PART I
In this Annual Report on Form 10-K, unless the context requires otherwise, references to "Molycorp," "we," "our" or "us" refer to Molycorp, LLC and its consolidated subsidiaries prior to the Corporate Reorganization (as described below) and Molycorp, Inc. and its consolidated subsidiaries after the corporate reorganization. As used in this Annual Report on Form 10-K, the term "ton" means a ton (equal to 2,000 pounds), the term "mt" means a metric tonne (equal to 2,205 pounds), the term
"Roskill" means Roskill Consulting Group Limited, a rare-earth market consultant, t
he term "IMCOA" means the Industrial Minerals Company of Australia Pty Ltd, a rare-earth market consultant, and the term "Rest of World" means the entire world except China. For definitions of certain rare earth-related and mining terms, see "Glossary of Selected Mining Terms." IMCOA states that its data is accurate to within 20% of the stated amounts. IMCOA data takes into account only legal exports of rare earths, and ignores illegal exports from China and usage thereof, which could be significant due to the difficulties with accurately collecting information with respect thereto.
Our Business
We are a leading global rare earths producer that operates a vertically integrated, global supply chain that combines a world-class rare earths resource with manufacturing facilities on three continents that can produce a wide variety of custom engineered, advanced rare earth materials from all of the lanthanide elements, plus yttrium. With a workforce of approximately
2,580
employees at
26
locations in
11
countries, our vertical integrated business allows us to operate multiple product supply chains, serve as a supplier of advanced rare earths and rare metal materials, and provide price visibility to customers worldwide.
Rare earth products are critical inputs in many existing and emerging applications including: clean energy technologies, such as hybrid and electric vehicles and wind power turbines; multiple high-tech uses, including mobile devices, fiber optics, lasers and hard disk drives; critical defense applications, such as guidance and control systems and global positioning systems; and advanced water treatment technology for use in industrial, municipal and recreational applications. Global demand for rare earth elements, or REEs, is projected by industry analysts to steadily increase both due to continuing growth in existing applications and increased innovation and development of new end uses. We have made significant investments, and expect to continue to invest, in developing technologically advanced applications and proprietary applications for individual REEs.
Our Molycorp Mountain Pass Rare Earth Facility, which we refer to as the Molycorp Mountain Pass facility, is the foundation for our vertical integration strategy, home to one of the world's largest and richest deposits of rare earths (including light, mid, and heavy rare earths) that has been producing rare earth products for approximately 60 years. At the Molycorp Mountain Pass facility, we conduct rare earth minerals extraction to produce: purified unseparated light rare earth concentrates, or LREC; separated rare earth oxides, including lanthanum, cerium and neodymium/praseodymium; heavy rare earth concentrates, which include samarium, europium, gadolinium, or SEG, terbium, dysprosium and others; and a line of proprietary rare earth-based water treatment products, including SorbX™ and PhosFIX™. In 2013, we completed a number of case studies at various plants using SorbX™ to remove contaminants from water. Based on the results from these case studies, we currently are working with some of our initial customers to use their plants to demonstrate the benefits of using SorbX™ to remove contaminants, including phosphates, from wastewater. In 2013, we entered into a distribution agreement for SorbX™ for the removal of phosphates in the municipal and industrial wastewater markets, and have since sold limited quantities of SorbX™ directly to third-party customers. Beginning in 2013, we have been selling limited but consistent volumes of PhosFIX™ for recreational water applications.
We also own several of the leading rare earth processing facilities in the world. We are a leading global producer, processor and developer of neodymium-iron-boron, or NdFeB, magnetic powders, or Neo Powders™, rare earths and zirconium-based engineered materials and applications and other rare metals and their compounds. These products are essential in many of today's high-technology applications. Neo Powders™ are used in the production of high performance, bonded NdFeB permanent magnets, which are found in micro motors, precision motors, sensors and other applications requiring high levels of magnetic strength, flexibility, small size and reduced weight. We also manufacture a line of mixed rare earth/zirconium oxides and reclaim, refine and market high value niche metals and their compounds including gallium, indium and rhenium used in wireless, light emitting diode, or LED, flat panel display, turbine, solar and catalyst applications. Our operations include subsidiaries, joint ventures and majority owned manufacturing facilities in Jiangyin, Jiangsu Province, China; Zibo, Shandong Province, China; Tianjin, China; Hyeongok Industrial Zone in South Korea; Korat, Thailand; Sillamäe, Estonia; Stade, Germany; Sagard, Germany; Peterborough, Ontario, Canada; Tolleson, Arizona; Blanding, Utah; and Quapaw, Oklahoma. We also have created a joint venture with Daido Steel Co., Ltd., or Daido, and Mitsubishi Corporation, or Mitsubishi, in the form of a private company, Intermetallics Japan, or IMJ, to manufacture sintered NdFeB permanent rare earth magnets in Japan. Additionally, we now conduct research and product development through laboratories in Singapore and Abingdon, United Kingdom.
