reserves. For the three and nine months ended September 30, 2012, the Company capitalized a nominal amount of depletion costs in work-in-process inventory related to the reserves that were mined and crushed during these periods.
(9)
Intangible Assets
At September 30, 2012 and December 31, 2011, amortizable intangible assets consisted of the following (in thousands):



 

15


 
September 30,
2012
 
December 31,
2011
Customer relationships
$
350,925

 
$
2,153

Rare earth quotas
80,300

 

Patents
39,753

 

Trade name
16,586

 
786

Land use rights
3,420

 

Other
4,419

 
516

Gross carrying amount
495,403

 
3,455

Less accumulated amortization
(16,230
)
 
(383
)
Net carrying amount
$
479,173

 
$
3,072

At September 30, 2012, the net carrying amounts of customer relationships, rare earth quotas, patents, trade name, and other intangible assets included preliminary estimates of $476.4 million as a result of the Molycorp Canada acquisition. The Company expects to complete the final determination of these estimates and related estimated lives for amortizable intangible assets no later than the second quarter of 2013.
(10)
Investments
Boulder Wind Power, Inc.
On September 13, 2011, the Company invested $20.0 million into Boulder Wind Power, Inc. Series B convertible preferred stock, which is accounted for at cost. At September 30, 2012, the fair value of this investment was not estimated as there were no identified events or changes in circumstances that may have had a significant adverse effect on the fair value of the investment.
Intermetallics Japan Joint Venture
On November 28, 2011, Molycorp, Daido Steel Co., Ltd. (“Daido”) and Mitsubishi Corporation (“Mitsubishi”) entered into a preliminary shareholders agreement for the purpose of establishing a new private company, IMJ, to manufacture sintered NdFeB permanent rare earth magnets. The capital contribution ratio of the newly formed company is 30.0% by Molycorp, 35.5% by Daido and 34.5% by Mitsubishi. According to the definitive shareholders agreement, which was signed in January 2012, Molycorp will contribute, upon achievement of certain milestones and subject to the approval of Molycorp’s Board of Directors, Japanese Yen (JPY) 2.5 billion in cash in exchange for ordinary shares of IMJ over a period of twelve months. The actual remittance amounts will vary depending on the future exchange rate between the U.S. dollar and the Japanese Yen, and the achievement of certain milestones by the joint venture. The Company contributed $27.7 million (representing JPY 2.2 billion) to IMJ through September 30, 2012.
Molycorp accounts for this investment under the equity method because it has the ability to exercise significant influence over the operating and financial policies of IMJ, as evidenced by Molycorp’s ownership share and its proportional voting rights and representation in the Board of Directors of IMJ. The condensed consolidated statement of operations and comprehensive income for the three and nine months ended September 30, 2012 include a loss of $0.2 million and $0.8 million, respectively, associated with this equity method interest.
Ganzhou Keli Rare Earth New Material Co., Ltd.
As a result of the Molycorp Canada acquisition in June 2012, Molycorp acquired a 25% ownership interest in Ganzhou Keli Rare Earth New Material Co., Ltd. (“Keli”), a company that converts REO into metals for use in Neo Powders. The preliminary purchase allocation attributable to this investment at the time of the Molycorp Canada acquisition was $12.2 million. Molycorp accounts for this ownership interest under the equity method because it has the ability to exercise significant influence over the operating and financial policies of Keli, as evidenced by Molycorp’s ownership share and its proportional voting rights. The condensed consolidated statements of operations and comprehensive income include a gain of $0.3 million for the period from June 12, 2012 to September 30, 2012 associated with this equity method ownership interest.

