Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2011

Summary of Significant Accounting Policies [Abstract]

Summary of Significant Accounting Policies

(4) Summary of Significant Accounting Policies

(a) Use of Estimates

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, and the adequacy of the Company’s asset retirement obligations.

(b) Revenue and Cost 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 the Company’s production facilities. Prices are generally set at the time of, or prior to, shipment. Transportation and distribution costs are incurred only on sales for which the Company is responsible for delivering the product.

Cost of goods sold includes the cost of production as well as write-downs to the extent of inventory costs in excess of market values. Primary production costs include labor, supplies, maintenance costs, depreciation, and plant overhead.

(c) Cash and Cash Equivalents

Cash and cash equivalents consist of cash and liquid investments with an original maturity of three months or less. At June 30, 2011, cash and cash equivalents included $664 million of funds held in money market accounts.

(d) Trade Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company reviews its allowance for doubtful accounts on a quarterly basis. As of June 30, 2011 and December 31, 2010, an allowance for doubtful accounts was not required.

(e) Inventories

Inventories consist of raw materials, 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 sheets.

Molycorp evaluates its production levels and costs to determine if any should be deemed abnormal, and therefore excluded from inventory costs. For the three months ended June 30, 2011 and 2010, Molycorp determined that $0.9 million and $3.6 million, respectively, of production costs would have been allocated to additional metric tons produced, assuming Molycorp had been operating at normal production rates. For the six months ended June 30, 2011 and 2010, and cumulatively for the period from June 12, 2008 (Inception) through June 30, 2011, Molycorp determined that $3.5 million, $6.0 million and $17.0 million, respectively, of production costs would have been allocated to additional metric tons produced, assuming Molycorp had been operating at normal production rates. 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. Molycorp models normal production levels and evaluates historical ranges of production in assessing what is deemed to be normal.

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 an independent pricing source to evaluate market prices for REOs at the end of each quarter. For the three months ended June 30, 2011 and 2010, the Company recognized write-downs of zero and $0.3 million, respectively, as a result of production costs in excess of certain REO market prices. For the six months ended June 30, 2011 and 2010, and cumulatively for the period from June 12, 2008 (Inception) through June 30, 2011, the Company recognized write-downs of $0.6 million, $0.9 million, and $21.6 million, respectively, as a result of production costs in excess of certain REO market prices. In addition, the Company recognized a $1.0 million write-down of work in process inventory based on estimated REO quantities for the three months ended June 2011.

The Company evaluates the carrying value of materials and supplies inventories each quarter giving consideration to slow-moving items, obsolescence, excessive levels, and other factors and recognizes related write-downs as necessary.

At June 30, 2011 and December 31, 2010, inventory consisted of the following (in thousands):

	June 30,		December 31,
	2011		2010
Current:
Concentrate stockpiles	$	6,272	$	4,206
Raw materials		29,689		—
Work in process		11,317		3,582
Finished goods		22,645		9,307
Materials and supplies		2,358		1,727
Total current	$	72,281	$	18,822
Long-term:
Concentrate stockpiles	$	995	$	5,108
Finished goods		56		104
Total long-term	$	1,051	$	5,212

(f) Deposits

The Company has $15.5 million in deposits reported as Non-current assets on the Consolidated Balance Sheet as of June 30, 2011. The deposits consist of $14.0 million under an escrow arrangement for the Company’s facilities agreement with Kern River Gas Transmission Company and $1.5 million related to the Company’s construction insurance program. During the second quarter of 2011, the Company collected an $18.2 million deposit which was no longer required to secure surety bonds obtained for the California state and regional agencies relating to the Mountain Pass facility closure and reclamation obligations.