THE GLOBAL FOOTPRINT OF MOLYCORP'S VERTICALLY INTEGRATED SUPPLY CHAIN
Reportable Segments
Our business is organized into four reportable segments: (1) Resources; (2) Chemicals and Oxides; (3) Magnetic Materials and Alloys; and (4) Rare Metals. See Note 4 in Part II, Item 8 of this Annual Report on Form 10-K for financial information regarding our reportable segments.
The Resources segment includes our operations at the Molycorp Mountain Pass facility.
The Chemicals and Oxides segment includes: production of rare earths at our operations at Molycorp Silmet; heavy rare earths and other custom engineered materials from our facilities in Jiangyin, Jiangsu Province, China; and production of rare earths, salts of REEs, zirconium-based engineered materials and mixed rare earth/zirconium oxides from our facilities in Zibo, Shandong Province, China. Rare earth and zirconium applications from products made in this segment include catalytic converters, computers, television display panels, optical lenses, mobile phones, electronic chips, and many others.
The Magnetic Materials and Alloys segment includes: the production of Neo Powders™ through our wholly-owned manufacturing facilities in Tianjin, China, and Korat, Thailand, under the Molycorp Magnequench brand. This operating segment also includes manufacturing of neodymium and samarium magnet alloys, other specialty alloy products and rare earth metals at our Molycorp Metals & Alloys, or MMA, facility. Neo Powders™ are used in micro motors, precision motors, sensors, and other applications requiring high levels of magnetic strength, flexibility, small size and reduced weight.
The Rare Metals segment produces, reclaims, refines and markets high value niche metals and their compounds including gallium, indium, rhenium, tantalum, and niobium. Our operating facilities in this segment are located in Quapaw, Oklahoma; Blanding, Utah; Peterborough, Ontario; Sagard, Germany; Hyeongok Industrial Zone in South Korea; and Sillamäe, Estonia. Applications from products made in this segment include wireless technologies, LED, flat panel display, turbine, solar, catalyst, steel additive, electronics applications, and others.
Our Products
Our vertically integrated manufacturing supply chain allows us to provide a variety of rare earth products for customers around the globe. Currently, we produce custom engineered materials from 13 different rare earths, plus yttrium, with purity levels of up to 6N (99.9999%), and from five other rare metals (niobium, tantalum, gallium, indium and rhenium) at purity levels of up to 8N (99.999999%).
Our Corporate History and Structure
Molycorp Minerals, LLC, a Delaware limited liability company formerly known as Rare Earth Acquisitions LLC, was formed on June 12, 2008 to purchase the Mountain Pass, California rare earths deposit and associated assets from Chevron Mining Inc., a subsidiary of Chevron Corporation. Prior to the acquisition, the Molycorp Mountain Pass facility was owned by Chevron Mining Inc. and, before 2005, by Unocal Corporation. Molycorp, LLC, which was the parent of Molycorp Minerals, LLC, was formed on September 9, 2009 as a Delaware limited liability company. Molycorp, Inc. was formed on March 4, 2010 as a new Delaware corporation and was not, prior to the date of the consummation of its initial public offering, conducting any material activities.
The members of Molycorp, LLC contributed either (a) all of their member interests in Molycorp, LLC or (b) all of their equity interests in entities that held member interests in Molycorp, LLC (and no other assets or liabilities) to Molycorp, Inc. in exchange for shares of Molycorp, Inc. Class A common stock. Additionally, all of the holders of profits interests in Molycorp Minerals, LLC, which were represented by incentive shares, contributed all of their incentive shares to Molycorp, Inc. in exchange for shares of Molycorp, Inc. Class B common stock. Accordingly, Molycorp, LLC and Molycorp Minerals, LLC became subsidiaries of Molycorp, Inc., which we refer to as the Corporate Reorganization. Following the Corporate Reorganization, Molycorp, LLC was merged with and into Molycorp Minerals, LLC. Immediately prior to the consummation of Molycorp, Inc.’s initial public offering, all of the shares of Class A common stock and Class B common stock were converted into shares of common stock.
On April 1, 2011, we completed the acquisition of a 90.023% controlling stake in AS Silmet, which is now known as Molycorp Silmet. On October 24, 2011, we acquired the remaining 9.977% ownership interest in Molycorp Silmet. This acquisition provides us with a European base of operations and significantly increases our annual capacity to produce rare earths by approximately 3,000 mt. Molycorp Silmet began sourcing rare earth feed stocks for the manufacturing of its products
from our Molycorp Mountain Pass facility in 2013. The main focus of Molycorp Silmet is on the production of rare earth oxides and rare metals, including production of neodymium oxide, a critical component in the manufacture of NdFeB permanent rare earth magnets.