16


Toda Magnequench Magnetic Materials Co. Ltd.
As a result of the Molycorp Canada acquisition in June 2012, Molycorp acquired a 33% ownership interest in Toda Magnequench Magnetic Materials Co. Ltd. (“TMT”), a company that produces rare earth magnetic compounds with Neo Powders supplied by Magnequench (Tianjin) Company Limited in its normal course of business. The preliminary purchase allocation attributable to this investment at the time of the Molycorp Canada acquisition was $1.6 million. Molycorp accounts for this ownership interest under the equity method because it has the ability to exercise significant influence over the operating and financial policies of TMT, as evidenced by Molycorp’s ownership share and its proportional voting rights.
Ingal Stade GmbH
As a result of the Molycorp Canada acquisition in June 2012, Molycorp acquired a 50% ownership interest in Ingal Stade GmbH (“Ingal Stade”), a joint venture facility in Stade, Germany, which extracts gallium metal from alumina smelter bayer liquor with purity level of 5N (99.999%) or higher. The preliminary purchase allocation attributable to this investment at the time of the Molycorp Canada acquisition was $4.9 million. Molycorp accounts for this ownership interest under the equity method.
Atlantic Metals & Alloys, LLC
As a result of the Molycorp Canada acquisition in June 2012, Molycorp acquired a 19.5% ownership interest in Atlantic Metals & Alloys, LLC, a company which provides refining services for residues and scrap of the rare and platinum group metals. The preliminary purchase allocation attributable to this investment at the time of the Molycorp Canada acquisition was $1.4 million. Molycorp accounts for this ownership interest under the cost method. At September 30, 2012, the fair value of this investment was not estimated as there were no identified events or changes in circumstances that may have had a significant adverse effect on the fair value of the investment.
Vive Crop Protection
As a result of the Molycorp Canada acquisition in June 2012, Molycorp acquired a 7% ownership interest in Vive Crop Protection, a company that specializes in the formulation of active ingredients used in crop protection. The preliminary purchase allocation attributable to this investment at the time of the Molycorp Canada acquisition was $0.9 million. Molycorp accounts for this ownership interest under the cost method. At September 30, 2012, the fair value of this investment was not estimated as there were no identified events or changes in circumstances that may have had a significant adverse effect on the fair value of the investment.
(11)
Acquisitions
On June 11, 2012, Molycorp completed the acquisition of all of the outstanding equity of Molycorp Canada's predecessor company pursuant to the terms of an arrangement agreement (the "Arrangement Agreement") for an aggregate purchase price of approximately $1,192.3 million. Pursuant to the Arrangement Agreement, Molycorp Canada's former shareholders elected to receive: (a) cash consideration equal to Canadian dollars ("Cdn") $11.30 per share of Molycorp Canada's predecessor company's common stock; or (b) share consideration of 0.4242 shares of Molycorp common stock or 0.4242 shares (the "Exchangeable Shares") issued by MCP Exchangeco Inc., Molycorp's wholly-owned Canadian subsidiary, which are exchangeable for shares of Molycorp's common stock on a one for one basis, per each share of Molycorp Canada's predecessor company's common stock; or (c) a combination of cash and shares of Molycorp common stock or Exchangeable Shares, all subject to the proration mechanics set forth in the Arrangement Agreement.
The consideration paid to Molycorp Canada's former shareholders was comprised of approximately $908.2 million in cash, exclusive of realized losses on the contingent forward contract to purchase $870.0 million Canadian dollars, accounted for as a separate transaction apart from the business combination, as further discussed in Note 25. Additionally, 13,545,426 shares of Molycorp common stock and 507,203 Exchangeable Shares were issued and collectively valued at $284.1 million based on the closing price of the Company's common stock on the acquisition date in accordance with the relevant accounting guidance. The Exchangeable Shares have no par value.
The following is a preliminary allocation of the Molycorp Canada purchase price (in thousands) and is based on

17


management's preliminary estimates of the fair value of the tangible and intangible assets and liabilities of Molycorp Canada. This valuation is subject to change as the Company obtains additional information on the assets acquired and liabilities assumed during the acquisition measurement period (up to one year from the acquisition date).
 
June 11, 2012
Purchase consideration:
 
Cash consideration
$
908,181

Fair value of Molycorp common stock and Exchangeable Shares issued
284,144

Total purchase consideration
$
1,192,325

Estimated fair values of the assets and liabilities acquired:
 
Cash and cash equivalents
$
317,169

Accounts receivable
101,470

Inventory
250,989

Prepaid expenses and other current assets
26,893

Property, plant and equipment
70,391

Investments
21,019

Intangibles
491,786

Goodwill
501,571

Other non-current assets
22,859

Accounts payable and accrued expenses
(138,576
)
Debt - current
(255,056
)
Other current liabilities
(29,939
)
Deferred tax liabilities
(158,177
)
Long-term debt
(281
)
Other non-current liabilities
(14,032
)
Non-controlling interests
(15,761
)
Total purchase consideration
$
1,192,325


