Stock-Based Compensation

Molycorp has stock-based compensation plans for executives, eligible employees and non-employee directors. Stock-based awards issued under these plans include stock options to purchase shares of the Company’s common stock, restricted stock awards (“RSAs”), restricted stock units (“RSUs”) and, starting in the first quarter of 2012, performance-based restricted stock units ("PBRSUs"). The remaining number of shares authorized for awards of equity share options or other equity instruments was 3,765,911 at December 31, 2012.

Yearly amounts recognized in total for all stock-based awards were as follows (in millions):



	2012	2011	2010
Compensation cost	$3.4	$4.7	$30.1
Income tax benefit	$0.9	$0.8	0

Stock-based compensation in 2011 and 2010 included $2.6 million and $28.7 million, respectively, associated with the conversion into Molycorp's common stock of incentive shares granted to certain employees and independent directors of Molycorp LLC in 2009.

RSAs, RSUs and PBRSUs

The RSUs and RSAs vest on the third anniversary of the grant date. The grant-date fair value of RSUs and RSAs is determined using the Company’s common stock price on the date of grant and is recognized as stock-based compensation expense on a straight-line basis over the three-year vesting period for the awards that are expected to vest. The PBRSUs vest with respect to between 0% and 150% of the PBRSUs granted to an individual on the basis of the achievement of certain management objectives measured by specified levels of total shareholder return relative to a defined index group over the performance period from January 1, 2012 through December 31, 2014, or upon the occurrence of certain change of control or termination events. The grant-date fair value of PBRSUs is determined using a lattice approach that incorporates a Monte Carlo simulation model. The compensation cost associated with the PBRSUs is recognized straight-line over the performance period for the awards that are expected to vest, even if the market conditions are never satisfied.

Some of the RSUs granted to the non-employee directors relate to the grantees' election to convert a portion of their quarterly cash retainer into RSUs. These converted RSUs are fully vested because they relate to services already rendered by the non-employee directors. The same non-employee directors who elected to convert their cash retainer into RSUs, received additional RSUs as matching contributions by the Company equal to 25% of the converted units. The matching RSUs vest on the third anniversary of the grant date.

Certain other RSUs issued earlier in 2012 relate to the election by certain executive officers and other employees of the Company to convert a portion of their 2011 annual cash bonuses into RSUs. These RSUs are fully vested because they relate to services already rendered by the grantees. The conversion of the 2011 annual bonuses into RSUs resulted into an increase in Additional Paid-In Capital of $0.6 million in 2012. The same executive officers and other employees who elected to convert a portion of their 2011 annual cash bonuses into RSUs received additional RSUs as matching contribution by the Company equal to 25% of the converted RSUs. The matching RSUs vest on the third anniversary of the grant date.

The following tables summarize the activity related to restricted stock-based awards for the year ended December 31, 2012:



PBRSUs	Number of Shares		Weighted Average Grant-Date Price
Unvested at January 1, 2012	—		—
Granted	45,576		$	30.33
Forfeited	(16,274	)	$	30.33
Vested	—		—
Unvested at December 31, 2012	29,302		$	30.33



RSUs	Number of Shares		Weighted Average Grant-Date Price
Unvested at January 1, 2012	78,544		$	56.55
Granted	239,618		$	23.12
Forfeited	(92,848	)	$	36.92
Vested*	(43,712	)	$	17.38
Unvested at December 31, 2012	181,602		$	32.15


*	Includes: a) deferral and conversion of a portion of fees payable to certain non-employee directors of the Company; b) deferral and conversion of a portion of the 2011 annual cash bonuses paid to certain executive officers and other employees of the Company; and c) RSUs with an accelerated vesting period that were granted to some employees of Molycorp Canada on the acquisition date.



RSAs	Number of Shares		Weighted Average Grant-Date Price
Unvested at January 1, 2012	48,924		$	40.20
Granted	—		—
Forfeited	(8,950	)	$	48.87
Vested	—		—
Unvested at December 31, 2012	39,974		$	40.09

Additional annual information for restricted stock-based awards is included in the following tables (in millions):



PBRSUs	2012	2011	2010
Weighted average grant-date fair value of shares granted	$1.4	n/a	n/a
Total fair value of shares vested	n/a	n/a	n/a



RSUs	2012	2011	2010
Weighted average grant-date fair value of shares granted	$5.5	$4.5	n/a
Total fair value of shares vested	$0.8	$0.1	n/a



RSAs	2012	2011	2010
Weighted average grant-date fair value of shares granted	n/a	$0.6	$1.4
Total fair value of shares vested	n/a	n/a	$1.4

At December 31, 2012, there was $5.0 million of aggregate unrecognized compensation cost related to the unvested shares of RSAs, RSUs and PBRSUs. This cost is expected to be recognized over a weighted-average period of approximately 1.78 years.

Stock Options

Stock options vest in equal installments annually over a 3-year period and have a 10-year contractual term from the grant date. The fair value of each stock option award is estimated at the grant date using the Black-Scholes option pricing model and the Company’s common stock price on the date of grant. The significant assumptions used to estimate the fair value of stock option awards using the Black-Scholes model are as follows:



	2012	2011	2010
Risk-free interest rate	n/a	2.21%	n/a
Expected term (in years)	n/a	6	n/a
Volatility	n/a	60.1%	n/a
Expected dividend yield	n/a	0	n/a

The risk-free interest rate used is the yield of a zero-coupon U.S. Treasury bond with a term equal to the expected term of the option.

The expected term of options granted is usually derived from historical option exercise experience and expected post-vesting termination behavior. However, given that Molycorp does not have sufficient historical exercise and post-vesting data, management adopted the simplified method by reference to Staff Accounting Bulletin (“SAB”) Topic 14, Share-Based Payment, whereby the expected term of options granted can be calculated by using an average of the midpoint between when options become exercisable and when they expire.

Expected volatility is generally based on a combination of 1) the historical volatility of an entity’s stock at the grant date for a period equal to the average expected term of the entity’s options, and 2) the volatility implied by the observed current market prices of an entity’s traded options or other convertible securities, if available. Given that Molycorp has been a publicly traded company only since July 29, 2010, management computed volatility assumptions based on a peer group analysis by reference to SAB Topic 14.

The following table summarizes the activity related to stock options in 2012:



Stock Options	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Intrinsic Value
Outstanding at January 1, 2012	52,819		$	48.87
Granted	—		—
Exercised	—		—
Forfeited and expired	(17,195	)	48.87
Outstanding at December 31, 2012	35,624		$	48.87	4.04	0
Options exercisable at December 31, 2012	11,875		$	48.87	4.04	0

Additional annual information for stock options is included in the following table (in millions):



	2012	2011	2010
Weighted average grant-date fair value of options granted	n/a	$1.5	$8.0
Total intrinsic value of options exercised	n/a	n/a	$14.3
Total fair value of options vested	$0.3	n/a	$8.0

At December 31, 2012, there was $0.4 million of unrecognized compensation cost related to stock options, which is expected to be recognized over a weighted-average period of approximately 1.04 years.