On April 15, 2011, we acquired Santoku America, Inc., which is now known as MMA. This acquisition provides us with access to certain intellectual property related to the development, processing and manufacturing of neodymium and samarium magnet alloy products.
On November 28, 2011, we formed the IMJ joint venture to manufacture and sell next-generation NdFeB permanent rare earth magnets using a technology licensed from Intermetallics, Inc., a partnership between Mitsubishi, Daido and Dr. Masato Sagawa, co-inventor of the NdFeB magnet. Concurrently with the formation of this joint venture, we entered into a supply agreement with Mitsubishi (acting as the procurement agent) and Daido to sell to the joint venture certain rare earth products at the conditions set forth in the supply agreement.
On June 11, 2012, we completed the acquisition of all of the outstanding equity of Neo Material Technologies Inc., formerly referred to as Neo or Neo Materials and now Molycorp Minerals Canada ULC or Molycorp Canada. This acquisition allowed us to become a leading global producer, processor and developer of Neo Powders™, rare earths and zirconium based engineered materials and applications, and other rare metals and their compounds.
Modernization and Expansion of our Molycorp Mountain Pass Facility
Our production ramp-up at the Molycorp Mountain Pass facility has taken longer than expected, which has led to lower than anticipated production volumes, revenues and cash flows in 2013 and 2012, and delayed our realization of the benefits of our vertical integration strategy while our other operations continued to purchase raw materials from third-parties rather than accepting delivery of products from our Molycorp Mountain Pass facility. These production delays were the result of several factors typical of the start-up of complex, multi-stage mining and chemical manufacturing facilities including: certain defective engineering work that required additional engineering, procurement and construction to correct; delays in the delivery of critical parts and equipment; production bottlenecks during start-up resulting from delays in bringing the leach and multi-stage crack processes up to initial run rate capacity; and limitations on available bastnasite feedstock due to delays in bringing the mill up to initial run rate capacity and the fact that historic stockpiles were exhausted in 2012. Production at Mountain Pass from stockpiled feedstock versus newly produced feedstock can be broken down as follows: 100% of production from January 1, 2012 through June 25, 2012 was from stockpiled material; from June 26, 2012 through July 30, 2012, 91.7% came from stockpiled material and 8.3% from new material; from July 31, 2012 through September, 27, 2012, 50% came from stockpiled material and 50% from new material; and from September 28, 2012 through December 31, 2012, 100% came from new material.
All key production components of our Molycorp Mountain Pass facility are operational. The chloralkali plant completed commissioning in February 2014, and has been turned over to operations. Our chloralkali plant will help us recycle wastewater from our separation processes as well as regenerate chemical reagents needed for separations, including hydrochloric acid and caustic soda, which is expected to reduce the amount of chemical reagents supplies we must purchase. While the chloralkali plant is not required for rare earths production, it is expected to significantly drive down the unit cash production costs at our Molycorp Mountain Pass facility, which we believe will make it competitive with the lowest cost producers of rare earth products globally. Additionally, the final unit of our multi-stage cracking plant at our Molycorp Mountain Pass facility was turned over to operations during the fourth quarter of 2013. The multi-stage cracking plant is part of a multi-stage chemical process designed to increase the current rare earth recovery rates at our Molycorp Mountain Pass facility, increase production throughput, and contribute to lower unit production costs. However, we expect that it will take several months of optimization before we can fully realize anticipated benefits from the chloralkali plant and multi-stage cracking plant.
We believe that our Molycorp Mountain Pass facility will be capable of producing 19,050 mt of rare earth oxides, or REO, (including light rare earth concentrate, or LREC) per year. Actual production of REO (including LREC) at our Molycorp Mountain Pass facility has been lower than expected as a result of production interruptions while we continue to optimize operations. We produced
1,099
mt and
1,000
mt of REO (including LREC) at our Molycorp Mountain Pass facility during the third and fourth quarters of 2013, respectively. Actual production of REO (including LREC) during January 2014 was
412
mt, and we estimate that production of REO (including LREC) at our Molycorp Mountain Pass facility will be approximately
400
mt in February 2014. We are currently targeting to gradually increase our production capacity during the remainder of 2014 to an annualized production rate of REO (including LREC) of approximately 23,000 mt during the fourth quarter of 2014, although actual production during the first half of the year is expected to be below the design capacity of 19,050 mt on an annualized basis. Actual production of REO (including LREC) during 2014 will depend on internal requirements for our
Chemical and Oxides segment and our Magnetic Materials and Alloys segment and external customer demand as well as our success in ramping up and operating our Molycorp Mountain Pass facility.
