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Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2012

The preparation of the Company's consolidated financial statements, in accordance with generally accepted accounting principles in the United States of America (“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, capital leases, intangible assets, including goodwill, and investments; determination of uncertain tax positions; the fair values of assets acquired and liabilities assumed from business combinations; and the adequacy of the asset retirement obligation.

Basis of Presentation

The consolidated financial statements include the accounts of Molycorp and its majority-owned subsidiaries where it exerts control. Investments in which Molycorp does not have control and is not considered to be the primary beneficiary of a variable interest entity, but it exercises significant influence over the operating and financial policies of the investee, are accounted for using the equity method of accounting. All other investments are accounted for using the cost method of accounting. All intercompany balances and transactions are eliminated in consolidation.

Certain prior period amounts have been reclassified to conform to the current period presentation. Such reclassifications did not affect results of operations.

Revenues and Costs of Sales

Revenues are 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.

Costs of sales include costs of production and write downs to the extent of inventory costs in excess of net realizable value. Primary production costs include labor, raw materials, depreciation, supplies, maintenance costs and plant overhead.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and liquid investments with an original maturity of three months or less. Because of the short maturity of these investments, the carrying amounts approximate their fair value.

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 quarterly based on historical experience with each customer and the specifics of each arrangement.

Inventories

Inventories consist of stockpiles of bastnasite concentrate, raw materials, work in process, finished goods and materials and supplies. Inventory cost is determined using the lower of weighted average cost or estimated net realizable value, and includes all expenses directly attributable to the manufacturing process as well as portions of production overheads, which are based on normal operating capacity. Inventories expected to be used and sold beyond a twelve-month period are classified as a non-current asset in the consolidated balance sheets. The Company evaluates the carrying value of materials and supply inventories each quarter giving consideration to slow-moving items, obsolescence, excessive levels, and other factors and recognizes related write-downs as necessary. Write-downs of inventory to estimated net realizable value are charged to costs of sales.

Property, Plant and Equipment

Property, plant and equipment obtained from business acquisitions are recorded at their estimated fair value as of the acquisition date. Expenditures for new property, plant and equipment, and improvements that extend the useful life or functionality of the asset, are recorded at their cost of acquisition or construction. Depreciation on plant and equipment is provided using the straight-line method over their estimated useful lives (buildings and improvements - generally 4 to 40 years; plant and equipment - 2 to 15 years). As no finite useful life for land can be determined, related carrying amounts are not depreciated. Maintenance costs are expensed as incurred.

Construction in progress is recognized for costs directly attributable to the construction or development of long-term tangible assets. These costs may include: labor and employee benefits associated with the construction of the asset; site preparation; permitting; engineering; installation and assembly; procurement; insurance; legal; commissioning; and interest on borrowings to finance the construction of the asset. Construction in progress is not depreciated until the asset built is put into service.

Gains or losses arising on the disposal of property, plant and equipment are determined as the difference between the proceeds from disposal and the carrying amount of the asset, and are recognized in the consolidated statements of operations within other income or expense.

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 depletes mineral properties using the units of production method over estimated proven and probable reserves. Proven and probable reserves are based on extensive drilling, sampling, mine modeling, and mineral recovery from which economic feasibility has been determined, and 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 rare earth oxides ("REO") 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 REO, 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. The Company began depleting mineral properties in 2012 using the units of production method over estimated proven and probable reserves. Depletion costs are recorded as part of work-in-process inventory.

Intangible Assets

Intangible assets consist primarily of customer relationships, Chinese rare earth quotas, patents, Chinese land use rights and both indefinite-lived and finite-lived trade names. Finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives determined as of the asset acquisition date or based on the legal terms of internally-developed patents. Useful lives of the Company's finite-lived intangible assets range from 2 to 16 years for customer relationships, Chinese rare earth quotas, patents and trade name, and 50 years for Chinese land use rights.

Recoverability of Long-Lived Amortizable Assets

Long-lived assets such as property, plant, and equipment, mineral properties and 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. An impairment is considered to exist if the total undiscounted future cash flows expected from the use of the asset or group of assets are less than its carrying amount. An impairment loss, if any, is recorded for the excess of the asset's or group of assets' carrying value over its fair value, as determined by a valuation technique appropriate to the given circumstances.

In the fourth quarter of 2012, the Company recognized an impairment of $6.0 million related to some patents that were recorded under the Magnetic Materials and Alloys segment, and a total $5.9 million impairment of long-lived tangible assets, $3.8 million of which related to the Resources segment and $2.0 million to the Rare Metals segment. See Note 7 and Note 9 for further details. The undiscounted future cash flows expected from the use of all other amortizable long-lived assets the Company tested for recoverability were in excess of their carrying amounts as of December 31, 2012.