(g) Property, Plant and Equipment, net

Property, plant and equipment associated with the acquisitions of the Mountain Pass facility, Molycorp Silmet and MMA was recorded at estimated fair value as of the respective acquisition date. Expenditures for new property, plant and equipment and improvements that extend the useful life or functionality of the asset are capitalized. The Company capitalized $73.0 million and $5.0 million in plant modernization costs for the three months ended June 30, 2011 and 2010, respectively, and $114.2 million and $8.4 million in plant modernization costs for the six months ended June 30, 2011 and 2010, respectively. Our anticipated project cost through 2012 to restart the mining operations, construct and refurbish processing facilities and to expand into the production of metals and alloys is $531 million, which includes a $20 million increase, approved by the Board of Directors in January 2011 over our previous estimate. The increase is due to the increased scope of the project including the acceleration of the construction of the new crushing and milling facility and other design changes to allow a faster conversion to 40,000 mt per year than would otherwise be possible.

Mineral properties at June 30, 2011 and December 31, 2010, represent the purchase price allocated to mineral resources associated with the Mountain Pass facility and mineral property development costs.

At June 30, 2011 and December 31, 2010, property, plant and equipment consisted of the following (in thousands):

	June 30,			December 31,
	2011			2010
Land	$	3,860		$	800
Land improvements		15,748			15,415
Buildings and improvements		18,053			6,892
Plant and equipment		90,635			19,560
Vehicles		1,055			1,049
Computer software		2,173			1,563
Furniture and fixtures		279			170
Construction in progress		145,894			34,809
Mineral properties		23,968			23,968
Property, plant and equipment at cost		301,665			104,226
Less accumulated depreciation		(15,276	)		(10,260	)
Property, plant and equipment, net	$	286,389		$	93,966

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. There were no events or changes in circumstances indicating that the carrying amount of the Company’s long-lived assets as of June 30, 2011 may not be recoverable.

(h) 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 amortizes mineral properties using the units of production method over estimated proven and probable reserves. Molycorp’s proven and probable reserves are based on extensive drilling, sampling, mine modeling, and mineral recovery from which economic feasibility has been determined. The reserves are estimated based on information available at the time the reserves are calculated. Proven and probable reserves are based on estimates, and no assurance can be given that the indicated levels of recovery of REOs will be realized or that production costs and estimated future development costs will not exceed the net realizable value of the products. Reserve estimates may require revisions based on actual production experience. Market price fluctuations of REOs, as well as increased production costs or reduced recovery rates, could render proven and probable reserves containing relatively lower grades of mineralization uneconomic to exploit and might result in a reduction of reserves.

(i) Intangible Assets

At June 30, 2011 and December 31, 2010, amortizable intangible assets consisted of the following (in thousands):

	June 30,			December 31,
	2011			2010
Trade name	$	786		$	786
Other		558			—
Gross carrying amount		1,344			786
Less accumulated amortization		(387	)		(147	)
Net carrying amount	$	957		$	639

Amortization expense for the three months ended June 30, 2011 and 2010 was $222,250 and $16,250, respectively. Amortization expense for the six months ended June 30, 2011 and 2010, and cumulatively for the period from June 12, 2008 (Inception) through June 30, 2011 was $238,620, $32,500 and $385,950, respectively. Amortization expense for the next five years and thereafter is expected to be as follows (in thousands):

2012	$	128
2013		128
2014		128
2015		128
2016		128
Thereafter		317
Total	$	957

(j) Accrued Expenses

Accrued expenses at June 30, 2011 and December 31, 2010 consisted of the following (in thousands):

	June 30,		December 31,
	2011		2010
Defined contribution plan	$	562	$	1,199
Accrued payroll and related benefits		2,373		1,185
Accrued tolling fees		—		404
Sales and use tax		1,797		532
Bonus accrual		587		554
Other accrued expenses		2,339		351
Total accrued expenses	$	7,658	$	4,225

(k) Asset Retirement Obligation

The Company accounts for reclamation costs, along with other costs related to the closure of the Mountain Pass facility, in accordance with ASC 410-20, Asset Retirement Obligations. This standard requires the Company to recognize asset retirement obligations at estimated fair value in the period in which the obligation is incurred. The Company recognized an asset retirement obligation and corresponding asset retirement cost of $13.3 million in connection with the Mountain Pass facility acquisition. The liability was initially measured at fair value and is subsequently adjusted for accretion expense and changes in the amount or timing of the estimated cash flows. The asset retirement cost was capitalized as part of the carrying amount of the related long-lived assets and is being depreciated over the assets’ remaining useful lives.