Rare Earths Industry Overview
Pricing for REEs has experienced significant volatility over the past several years due to a number of factors: the recent global financial crisis; a severe contraction by China, beginning in 2010, of rare earths it allowed for export; China's continuing efforts to institute stronger environmental reforms across its rare earth industry, encourage industry consolidation, and constrict rare earth production; a build-up of stockpiles by rare earth consumers and government entities; and a general lack of certainty among rare earth customers regarding the reliability of the future supply of REEs. Current prices for all REEs, except for lanthanum and cerium, remain significantly higher than historic (pre-2010) levels, although they have fallen from the peak levels seen in 2011.
Average Free On Board ("FOB") China $/Kg of most common REEs Oxide 99%
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2013
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2008
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2009
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2010
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2011
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2012
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Q1
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Q2
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Q3
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Q4
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Lanthanum
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$
|
8
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$
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6
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$
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23
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$
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101
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$
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21
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|
$
|
10
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|
$
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8
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|
|
$
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6
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$
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6
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Cerium
|
$
|
4
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|
$
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4
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$
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21
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$
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99
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$
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21
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$
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11
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$
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8
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$
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7
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$
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6
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Praseodymium
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$
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27
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$
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15
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$
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46
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$
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195
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$
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112
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$
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83
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$
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75
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$
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100
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$
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120
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Neodymium
|
$
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27
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$
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15
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$
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47
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$
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230
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$
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117
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$
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76
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$
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64
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$
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69
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$
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74
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Terbium
|
$
|
650
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|
$
|
350
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$
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530
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$
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2,300
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$
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1,922
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|
$
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1,242
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$
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897
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$
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815
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$
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821
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Dysprosium
|
$
|
110
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$
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100
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|
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$
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225
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|
$
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1,450
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$
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979
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|
$
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615
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|
$
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537
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|
$
|
508
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|
$
|
509
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Source: IMCOA, Metal-Pages, Asian Metal. Prices have been rounded.
Regarding global rare earths demand forecasts, IMCOA is of the view that rare earths markets are poised for growth, and now estimates global demand for rare earths to grow from 115,000 mt in 2012 to 160,000 mt in 2016, which represents approximately a 9% compound annual growth rate, or CAGR. IMCOA estimates that global rare earths demand for rare earths will increase further by 2020 to an estimated range of 200,000 mt to 240,000 mt.
On the supply side, China has dominated the global supply of rare earths for the last sixteen years and, according to IMCOA, will continue to do so through at least 2016. IMCOA's estimate of global production of rare earths for 2013 is approximately 100,000 mt, with China representing approximately 82% of that total. IMCOA forecasts that global rare earths supply will increase to 182,500 mt in 2016, with China producing approximately 63% of that total.
Rare Earths End-Use Markets
REEs have unique properties that make them critical materials to many existing applications upon which society has become dependent as well as many emerging applications. Examples include:
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•
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Clean-Energy Technologies:
hybrid and electric vehicles, wind power turbines and compact fluorescent lighting;
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•
|
High-Technology Applications:
miniaturization of cell phones, personal digital assistant devices, digital music players, hard disk drives used in computers, computing devices, “ear bud” speakers and microphones, as well as fiber optics, lasers and optical temperature sensors; and
|
|
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•
|
Advanced Water Treatment:
industrial, military, homeland security and domestic and foreign aid applications.