The fair value of the accounts receivable acquired includes trade receivables of $101.5 million, which are considered to be fully collectible at September 30, 2012.
Molycorp Canada's intangible assets subject to amortization relate to: a) customer relationships of $348.1 million with a weighted average useful life of approximately fifteen years; b) rare earth quotas of $80.3 million with a useful life of approximately 11 years; c) patents of $39.8 million with a weighted average useful life of approximately two years; d) trade name of $15.8 million with a useful life of approximately ten years; and e) other of $7.8 million with a weighted average useful life of approximately twelve years.
Goodwill associated with the Molycorp Canada acquisition arose primarily because of Molycorp Canada's proven leadership in the development, processing, and distribution of technically advanced rare earth products; greater exposure to the world’s largest and fastest-growing rare earths consuming market; deferred tax liabilities and expected synergies that do not qualify for separate recognition. The goodwill is not amortized and is not deductible for tax purposes. As the purchase price allocation is not complete, the Company has not assigned the goodwill to its various reporting units.
The amounts of Molycorp Canada's sales, earnings and earnings per share included in the Company’s condensed consolidated statements of operations since the acquisition date, and the sales, earnings and earnings per share of the combined entity had the acquisition date been January 1, 2011, are as follows:

18




(In thousands, except per share amounts)    
 
Sales
 
Net Income (Loss)
 
Net Income (Loss)
Attributable To Molycorp
 
EPS Basic
Actual July 1, 2012 to September 30, 2012 (acquiree)
 
$
162,764

 
$
1,118

 
$
(2,322
)
 
$
(0.02
)
Actual June 11, 2012 to September 30, 2012 (acquiree)
 
$
206,397

 
$
1,165

 
$
(2,955
)
 
$
(0.03
)
Unaudited pro forma January 1, 2012 to September 30, 2012 (combined entity)
 
$
729,469

 
$
(74,229
)
 
$
(82,056
)
 
$
(0.77
)
Unaudited pro forma July 1, 2011 to September 30, 2011 (combined entity)
 
$
385,889

 
$
108,386

 
$
105,947

 
$
0.94

Unaudited pro forma January 1, 2011 to September 30, 2011 (combined entity)
 
$
860,707

 
$
200,951

 
$
192,300

 
$
1.69

The unaudited pro forma amounts are not necessarily indicative of the operating results that would have occurred if the Molycorp Canada acquisition had taken place on January 1, 2011.
The unaudited pro forma sales, earnings and earnings per share of the combined entity above are adjusted: a) to eliminate the effect of sales and costs that occurred previous to the business combination between the Company and Molycorp Canada; b) to reflect the net incremental depreciation and amortization expense as a result of the allocation of the purchase price to certain depreciable and amortizable assets with useful lives ranging from two to 30 years; c) the tax effect of unaudited pro forma adjustments using the Molycorp federal, state and international statutory tax rates based on the applicable tax jurisdictions; and d) the estimated net increase of interest expense associated with the issuance of the Company's 10% Senior Secured Notes (as defined below) as part of the acquisition. The unaudited pro forma earnings of the combined entity for the nine months ended September 30, 2012 were also adjusted to exclude $115.2 million of non-recurring direct transaction costs. The weighted average number of shares outstanding utilized in the EPS basic calculation have been adjusted to reflect the additional shares issued pursuant to the acquisition of Molycorp Canada and the related Molibdenos y Metales S.A. equity financing further discussed in Note 16.
For the three and nine months ended September 30, 2012, the Company recognized approximately $0.5 million and $62.0 million, respectively, of transaction costs related to the Molycorp Canada acquisition in the condensed consolidated statements of operations and comprehensive income as follows:    
(In thousands)
Three Months Ended September 30, 2012
 
Nine Months Ended September 30, 2012
Corporate development
 
 
 
    Legal, accounting and advisory fees
$
465

 
$
16,498

Other expenses:
 
 
 
    Contingent forward contract loss
$

 
$
37,589

Interest expense:
 
 
 
Bridge loan fee
$

 
$
7,937

Molycorp Silmet and MMA
The following table summarizes the purchase prices and opening balance sheets for the acquisition of 90.023% controlling interest in Molycorp Silmet on April 1, 2011 and of MMA on April 15, 2011 (in thousands):

19


Effective acquisition date for financial reporting purposes:
 
Molycorp Silmet
April 1, 2011
 
MMA
April 15, 2011
Purchase consideration:
 
 
 
 
Cash consideration
 
$
9,021

 
$
17,500

Fair value of Molycorp common stock issued
 
72,653

 

Total purchase consideration
 
$
81,674

 
$
17,500

Fair values of the assets and liabilities acquired:
 