Recoverability of Goodwill

The Company assigns goodwill arising from acquired companies to the reporting units that are expected to benefit from the synergies of the acquisition. On an annual basis and at interim periods when circumstances require, the Company tests the recoverability of its goodwill utilizing a two-step impairment analysis. Under this analysis, the Company initially compares the fair value of each identified reporting unit with the reporting unit's net book value. The Company's reporting units are determined either at the operating segment level or a component one level below the operating segment that constitutes a business for which the operating segment management generally reviews production and financial results of that reporting unit. To the extent that a reporting unit's fair value is less than its carrying value, the Company performs an additional step to determine the implied fair value of goodwill allocated to that reporting unit. The implied fair value of goodwill is calculated by first allocating the fair value of the reporting unit to all of its assets and liabilities, including goodwill, and then computing the excess of the reporting unit's fair value over the amounts assigned to its assets and liabilities. To the extent that the carrying value of goodwill exceeds its implied fair value, the Company would recognize an impairment loss corresponding to such amount. The valuation methodology utilized to fair value the Company's reporting units is based on a discounted cash flow model, or income approach, in which expected future net cash flows, excluding any financing costs or dividends, are discounted to present value using an appropriate after-tax weighted average cost of capital, or discount factor. The income approach is dependent upon a number of significant management estimates about future performance including sales volumes and average sales prices for our products, production costs, income taxes, capital expenditures, working capital changes, foreign exchange rates and the after-tax weighted average cost of capital. Changes in any of these assumptions could materially impact the estimated fair value of the Company's reporting units. Discount factors are determined individually for each reporting unit to reflect its respective risk profile as assessed by the Company's management.

Investments

Investments in common stock or in-substance common stock of entities in which the Company has the ability to exercise significant influence over their operating and financial policies, has presumed by an ownership share greater than 20% but lower than 50%, are accounted for by the equity method. Under this method of accounting, the Company's proportional shares of net assets and results of operations of the investee or affiliate are included in the Company's consolidated financial statements. All subsequent changes to the Company's share of interest in the equity of the affiliate are recognized in the carrying amount of the investment. Changes resulting from the net income or loss generated by the affiliate are reported within "Equity in results of affiliate" in the consolidated statements of operations and comprehensive income. Equity method investments are reviewed periodically for other-than-temporary decline in value.

The Company accounts for investments in non-marketable equity securities for which it does not have the ability to exercise significant influence over the investee’s operations and financial policies under the cost method of accounting. Cost method investments are carried at cost and are subject to other-than-temporary impairment assessments.

Business Combinations

The Company accounts for all business combinations using the acquisition method of accounting. Under this method, assets and liabilities, including any remaining noncontrolling interests, are recognized at fair value at the date of acquisition. The excess of the purchase price over the fair value of assets acquired, net of liabilities assumed, and noncontrolling interests is recognized as goodwill. Certain adjustments to the assessed fair values of the assets, liabilities, or noncontrolling interests made subsequent to the acquisition date, but within the measurement period, which is up to one year, are recorded as adjustments to goodwill. Any adjustments subsequent to the measurement period are recorded in income. Any cost or equity method interest that the Company holds in the acquired company prior to the acquisition is remeasured to fair value at acquisition with a resulting gain or loss recognized in income for the difference between fair value and the existing book value. Results of operations of the acquired entity are included in the Company’s results from the date of the acquisition onward and include amortization expense arising from acquired tangible and intangible assets. The Company expenses all costs as incurred related to an acquisition under “Corporate development” in the consolidated statement of operations and comprehensive income.

Asset Retirement Obligation

The Company accounts for reclamation costs, along with other costs related to the closure of the Molycorp 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. Events that trigger the recognition of asset retirement obligations include land disturbance and construction of properties for which there is a legal obligation, as determined by the local environmental authorities, to demolish the facilities and/or to restore the land disturbance to its original status at the end of the life of the mine plan at the Molycorp Mountain Pass facility. The liability is initially measured at fair value using a discounted cash flow model, and is subsequently adjusted for accretion expense and changes in the amount or timing of the estimated cash flows. The asset retirement cost is capitalized as part of the carrying amount of the related long-lived assets and is depreciated over the assets’ remaining useful lives.

Income Taxes

The Company accounts for income taxes in accordance with Accounting Standard Codification 740, Income Taxes. This guidance requires that deferred tax assets and liabilities be recognized for the tax effect of temporary differences between the financial statement and tax basis of recorded assets and liabilities at enacted statutory tax rates. This guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The recoverability of deferred tax assets is based on both our historical and anticipated earnings levels and we review it each reporting period to determine if any additional valuation allowance is necessary when it is more likely than not that amounts will not be recovered. We have concluded that a valuation allowance of $20.6 million is required as of December 31, 2012 and no valuation allowance was required as of December 31, 2011.

We review our deferred tax assets and liabilities each reporting period using the enacted tax rate expected to apply to taxable income for the period in which the deferred tax asset or liability is expected to be realized. The statutory income tax rates that are applied to the current and deferred income tax calculations are significantly impacted by the jurisdictions in which we conduct business. Changes in jurisdiction income tax rates and apportionment laws may result in changes in the calculation of our current and deferred income taxes. The effects of any changes are recorded in the period of enactment and can increase or decrease the net deferred tax assets and liabilities on the balance sheet.