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As illustrated in the following table, each of our operating segment targets the needs of several value-added end-use REE markets across multiple industry sectors:
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Operating Segment
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Locations
|
Products
|
End Markets
|
Resources
|
•Mountain Pass, California
|
•LREC
•Separated Rare Earth Oxides
•Heavy Rare Earth Concentrate •SorbX
TM
|
•Oil Refinery Catalyst
•Glass Polishing
•Automotive •Hybrid and Electric Vehicles
•Water Purification •Energy Efficiency Lighting
|
Chemicals & Oxides
|
•Sillamäe, Estonia
•Zibo, China
•Jiangyin, China
|
• Rare Earth Oxides
•Mixed Oxides •Zirconium Oxide
|
•Automotive •Hybrid and Electric Vehicles
•Consumer Electronics
•Communication Systems
•High-End Optics •Energy Efficiency Lighting
|
Magnetic Materials & Alloys
|
•Korat, Thailand
•Tianjin, China
•Tolleson, Arizona
|
•Neo Powders™
•NdFeB Alloys
•SmCo Alloys
|
•Computing
•Automotive •Hybrid and Electric Vehicles •Aerospace
•Health Care •Industrial Motors •Wind Power Generation •Battery Technologies •Consumer Electronics •Home Appliance
|
Rare Metals
|
•Sillamäe, Estonia
•Peterborough, Canada
•Napanee, Canada (discontinued in 2013)
•Blanding, Utah
•Quapaw, Oklahoma
•Hyongeok, South Korea
|
•Niobium
•Tantalum
•Gallium
•Indium
•Rhenium
|
•Computing
•Electronic Controls
•Steel Additives
•Industrial Applications
•Photovoltaics •Super Alloys
|
Customers
We sell a variety of rare earths and rare metal materials, including ultra-high-purity and custom-engineered rare earth products, directly to customers and through distributors in multiple countries. The geographic distribution of our revenues based on our customers' locations for the years ended December 31, 2013, 2012 and 2011, was as follows:
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Years Ended December 31,
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(In thousands)
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2013
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2012
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2011
|
Asia:
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China
|
$
|
199,021
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|
|
$
|
118,086
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|
|
$
|
421
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Japan
|
99,952
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|
|
160,942
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|
|
204,262
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Thailand
|
17,129
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|
|
7,674
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|
|
—
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|
Hong Kong
|
8,815
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|
|
4,793
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—
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South Korea
|
12,418
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|
|
3,828
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|
—
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Singapore
|
54
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|
|
212
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|
|
—
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|
North America
|
92,066
|
|
|
103,555
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|
128,544
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Europe
|
113,549
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|
|
117,907
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|
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56,760
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Other
|
11,386
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|
10,699
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6,844
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Total
|
$
|
554,390
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|
|
$
|
527,696
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|
|
$
|
396,831
|
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See Note 4 in Part II, Item 8 of this Annual Report on Form 10-K for a breakdown of long-lived tangible assets by country at December 31, 2013 and 2012.
Product and Customers Concentrations
Resources Segment
There were no significant sales by customer and by product during 2013 and 2012 at the Resources segment relative to consolidated revenues.
In 2011, significant sales by product at the Resources segment included lanthanum products
23%
, cerium products
11%
and neodymium/praseodymium products
26%
. Additionally, in 2011 sales to Hitachi Metals Ltd. totaled
$92.2 million
, or
23%
of consolidated revenues.
Chemicals and Oxides Segment
The Chemicals and Oxides segment includes sales of rare earths, zirconium-based engineered materials and mixed rare earth oxides from the Molycorp Canada acquisition on June 11, 2012, and rare earths from the Molycorp Silmet acquisition on April 1, 2011. Sales of cerium products within the Chemicals and Oxides segment accounted for approximately
9%
and
15%
of consolidated sales in 2013 and 2012, respectively. There were no significant sales by customer in this segment in 2013, 2012 and 2011.
Magnetic Materials and Alloys Segment
Within the Magnetic Materials and Alloys segment, sales of Neo Powders™ were approximately
41%
and
25%
of consolidated revenues in 2013 and 2012, respectively. The Neo Powders™ were introduced into Molycorp's product mix with the Molycorp Canada acquisition.
In 2013 and for the period from June 12, 2012 to December 31, 2012, the Magnetic Materials and Alloys segment sold Neo Powders™ for
$56.5 million
and
$32.9 million
, respectively, to Daido Electronics, a subsidiary of one of IMJ’s shareholders. At
December 31, 2013
, we had a balance receivable from Daido Electronics of
$7.5 million
.
Sales of NdFeB alloys at the Magnetic Materials and Alloys segment for the year ended December 31, 2011 were approximately
11%
of consolidated revenues.
Sales from the Magnetic Materials and Alloys segment to Santoku Corporation for the period from April 15, 2011 to December 31, 2011, were
$48.8 million
, or approximately
12%
of consolidated revenues in 2011.
Rare Metals Segment
There were no significant sales by product and by customer at the Rare Metals segment in 2013, 2012 and 2011. The Rare Metals segment was formed as a result of the Molycorp Silmet and the Molycorp Canada acquisitions.
Seasonality
Sales of our rare earths, salts of REEs, zirconium-based engineered materials and mixed rare earth/zirconium oxides products from our Chemicals and Oxides segment are affected by the typical manufacturing slow down across Asia during the Chinese New Year and Spring Festival holidays. First quarter sales in the Magnetic Materials and Alloys segment are typically weaker than the following periods due to the fact that the first quarter of each year coincides with the end of the fiscal year for most Japanese companies in the supply chain predominantly served by that segment. The effort by these companies to draw down inventory levels near to their year-end closing typically results into lower shipments of products from the Magnetic Materials and Alloys segment. However, third quarter sales for Neo Powders™, the most significant product in the Magnetic Materials and Alloys segment, are typically stronger than the other periods of the year, as the supply chains increase production in order to meet an anticipated increase in demand for the Christmas holiday season later in the year. Sales of our rare earths, LREC and heavy rare earth concentrates from our Resources segment are affected by a combination of the factors described above. Additionally, in certain of our segments, particularly Magnetic Materials and Alloys, prices are set at a one quarter lag, so improvements in our results will lag any market improvements.