 
 
 
Cash
 
$
105

 
$
6,395

Accounts receivable and other current assets
 
8,626

 
5,474

Inventory
 
37,404

 
11,327

Property, plant and equipment, net
 
63,393

 
4,512

Intangible assets subject to amortization
 
2,669

 

Goodwill
 
1,455

 
1,977

Liabilities
 
(19,974
)
 
(8,989
)
Deferred tax liabilities
 

 
(3,196
)
Long-term debt
 
(3,184
)
 

Noncontrolling interest
 
(8,820
)
 

Total purchase consideration
 
$
81,674

 
$
17,500

The fair value of the accounts receivable acquired includes trade receivables of $5.0 million for Molycorp Silmet and $4.9 million for MMA. These trade receivables were collected by December 31, 2011. Molycorp Silmet’s intangible assets subject to amortization relate primarily to customer relationships with a weighted average useful life of 15 years. Goodwill associated with the Molycorp Silmet acquisition arose primarily because of the acquired workforce. Goodwill associated with the MMA acquisition arose primarily because of the requirement to record a deferred tax liability for the difference between the assigned values and the tax basis of assets acquired and liabilities assumed at amounts that do not reflect fair value. The goodwill is not amortized and is not deductible for tax purposes. The fair value of the noncontrolling interest in Molycorp Silmet as of April 1, 2011 was valued using a combination of the market approach and income approach.
The pro forma sales, earnings and earnings per share of the Company had both acquisitions occurred on January 1, 2011, are as follows:
(In thousands, except per share amounts)
 
Sales
 

Net Income
 
Net Income
Attributable To
Molycorp
 
EPS Basic
Unaudited pro forma January 1, 2011 to September 30, 2011 (combined entity)
 
$
297,400

 
$
104,170

 
$
103,457

 
$
1.17

The unaudited pro forma amounts are not necessarily indicative of the operating results that would have occurred if these acquisitions had taken place on January 1, 2011.
The 2011 earnings of the combined entity were adjusted to exclude $19.6 million of intercompany sales and $1.8 million of non-recurring acquisition-related costs the Company incurred to acquire Molycorp Silmet and MMA, and to reverse $1.1 million of purchase price variance MMA capitalized during the first quarter of 2011.
Molycorp Silmet
On April 1, 2011, Molycorp acquired 80% of the outstanding shares of Molycorp Silmet from AS Silmet Grupp in exchange for 1,593,419 shares of Molycorp common stock contractually valued at $80.0 million based on the average closing price of the Company’s common stock as reported by The New York Stock Exchange for the 20 consecutive trading days immediately preceding April 1, 2011, the acquisition date.
Generally, the acquisition-date fair value of shares of common stock transferred by the acquirer is the closing price of that stock on the same date adjusted by a discount that a market participant would require as a result of any restrictions on the sale or transferability of the stock. The fair value of common stock of $72.7 million disclosed in the table above is based on the

20


closing price of the Company’s common stock on the acquisition date, net of an estimated discount of 23% that a market participant would require given that issuance of the shares of common stock Molycorp transferred in consideration to AS Silmet Grupp was not registered under the Securities Act of 1933 (the "Securities Act") and such shares were subject to certain lock-up provisions, which limited AS Silmet Grupp’s ability to sell these shares. AS Silmet Grupp retained a 9.977% ownership interest in Molycorp Silmet on the acquisition date; Molycorp acquired the other 10.023% from Treibacher Industrie AG for $9.0 million in cash also on April 1, 2011.
On October 24, 2011, the Company acquired the remaining 9.977% ownership interest in Molycorp Silmet for $10.0 million in cash, which resulted in an adjustment to Additional Paid-In Capital of $0.4 million for the difference between the consideration paid and the carrying value of the noncontrolling interest at October 24, 2011.
The Molycorp Silmet acquisition provided Molycorp with a European base of operations and increased the Company’s yearly REO production capacity by approximately 3,000 mt. Molycorp Silmet sources a portion of rare earth feed stocks for production of its products primarily from the Molycorp Mountain Pass facility. The main focus of Molycorp Silmet is on the production of REO and metals, including didymium metal, a critical component in the manufacture of NdFeB permanent rare earth magnets. Molycorp Silmet’s manufacturing operation is located in Sillamäe, Estonia.
MMA
On April 15, 2011, Molycorp completed the acquisition from Santoku Corporation (“Santoku”) of all the issued and outstanding shares of capital stock of Santoku America, Inc., which is now known as MMA, an Arizona-based corporation, in an all-cash transaction for $17.5 million. The acquisition provided Molycorp with access to certain intellectual properties relative to the development, processing and manufacturing of neodymium and samarium magnet alloy products. As part of the stock purchase agreement, Santoku will provide consulting services to Molycorp for the purpose of maintaining and enhancing the quality of MMA’s products. Molycorp and Santoku also entered into five-year marketing and distribution agreements for the sale and distribution of neodymium and samarium magnet alloy products produced by each party. Additionally, the parties entered into a rare earth products purchase and supply agreement through which MMA will supply Santoku with certain rare earth alloys for a two-year period at prices equal to the feedstock cost plus the applicable product premium as such terms are defined in the agreement.
(12)
Accrued Expenses
Accrued expenses at September 30, 2012 and December 31, 2011 consisted of the following (in thousands):
 