Depreciation expense associated with the asset retirement cost was $0.3 million and $0.2 million for the three months ended June 30, 2011 and 2010, respectively. Depreciation expense associated with the asset retirement cost was $0.5 million, $0.5 million and $4.4 million for the six months ended June 30, 2011 and 2010, and cumulatively for the period from June 12, 2008 (Inception) through June 30, 2011, respectively. The following table presents the activity in our asset retirement obligation (in thousands):

				Year Ended
	Six Months Ended			December 31,
	June 30, 2011			2010
Balance at beginning of period	$	12,471		$	14,202
Obligations settled		(339	)		(632	)
Accretion expense		474			912
Revisions in estimated cash flows		628			(1,939	)
Gain on settlement		—			(72	)
Balance at end of period	$	13,234		$	12,471

The Company is required to provide the applicable governmental agencies with financial assurances relating to its closure and reclamation obligations. As of June 30, 2011, the Company had financial assurance requirements of $27.4 million which were satisfied with surety bonds placed with the California state and regional agencies.

(l) Debt

On June 15, 2011, the Company completed the issuance and sale of $230.0 million in aggregate principal amount (net proceeds of $223.1 million after deducting the initial purchasers’ discounts and commissions) of the Notes in an offering exempt from the registration requirements of the Securities Act of 1933 (the “Securities Act”). The Notes were offered only to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The Notes are senior unsecured obligations of the Company and bear interest at a rate of 3.25% per annum, payable semi-annually in arrears on June 15 and December 15 of each year, commencing on December 15, 2011. The Notes are convertible at any time into shares of Molycorp’s common stock, cash, or a combination thereof, at Molycorp’s election. The initial conversion rate is 14.0056 shares of Molycorp common stock per $1,000 principal amount of the Notes (equivalent to an initial conversion price of approximately $71.40 per share of Molycorp’s common stock), subject to customary adjustments. The Notes mature on June 15, 2016, unless earlier repurchased or converted in accordance with their terms prior to that date. Molycorp does not have the right to redeem the Notes prior to maturity.

The Company separately accounts for the liability and equity components of convertible debt instruments (the Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The equity component of the Notes is included in the additional paid-in capital section of stockholders’ equity on the consolidated balance sheet and the value of the equity component is treated as original issue discount for purposes of accounting for the debt component of the Notes. As of June 30, 2011, Molycorp recognized a liability component related to the Notes of $187.2 million, which includes accretion of $0.3 million of the original issue discount, and an equity component of $36.2 million. Transaction costs related to the issuance of the 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 Notes using the effective interest method) and equity issuance costs (charged against equity), respectively.

Additional debt was assumed as part of the Molycorp Silmet acquisition. The following table provides a summary of the current and noncurrent portion of the debt outstanding as of June 30, 2011 (in thousands).

	At June 30, 2011
	Current		Non-Current
Notes 3.25%, net of discount due June 2016	$	—	$	187,158
Bank loans 2.69% - 3.88% due February 2012 — September 2017		1,010		7,892
Bank overdraft 3.00% due 2011		1,594		—
Total debt		2,604		195,050
Capital lease obligations 1.88% due April 2012		6		23
Total debt and capital lease obligations	$	2,610	$	195,073

Scheduled minimum debt repayments in thousands are $2,610 for the remainder of 2011, $1,734 in 2012, $1,602 in 2013, $1,602 in 2014, $1,526 in 2015, and $235,188 thereafter.