Sources and Availability of Raw Materials
Note: Percentages next to a rare earth feedstock material indicate the level of REO content per metric ton (mt) of rare earth feedstock purchased. Percentages next to a rare metal feedstock material indicate the level of purity in that metal. The higher the percentage of REO or rare metal purity, the greater the quality of feedstock materials. In the case of a mixed feedstock materials, the percentages indicate the relative content of the mixed material.
Resources Segment
The principal raw materials used by our Resources segment operations include rare earth ore mined on site, energy (including electricity and natural gas), hydrochloric acid, sodium hydroxide and water.
In 2012, we built a new 24 megawatt Combined Heat and Power, or CHP, plant that utilizes natural gas to provide reliable electricity and steam to our Molycorp Mountain Pass facility. As a result, natural gas costs have gradually replaced third-party electricity and reduced our energy costs at the Molycorp Mountain Pass facility.
We use large amounts of hydrochloric acid and sodium hydroxide, also known as caustic soda, as chemical reagents to process rare earths at our Molycorp Mountain Pass facility. As we expect that it will take several months to optimize the chloralkali plant in order to produce large volumes of our own hydrochloric acid and caustic soda, we currently purchase those main chemical reagents in the open market and, as a result, we could be subject to significant volatility in the cost or availability of these materials. We may not be able to pass increased prices for these chemical reagents through to our customers in the form of price increases. A significant increase in the price, or decrease in the availability, of these chemical reagents before we can largely produce them on site at our Molycorp Mountain Pass facility, could materially increase our operating costs and adversely affect some of our profit margins from quarter to quarter.
Operations at our Molycorp Mountain Pass facility also require significant quantities of water to process rare earths. In the third quarter of 2012, we started up our new water treatment plant that, when fully operational, will help us recycle process water that historically was treated as wastewater. This technology is also expected to drive down our production costs.
Chemicals and Oxides Segment
Main feedstock materials in this segment include rare earth carbonates and rare earth concentrates. Our Molycorp Jiangyin, or JAMR, facility and our Molycorp Zibo, or ZAMR, facility in China have been procuring their feedstock materials primarily from various producers over a number of years and, starting in 2013, procured a portion of their feedstock materials from our Molycorp Mountain Pass facility. Even though we believe there is an adequate supply of rare earth feedstock for our JAMR and ZAMR operations, we currently do not have long-term supply contracts with our main suppliers. In 2013 and during the period from June 12, 2012 (the day subsequent the closing of the Molycorp Canada acquisition) to December 31, 2012, our JAMR facility purchased 446 mt and 288 mt, respectively, of enriched Europium clay with an average grade of 92% in both periods per ton of rare earth oxide, or tREO, respectively, from third-party suppliers. During the same periods, our ZAMR facility procured 1,285 mt and 867 mt, respectively, of rare earth concentrate with an average grade of 43% and 59% per tREO, and 1,329 mt and 1,243 mt, respectively, of rare earth carbonate with an average grade of 44% and 44% per tREO, respectively, from third-party suppliers. In 2013, the ZAMR facility also purchased 203 mt of rare earth carbonate with an average grade of 39% per tREO from our Resources segment.
Within the Chemicals and Oxides segment, in 2013 and 2012, our Molycorp Silmet facility sourced 1,643 mt and 4,244 mt of light rare earth carbonates, respectively, with an average grade of 39% and 41% per tREO, respectively, from a third-party supplier that in total provided approximately 34% and 84% of feedstock materials used by Molycorp Silmet in 2013 and 2012, respectively. The remainder of light rare earth carbonates used by Molycorp Silmet in both periods was shipped from our Molycorp Mountain Pass facility. The third-party supplier has been consistently delivering feedstock materials to Molycorp Silmet on time over several years.
Prices for light rare earth carbonates generally follow the price trend of the light REEs, which have been very volatile during 2012 and 2013. Refer to the table above in the "Rare Earths Industry Overview" section for the average FOB China prices per kilogram of most common REEs in those periods. The volatility in China FOB prices substantially trails the volatility in China domestic prices, which are the prices our third-party feedstock material purchases are denominated in.
In addition to rare earth carbonates and rare earth concentrates, most operations comprising the Chemicals and Oxides segment utilize energy (electricity), mineral acid, nitric acid, sulphuric acid, tributylphosphate and water. We purchase these commodities in the open market through multiple suppliers and, as a result, could be subject to significant volatility in the cost or availability of these materials, which we may not be able to pass to our customers in the form of price increases for our products. A significant increase in the price, or decrease in the availability of electricity and chemical reagents in this segment could materially increase our operating costs and adversely affect our profit margins from quarter to quarter.