September 30,
2012
 
December 31,
2011
Defined contribution plan
$
1,928

 
$
1,088

Professional fees
4,456

 

Accrued payroll and related benefits
8,246

 
3,024

Sales and use tax
9,412

 
1,367

Bonus accrual
3,683

 
4,845

Interest payable
27,733

 
345

Advance from customer
2,898

 

Other accrued expenses
7,933

 
2,229

Total accrued expenses
$
66,289

 
$
12,898

(13)
Asset Retirement Obligation
The following table presents the activity in the Company’s asset retirement obligation for the nine months ended September 30, 2012, and for the year ended December 31, 2011 (in thousands):

21


 
Nine Months Ended September 30, 2012
 
Year Ended December 31, 2011
Balance at beginning of period
$
15,541

 
$
12,471

Obligations settled
(1,487
)
 
(1,030
)
Accretion expense
897

 
955

Revisions in estimated cash flows
7,872

 
2,508

Gain on settlement

 
637

Balance at end of period
$
22,823

 
$
15,541

The balances above for the nine months ended September 30, 2012 and the year ended December 31, 2011, include a short-term portion of $2.1 million and $0.4 million, respectively, which were recorded under other current liabilities. The Company is required to provide the applicable governmental agencies with financial assurances relating to its closure and reclamation obligations. At September 30, 2012, the Company had financial assurance requirements of $28.8 million, which were satisfied with surety bonds placed with California state and regional agencies.
(14)
Debt and Capital Lease Obligations
On August 22, 2012, the Company issued of $360.0 million aggregate principal amount of its 6.00% Convertible Senior Notes due 2017 (the “6.00% Convertible Notes”). On August 28, 2012, the underwriters of the 6.00% Convertible Notes exercised their option to purchase an additional $54.0 million aggregate principal amount of the 6.00% Convertible Notes. Total net proceeds from the issuance of the 6.00% Convertible Notes were $395.7 million, after deducting the underwriting discounts and commissions. Certain of the Company's directors, officers and other related parties purchased $6.4 million of the aggregate principal amount of the 6.00% Convertible Notes, for which the Company did not pay any underwriting discounts and commissions.
The 6.00% Convertible Notes are Molycorp's senior unsecured obligations with interest payable semi-annually in arrears on March 1 and September 1 of each year, commencing on March 1, 2013. The 6.00% Convertible Notes will mature on September 1, 2017, unless earlier repurchased, redeemed or converted in accordance with their terms, and will be convertible at any time prior to the second scheduled trading day immediately preceding the maturity date into shares of common stock, cash, or a combination thereof, at Molycorp's election. The conversion rate will initially be 83.333 shares of common stock per $1,000 principal amount of 6.00% Convertible Notes (equivalent to an initial conversion price of approximately $12 per share of common stock), subject to customary adjustments. Molycorp will have the right to redeem the 6.00% Convertible Notes on or after September 1, 2015 if the last reported sale price of its common stock has been at least 130% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which Molycorp provides notice of redemption at a redemption price equal to 100% of the principal amount of the 6.00% Convertible Notes to be redeemed, plus accrued and unpaid interest. The 6.00% Convertible Notes rank equal in right of payment to existing and future liabilities that are not expressly subordinated to the 6.00% Convertible Notes, and rank effectively junior to Molycorp's existing and future secured indebtedness.
The Company separately accounts for the liability and equity components of convertible debt instruments, such as the 6.00% Convertible Notes, that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer's economic interest cost. The additional discount on the liability component is amortized to interest cost over the term of the 6.00% Convertible Notes. The effective interest rate on the liability component is 4.6%. The equity component of the 6.00% Convertible Notes is included in the additional paid-in capital section of stockholders' equity on the condensed consolidated balance sheet as of September 30, 2012, and the value of the equity component is treated as original issue discount for purposes of accounting for the debt component of the 6.00% Convertible Notes. As of September 30, 2012, Molycorp recognized a liability component related to the 6.00% Convertible Notes of $328.5 million, which includes a cumulative accretion of $1.5 million related to both the underwriting discounts and the additional discount on the liability component, and an equity component of $68.7 million. The amount of interest costs recognized for the three months ended September 30, 2012 relating to both the contractual interest coupon and amortization of the discount on the liability component was $3.8 million, which was substantially capitalized. Transaction costs related to the issuance of the 6.00% Convertible Notes have been allocated to the liability and equity components in proportion to the allocation of proceeds to the components, and accounted for as debt issuance costs (recognized as interest expense over the life of the 6.00% Convertible Notes using the effective interest method) and equity issuance costs (charged against equity), respectively.