Foreign Currency

The functional currency of the majority of the Company's operations is the U.S. dollar. Assets and liabilities recorded in functional currencies other than U.S. dollars are translated at the spot rate in effect at the applicable reporting date; revenues and expenses in foreign currencies are translated at actual exchange rates for significant transactions or at the average exchange rates in effect during the applicable period. The resulting unrealized cumulative translation adjustment is recorded as a component of "Accumulated other comprehensive income (loss)" in the consolidated statement of stockholders’ equity. The effect of exchange rates on cash balances held in foreign currencies are separately reported in the Company’s consolidated statements of cash flows.

Transactions denominated in currencies other than the applicable functional currency are recorded based on exchange rates at the time such transactions occur. Changes in exchange rates associated with amounts recorded in the Company’s consolidated balance sheets related to these non-functional currency transactions result in transaction gains and losses that are reflected under "Foreign exchange gains (losses), net" in the consolidated statements of operations and comprehensive income.

Comprehensive Income (Loss)

The Company presents comprehensive income (loss) in two separate, but consecutive statements. In addition to "Net income (loss)", "Comprehensive income (loss)" includes all changes in equity during a period, such as foreign currency translation adjustments.

Earnings (Loss) per Share

Basic earnings per share is computed by dividing the Company’s net income attributable to its stockholders, reduced by cumulative undeclared and paid dividends on preferred stock, by the weighted average number of shares of common stock outstanding during the period.

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 considered 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 deemed options for purposes of computing diluted earnings per share. 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 is antidilutive whenever the amount of the dividend declared in or accumulated for the current period per common share obtainable on conversion, including the deemed dividend in the period from a beneficial conversion feature, exceeds basic earnings per share. Also under the if-converted method, convertible debt is antidilutive whenever its interest per common share obtainable on conversion, including any deemed interest from a beneficial conversion feature and nondiscretionary adjustments, net of tax, exceeds basic earnings per share.

Fair Value Measurements

For assets and liabilities that are required under GAAP to be measured at fair value on a recurring and nonrecurring basis, the Company refers to a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into the following three broad levels:


•	Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

•

Level 2 - Observable inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data by correlation or other means.


•	Level 3 - Prices or valuation techniques requiring inputs that are both significant to the fair value measurement and unobservable.

The fair value of many of the Company's financial instruments, including cash and cash equivalents, trade accounts receivables, trade accounts payable and accrued expenses approximate the amounts recorded in the balance sheet because of the relatively short-term nature of these financial instruments. Fixed rate notes are carried at their original issuance values as adjusted over time to accrete that value to the principal amount.

Recent Accounting Pronouncements

In July 2012, the Financial Accounting Standard Board ("FASB") issued ASU 2012-02, Intangibles - Goodwill and Other (Topic 350), Testing Indefinite-Lived Intangible Assets for Impairment. In accordance this update, an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount and record an impairment charge, if any.

The update is effective for annual and interim period impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company does not expect the adoption of this updated guidance to have a significant impact on its financial statements.

Completion of purchase price allocation and revision of previously issued financial statements

Accordingly, the Company's audited consolidated financial statements have been revised as follows:



	At December 31, 2012
	As originally reported			Revision			As revised
	(In thousands)
Investments	$	65,126		$	(1,090	)	$	64,036
Deferred tax assets	1,083			(1,083		)	—
Total non-current assets	2,361,030			(2,173		)	2,358,857
Total assets	2,994,708			(2,173		)	2,992,535
Deferred tax liabilities	166,215			(5,540		)	160,675
Total non-current liabilities	1,387,400			(5,540		)	1,381,860
Additional paid-in capital	1,680,838			10,591			1,691,429
Deficit	(434,476		)	(31,615		)	(466,091		)
Total Molycorp stockholders' equity	1,237,070			(21,024		)	1,216,046
Noncontrolling interests	10,821			24,391			35,212
Total stockholders' equity	1,247,891			3,367			1,251,258



	For the year ended December 31, 2012
	As originally reported			Revision		As revised
	(In thousands, except per share amounts)
Impairment of goodwill and other long-lived assets	$	(270,140	)	(31,615	)	$	(301,755	)
Loss before income taxes and equity earnings	(494,313		)	(31,615	)	(525,928		)
Net loss	(443,728		)	(31,615	)	(475,343		)
Net loss attributable to Molycorp stockholders	(449,554		)	(31,615	)	(481,169		)
Comprehensive loss	(444,680		)	(31,615	)	(476,295		)
Comprehensive loss attributable to Molycorp stockholders	(438,854		)	(31,615	)	(470,469		)
Loss per share of common stock:
Basic	(4.31		)	(0.29	)	(4.60		)
Diluted	(4.31		)	(0.29	)	(4.60		)

The completion of the purchase price allocation also resulted in revisions to Note 4 "Segment Information", Note 9 "Goodwill and Other Intangible Assets", Note 11 "Acquisitions, Note 15 "Income Taxes", Note 17 "(Loss) Earnings per Share", and Note 22 "Subsidiary Guarantor Financial Information".