Magnetic Materials and Alloys Segment
Main feedstock materials in this segment include: Neodymium, or Nd, Metal 99% and Nd Oxide 99%, Praseodymium, or Pr, Metal 99% and Pr Oxide 99%, mixed Nd 75% /Pr 25% in both 99% Metal and 99% Oxide form, Dysprosium, or Dy Metal 99%, Iron, or Fe, mixed Dy Metal 80%/ Fe 20%, Iron-Boron, or FeB, Samarium, or Sm, and Cobalt, or Co. During fiscal 2013 and 2012, respectively, we acquired the following quantity of feedstock in our Magnetic Materials and Alloys segment (all quantities are approximate; 2012 volumes include full year purchases at MMA and purchases from June 12, 2012 to December 31, 2012 at our wholly-owned manufacturing facilities in Tianjin, China, and Korat, Thailand that operate under the Molycorp Magnequench brand): 486 mt and 275 mt of Nd Metal, 200 mt and 166 mt of Nd Oxide, 80 mt and 18 mt of Pr Metal, 5 mt and 16 mt of Pr Oxide, 771 mt and 360 mt of mixed Nd/Pr Metal, 8 mt and 40 mt of Nd/Pr Oxide, 0.1 mt and 0.1 mt of Dy Metal, 19 mt and 14 mt of mixed DyFe Metal, 3,803 mt and 2,247 mt of Fe, 292 mt and 149 mt of FeB, 23 mt and 1 mt of Sm, and 791 mt and 517 mt of Co. The majority of the rare earth metal feedstock, which represented approximately 20% and 16% of the total sourced feedstock material during 2013 and 2012, respectively, was purchased primarily from two third-party suppliers, which have consistently delivered our metal feedstock materials on time over a number of years. All of the oxide feedstock, or approximately 3% and 6% of the total source feedstock material purchased during 2013 and 2012, respectively, was shipped from our JAMR and ZAMR facilities in China. The oxide feedstock is generally converted into the corresponding metal form at Ganzhou Keli Rare Earth New Material Co., Ltd., an equity method investee of ours, together with two other business partners. Our suppliers of Fe, FeB, Sm and Co feedstock materials have been very reliable over the past several years.
Prices for all REEs have been very volatile during 2013 and 2012. Refer to the table above in the "Rare Earths Industry Overview" section for the average FOB China prices per kilogram of most common REEs in those periods. The volatility in China FOB prices substantially trails the volatility in China domestic prices; price volatility of feedstock materials in metal form substantially trails the price volatility of feedstock materials in oxide form. Prices for non-REE feedstock materials have also been volatile and, as a result, we experienced the following weighted average increases between the low and the high purchase prices in 2013 and 2012, respectively: Fe: 32% and 13%; FeB: 88% and 113%; Sm: 21% (2013 only); and Co: 70% and 32%. We had limited purchases of Sm in 2012, but increases between the low and the high prices for Sm were substantially higher that year.
In our Magnetic Materials and Alloys segment, we procure most of the neodymium and praseodymium and all other feedstock materials in the open market through multiple suppliers. Part of the neodymium and praseodymium feedstock is procured from our Resources segment, which is expected to source increased volumes to the Magnetic Materials and Alloys segment. As a result, we could be subject to significant volatility in the cost or availability of these raw materials and we may not be able to pass increased prices for these materials through to our customers in the form of price increases for our products. A significant increase in the price, or decrease in the availability, of these raw materials could materially increase our operating costs and adversely affect our profit margins from quarter to quarter.
Rare Metals Segment
We are dependent on being able to secure an adequate supply of gallium, indium or rhenium bearing scrap at economic prices to maintain and grow the recycling business of our Rare Metals segment.
Quantities of indium and rhenium produced and sold in 2013 and during the period from June 12, 2012 to December 31, 2012 were immaterial. Gallium is sourced in two forms: scrap feed from various semiconductor producers and gallium metal 99.99%, or GaM, supplied primarily by our Ingal Stade joint venture. During 2013 and the period from June 12, 2012 to December 31, 2012, we purchased approximately 3.6 mt and 1.8 mt, respectively, of scrap feed gallium, and 25.7 mt and 14.5 mt, respectively, of GaM. Gallium scrap generators have been supplying scrap feedstock as long as the gallium semiconductor industry has been in business. GaM producers have been consistently supplying this metal over the years based on market demand for gallium end-use applications. Prices for gallium scrap feedstock have been relatively more stable than prices of GaM. Our average purchase price for gallium scrap in 2013 decreased by approximately 40% from our average price in 2012, whereas our average purchase price for GaM decreased by approximately 22%.