22


Concurrently with, and in order to facilitate the offering of the 6.00% Convertible Notes, the Company entered into a share lending agreement with Morgan Stanley Capital Services LLC (“MSCS”), an affiliate of Morgan Stanley & Co. LLC, under which it agreed to loan to MSCS up to a total of 13,800,000 shares of its common stock (the “Borrowed Shares”)during a period beginning on the date the Company entered into the share lending agreement and ending on or about the maturity date of the 6.00% Convertible Notes, or, if earlier, on or about the date as of which all of the 6.00% Convertible Notes cease to be outstanding as a result of redemption, repurchase, conversion or other acquisition for value. MSCS may terminate all or any portion of the Borrowed Shares at any time, and the Company and MSCS may terminate any or all of the outstanding Borrowed Shares upon a default by the other party under the share lending agreement, including certain breaches by MSCS of its representations and warranties, covenants or agreements under the share lending agreement, or the bankruptcy of Molycorp or MSCS. The Company issued a total of 13,800,000 Borrowed Shares between August 22, 2012 and August 23, 2012 and received no proceeds, but only a nominal lending fee from MSCS for the use of these loaned shares, which represented the fair value assigned to it. For corporate law purposes, the Borrowed Shares are issued and outstanding. However, under the share lending agreement, MSCS has agreed: to pay to Molycorp an amount equal to cash dividends, if any, that Molycorp pays on the Borrowed Shares; to pay or deliver, as the case may be, to the Company any other distribution, other than in a liquidation or a reorganization in bankruptcy, that the Company makes on the Borrowed Shares; and not to vote on the Borrowed Shares on any matter submitted to a vote of Molycorp's stockholders. In view of the contractual undertakings of MSCS in the share lending agreement, which have the effect of substantially eliminating the economic dilution that otherwise would result from the issuance of the Borrowed Shares, the Borrowed Shares will not be considered outstanding for the purpose of computing and reporting Molycorp's earnings per share.
             On May 25, 2012, Molycorp issued $650.0 million aggregate principal amount of senior secured notes due 2020 (the "Senior Notes") in an offering exempt from the registration requirements of the Securities Act. Total net proceeds from the issuance of the Senior Notes were $635.4 million after deducting the initial purchasers' discounts. The Senior Notes bear interest at the rate of 10% per year payable on June 1 and December 1 of each year beginning on December 1, 2012. At any time and from time to time prior to June 1, 2016, the Company may redeem any of the Senior Notes at a price equal to 100% of the principal amount thereof plus an applicable make-whole premium and accrued and unpaid interest. At any time and from time to time from and after June 1, 2016, Molycorp may redeem the Senior Notes, in whole or in part, at a redemption price for the Senior Notes plus accrued and unpaid interest, initially at 105% of the principal amount thereof, but gradually declining to 100% of the principal amount thereof. In addition, at any time and from time to time prior to June 1, 2015, the Company may redeem up to 35% of the aggregate principal amount of the Senior Notes with the net cash proceeds of one or more permitted sales of Molycorp’s capital stock at a redemption price (expressed as a percentage of principal amount) of 110% plus accrued and unpaid interest. Upon the occurrence of a change of control, Molycorp will be required to offer to repurchase all of the Senior Notes. The Senior Notes are senior secured obligations of Molycorp and are guaranteed by certain of Molycorp’s domestic subsidiaries ("Guarantors"). The Senior Notes are secured by first-priority security interest on substantially all of the property and assets of the Company and the Guarantors, subject to a number of exceptions as described in the indenture governing the Senior Notes. A substantial portion of the net proceeds from the offering of the Senior Notes was used to fund the cash consideration the Company paid for Molycorp Canada, with the remainder used for general corporate purposes. The Company, the Guarantors and the initial purchasers of the Senior Notes agreed that the Company and the Guarantor will file an exchange offer registration statement with the SEC within 180 days of the May 25, 2012 issuance date, and use their respective commercially reasonable efforts to have it declared effective at the earliest possible time and in any event within 270 days following the issuance date.
As a result of the Molycorp Canada acquisition, the Company assumed $230.0 million principal amount of subordinated unsecured convertible debentures of the predecessor of Molycorp Canada due December 2017 (the “Debentures”) maturing on December 31, 2017. The Debentures bear interest at 5.00% per annum and are convertible at $13.80 per share of Molycorp Canada's predecessor company. As required under the change of control provisions contained in the original underlying indenture, holders of the Debentures had the option to either require the Company to repurchase the Debentures at par plus accrued interest, convert the Debentures into common shares of Molycorp Canada's predecessor company, including a number of additional “make-whole” shares, or hold the Debentures to maturity. In August 2012, holders of $9.4 million aggregate principal amount of Debentures elected to convert, while holders of $217.9 million aggregate principal amount of Debentures elected to early redeem their Debentures for cash plus accrued interest. Under the term of the indenture governing the Debentures, as amended at the time of the Molycorp Canada acquisition, the holders of the Debenture that converted received, at their election and in lieu of receiving shares of Molycorp Canada's predecessor company, the same cash and/or share consideration that was paid to Molycorp Canada's former shareholders in connection with the acquisition of Molycorp Canada, subject to the same pro-ration calculation, as if such holders had converted immediately prior to the acquisition. As a result of the conversion, a total of $8.0 million, including accrued interest, was paid in cash with the remainder converted into 99,723 shares of Molycorp common stock. Total interest cost related to the Debentures for the period from June 12, 2012 to September 30, 2012 was $0.6 million, inclusive of the interest accrued and paid upon the August 2012 repurchase. As of September 30, 2012, $2.7 million principal amount of the Debentures was outstanding.