(m) Income Taxes and Valuation Allowance

Prior to the Corporate Reorganization, 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 files consolidated income tax returns. Molycorp recognizes income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or recognized. Molycorp records a valuation allowance if, based on available information, it is deemed more likely than not that its deferred income tax assets will not be realized in full. As of June 30, 2011, the Company’s net income of $11.6 million since the Corporate Reorganization included $31.1 million in certain stock-based compensation expense, which is a permanent difference between its income for financial reporting and tax purposes. Other permanent differences include legal and due diligence fees related to the acquisitions that were completed in April 2011, as well as costs related to the registration of common stock sold by certain stockholders in secondary offerings completed during the first and second quarters of 2011. Molycorp has generated net deferred income tax assets of $27.5 million, net of a $3.9 million valuation allowance, as of June 30, 2011.

Prior to the second quarter of 2011, Molycorp had a history of losses and, as a result, it recognized a full valuation allowance against its net deferred tax assets. At June 30, 2011 a significant portion of its deferred tax assets related to tax benefits attributable to mineral basis and the Notes.

Each quarter, the Company evaluates the need to retain all or a portion of the valuation allowance on its deferred tax assets. During the three months ended June 30, 2011, Molycorp determined that it is more likely than not that it will realize its deferred tax assets, including the NOLs. In making this determination, management analyzed, among other things, the Company’s recent history of earnings and cash flows, forecasts of future earnings, the nature and timing of future deductions and benefits represented by the deferred tax assets and liabilities. The reversal of the valuation allowance resulted in a current period net income tax benefit of $18.7 million and an increase in the non-current deferred tax assets on the condensed consolidated balance sheet as of June 30, 2011. The release of the valuation allowance on our mineral basis deferred tax asset of $17.3 million is being recorded as a discrete income tax benefit in the quarter because we are relying on future income to support the realization of the deferred tax asset. Of the remaining $5.3 million of valuation allowance on our other deferred tax assets, $1.4 million has been released and recorded as an income tax benefit in the quarter because we are relying on current year income to support the realization of this deferred tax asset. The remaining $3.9 million of valuation allowance will be released during the third and fourth quarter of 2011 is based on current year income.

The net tax effect of the elimination in consolidation of all intercompany balances and transactions resulted in a deferred charge and income tax payable of $7.6 million.

(n) Stockholders’ Equity

As of June 30, 2011 and December 31, 2010, the Company had 83,895,354 and 82,291,200 shares of common stock outstanding, respectively.

On February 16, 2011, Molycorp completed a public offering of its 5.50% Series A Mandatory Convertible Preferred Stock (“Convertible Preferred Stock”), $0.001 par value per share. In connection with this offering, the Company issued 1,800,000 shares of Convertible Preferred Stock for $100.00 per share. In addition, Molycorp granted the underwriters an option to purchase up to 270,000 additional shares of Convertible Preferred Stock to cover over-allotments. The underwriters exercised their option to purchase the additional shares of Convertible Preferred Stock on March 16, 2011. Each share of the Convertible Preferred Stock will automatically convert on March 1, 2014 into between 1.6667 and 2.0000 shares of Molycorp’s common stock, subject to anti-dilution adjustments. At any time prior to March 1, 2014, holders may elect to convert each share of the Convertible Preferred Stock into shares of common stock at the minimum conversion rate of 1.6667 shares of common stock per share of Convertible Preferred Stock, subject to anti-dilution adjustments. Dividends on the Convertible Preferred Stock are payable on a cumulative basis when, as and if declared by the Company’s Board of Directors (“Board”) or an authorized committee of such Board, at an annual rate of 5.50% on the liquidation preference of $100.00 per share. The Company may pay declared dividends in cash, common stock or any combination of cash and common stock, subject to certain limitations, on March 1, June 1, September 1 and December 1 of each year, starting on June 1, 2011 and to, and including, March 1, 2014. The Convertible Preferred Stock is not redeemable. Molycorp received net proceeds from the Convertible Preferred Stock offering totaling $199.6 million after underwriter discounts and commissions and offering expenses paid by Molycorp, Inc.

