Molycorp Betting on IPO to Open Federal Purse for Rare Earth

Rare earth mine in Mountain Pass, Calif.

Greentech IPOs and the Department of Energy’s loan guarantee program are like peas in a pod these days. An initial public offering slated for later this week — that of Molycorp, a company that mines minerals used in many green technologies — offers the latest example.

The Greenwood, Colo.-based firm, which has requested an approximately $280 million loan guarantee, filed in April to raise up to $350 million in an IPO. Priced at the middle of Molycorp’s expected $15-$17 range, however, the company’s 28.1 million shares could raise nearly $450 million. According to one of the company’s most recent filings with financial regulators, it’s hoping this week’s offering will help pave the way to the guarantee.

Molycorp mines a group of metals known as rare earth elements, which the U.S. currently imports almost entirely from China. Using proceeds from this week’s planned IPO, the company aims to modernize and expand its Mountain Pass, Calif. rare earth project (a more than 50-year-old mine where Molycorp stopped removing ore in 2002), and also acquire a rare earth metals and alloys producer.

But the company is on the hunt for additional funds. And as Molycorp CEO Mark Smith said earlier this year in a Congressional hearing, “Traditional bank financing in the current climate – with very short repayment periods and interest rates near double digits – is not economically feasible.” The loan guarantee program, he said,  “would allow Molycorp to accelerate development in the near-term while ensuring rare earth resource availability in the long term.”

Loans and guarantees from the DOE, awarded so far to companies including Tesla Motors, Abengoa, Beacon Power, BrightSource and Solyndra, also serve as a vote of confidence in a venture’s technology and ambitious plans, potentially helping to assuage investors’ fears about putting money into a firm with a rocky financial history or profits that are slim to nil. (Molycorp has run its business at a loss since inception, including $28.6 million in losses last year, and it expects to “incur substantial losses for the foreseeable future.”)

But these awards don’t come cheap, and the public markets can be an important source of capital for awardees to meet cost sharing requirements. The Energy Department’s loan guarantees can cover only 80 percent of total project costs, and some also require recipients to pay a “credit subsidy” at the time of closing for the estimated long-term cost to the agency of the guarantee.

Molycorp remains in the very early stages of the application process, having submitted its request in June. According to the company’s SEC filing, the DOE notified Molycorp last that it had cleared the initial review to see if the project meets basic eligibility requirements. (A DOE spokesperson tells us the program has many as 350 applications for this preliminary stage.) So now the company can submit an application for the next phase, which looks at technical and financial aspects of a project.

Even making it past these preliminary hurdles marks an important milestone for Molycorp. Back in December, the company saw a previous loan guarantee application (in Smith’s words) “summarily rejected” by the DOE, which explained that the program was not intended to cover mining projects and Molycorp’s project went “too far upstream,” according to Smith’s testimony.

A group of 20 senators led by Sens. Lisa Murkowski (R.-Alaska) and Evan Bayh (D.-Ind.) are now urging the Department of Energy to open the loan guarantee program to projects that would increase U.S. production of rare earth elements, and create a fast track for applications that “would help to rebuild the domestic rare earth supply chain and manufacturing sector.”

Even if Molycorp’s application gets an expedited review, however, it’s hardly a shoe-in for a loan guarantee. The company says in its filing that with its new application, the DOE has told the company that it should (among other things) “address its current liquidity situation and provide equity commitments.” Molycorp hopes its IPO will cover those bases, noting in its SEC filing that the company, “believes that the completion of its initial public offering should substantially alleviate equity funding and liquidity concerns that the DOE might have.”

As Molycorp acknowledges, it’s far from certain that the company’s submission to the DOE will move onto the next round of reviews in the agency’s due diligence process. It won’t get a response on the latest portion of its application until November 2010 at the earliest. And beyond that, the company would have to meet still more conditions to actually tap government support.

“Accordingly,” the filing states simply, “Molycorp ultimately may not successfully obtain a loan guarantee under the DOE program.” Depending on how much appetite investors end up having this week for a mining company looking to ride the wave of high hopes for emerging green technologies and fears of China limiting rare earth exports, the IPO may help boost Molycorp’s odds of a green light this time around.

Image courtesy of the U.S. Geological Survey

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