23



Additional short-term indebtedness was assumed as part of the acquisition of Molycorp Canada totaling $31.5 million, at September 30, 2012, which relates to various bank loans maturing between July 2012 and December 2012 with a weighted average interest rate of approximately 4.22%.
On September 1, 2010, Molycorp and Kern River entered into a firm Transportation Service Agreement ("TSA") under which Kern River agreed to construct and operate facilities necessary to provide natural gas transportation services to the Mountain Pass facility. Under the terms of the TSA, Molycorp agreed to pay Kern River for the cost attributable to the design, permitting, and construction of the delivery facilities through a transportation service charge of approximately $0.4 million per month for ten years. This charge includes reimbursement to Kern River for construction of the delivery facilities and installation, as well as reimbursement and compensation for transportation services. The term of the TSA commenced on June 1, 2012, the date on which Kern River deemed the TSA facilities ready to provide service. The Company accounted for the TSA as a capital lease under the relevant accounting guidance.
The following tables provide a summary of the current and non-current portions of the debt outstanding at September 30, 2012 and December 31, 2011 (in thousands):
 
September 30, 2012
 
Current
 
Non-Current
10% Senior Secured Notes, net of discount, due June 2020
$

 
$
635,802

3.25% Convertible Notes, net of discount, due June 2016

 
196,699

5.00% Debentures, net of discount

 
2,774

6.00% Convertible Notes, net of discount, due June 2017

 
328,494

Bank loans with a weighted average rate of 4.00% due November 2012 - September 2017
32,693

 
4,435

Total debt
32,693

 
1,168,204

 
 
 
 
Capital lease obligations
242

 
15,324

Total debt and capital lease obligations
$
32,935

 
$
1,183,528

 
December 31, 2011
 
Current
 
Non-Current
3.25% Convertible Notes, net of discount, due June 2016
$

 
$
190,877

Bank loans 2.69% - 3.88% due February 2012 - September 2017
1,516

 
5,668

Total debt
$
1,516

 
$