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, which had a fair value of approximately $72.7 million based on the closing price of the Company’s common stock on the acquisition date, net of an estimated discount that a market participant would require given that issuance of the shares Molycorp transferred in consideration to AS Silmet Grupp was not registered under the Securities Act and such shares are subject to certain lock up provisions, which limit AS Silmet Grupp’s ability to sell these shares.

On May 4, 2011, the Company declared a cash dividend of $1.604 per share on the Convertible Preferred Stock. The aggregate dividend of $3.3 million was paid on June 1, 2011 to holders of record at the close of business on May 15, 2011.

(o) Earnings per Share

Basic earnings per share is computed by dividing the Company’s net income attributed to common stockholders by the weighted average number of shares of common stock outstanding during the period. For the three and six months ended June 30, 2011, the cumulative undeclared and paid dividends on the Convertible Preferred Stock were subtracted from the net income in the period for the purpose of computing the basic earnings per share.

							Total from
							June 12, 2008
	Three Months			Six Months			(Inception)
	Ended			Ended			Through
(In thousands, except share and per share amounts)	June 30, 2011			June 30, 2011			June 30, 2011
Net income (loss) attributed to Molycorp stockholders	$	47,787		$	45,589		$	(47,846	)
Cumulative undeclared and paid dividends on preferred stock		(4,269	)		(4,269	)		(4,269	)
Income (loss) attributed to common stockholders		43,518			41,320			(52,115	)
Weighted average common shares outstanding — basic		83,847,119			83,054,811			53,957,611
Basic earnings (loss) per share	$	0.52		$	0.50		$	(0.97	)
Weighted average common shares outstanding — dilutive		84,413,499			83,339,566			53,957,611
Dilutive earnings (loss) per share	$	0.52		$	0.50		$	(0.97	)

Diluted earnings per share reflect the dilutive impact of potential common stock and unvested restricted shares of common stock in the weighted average number of common shares outstanding during the period, if dilutive. For this purpose, the “treasury stock method” and “if converted method,” as applicable, are used.

Under the treasury stock method, assumed proceeds upon the exercise of stock options are assumed to be used to purchase common stock at the average market price of the shares during the period. Also under the treasury stock method, fixed awards and nonvested shares, such as restricted stock, are considered options for purposes of computing diluted earnings per share. As of June 30, 2011 and December 31, 2010, all potential common stock under the treasury stock method were antidilutive in nature; consequently, the Company does not have any adjustments between earnings per share and diluted earnings per share related to stock options and restricted stock awards.

In applying the if-converted method, conversion is not assumed for purposes of computing diluted earnings per share if the effect would be antidilutive. Convertible preferred stock (such as the Convertible Preferred Stock) is antidilutive whenever the amount of the dividend declared in or accumulated for the current period including the deemed dividend in the period from a beneficial conversion feature per common share obtainable on conversion exceeds basic earnings per share. The Convertible Preferred Stock was antidilutive as of June 30, 2011. Convertible debt (such as the Notes) is antidilutive whenever its interest including any deemed interest from a beneficial conversion feature and nondiscretionary adjustments, net of tax, per common share obtainable on conversion exceeds basic earnings per share. As of June 30, 2011, the Notes were dilutive under the if-converted method; therefore, the shares of common stock obtainable on conversion of the Notes were included in the computation of diluted earnings per share.

(p) Comprehensive Income (Loss)

In addition to Net income (loss), Comprehensive income (loss) includes changes in equity for the three and six months ended June 30, 2011 due to foreign currency translation adjustments.

(q) Foreign Currency

The functional currency for Molycorp Silmet is the Euro. All monetary assets and liabilities recorded in Euro are translated at the current exchange rates and the resulting adjustments are charged or credited directly to cumulative translation adjustments which is a component of other comprehensive income in equity. Revenues and expenses in Euro are translated at the average exchange rates for the period; equity is translated at historical rates.