With respect to our production of tantalum and niobium, our Molycorp Silmet facility procures Iron-Niobium-Tantalite, or FeNbTa, tantalite, columbite and niobium hydroxide from various suppliers. All of Molycorp Silmet suppliers have a record of timely and reliable supply over several years. In 2013 and 2012, respectively, we purchased 410 mt and 371 mt of FeNbTa, 12 mt and 174 mt of tantalite, 138 mt and 550 mt of columbite and 28 mt and 47 mt of niobium hydroxide. We experienced increases of up to 25% and 16% between the low and the high purchase prices for FeNbTa in 2013 and 2012, respectively, up to 30% for tantalite in 2012 and none in 2013, up to 115% for columbite in 2013 and none in 2012, and up to 5% for niobium hydroxide in 2012 only.
In January 2014, our Molycorp Silmet facility received a certification by the Electronic Industry Citizenship Coalition, or EICC, that its purchases of tantalum comply with the Conflict Free Smelter, or CFS, program assessment protocol through July 2014.
Competition
Our ability to compete successfully across all of our reportable segments depends upon a number of factors including: market presence; low production costs; supply reliability; maintenance and improvement of quality; properties and purity of products; access to capital and the pricing policies of our competitors.
Once we reach higher run rates for rare earths at our Resource segment and increase other downstream productions through our Chemicals and Oxides and our Magnetic Materials and Alloys segments, the increased supply of rare earth products may lead our competitors, primarily various Chinese producers, to engage in predatory pricing behavior. Any increase in the amount of rare earth products exported from other nations and increased competition, whether legal or illegal, may result in price reductions, reduced margins and loss of potential market share, any of which could materially adversely affect our profitability. As a result of these factors, we may not be able to compete effectively against current and future competitors.
Patents, Trademarks and Licenses
We rely on a combination of trade secret protection, nondisclosure and licensing agreements, patents and trademarks to establish and protect our proprietary intellectual property rights. We utilize trade secret protection and nondisclosure agreements to protect our proprietary rare earths technology. We also have a proven technology and product development group and hold a number of U.S. and foreign patents and patent applications.
The MMA acquisition provided us with access to certain intellectual property relative to the development, processing and manufacturing of neodymium and samarium magnet alloy products. Molycorp Canada's current intellectual property position is dependent primarily on the essential nature of certain fundamental patents covering bonded magnets made with Neo Powders™ and Molycorp Canada's manufacturing process for Neo Powders™. The most effective of these patents expires in July 2014. While Molycorp Canada holds a wide range of additional patents and patent applications whose expiration dates extend (and in the case of patent applications, will extend, if issued) beyond 2014, none are of an equally essential nature as Molycorp Canada's fundamental patents and exclusive rights, and therefore Molycorp Canada's competitive position after the expiration of the fundamental patents is likely to be diminished as a result of the expiration of such patents. Molycorp Canada may therefore be unable to defend against new competitors entering the marketplace or maintain its existing pricing power.
We intend to rely on patented products and applications, such as the use of rare earths in water treatment, and related licensing agreements to establish proprietary markets for low demand REEs. These intellectual property rights may be challenged or infringed upon by third parties or we may be unable to maintain, renew or enter into new license agreements with third-party owners of intellectual property on reasonable terms. In addition, our intellectual property will be subject to infringement or other unauthorized use outside of the United States. In such case, our ability to protect our intellectual property rights by legal recourse or otherwise may be limited, particularly in countries where laws or enforcement practices are undeveloped or do not recognize or protect intellectual property rights to the same extent as the United States. Unauthorized use of our intellectual property rights or inability to preserve existing intellectual property rights could adversely impact our competitive position and results of operations. The loss of our patents could reduce the value of the related products.
Research and Development
We invest significant resources to improve the efficiency of our rare earths processing operations, develop new applications for individual REEs, research value added rare earth and rare metal applications, and perform exploratory drilling. As of December 31, 2013, our product and process development group consisted of 79 scientists and engineers. In addition, we spent
$23.2 million
, $27.8 million and $7.7 million on research and development for the years ended December 31, 2013, 2012 and 2011, respectively.
Employees
As of December 31, 2013:
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we have a combined workforce of approximately
2,580
employees, including scientists, engineers, chemists, technologists and highly skilled workers in
26
locations across
11
countries;
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237
employees, or approximately
61%
of the workforce at our Molycorp Mountain Pass facility, were represented by the United Steelworkers of America. Our contract with the United Steelworkers of America expires in March 2015; and
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171
employees, or approximately
30%
of the workforce at our Molycorp Silmet facility, were unionized employees. Our contract with the labor union in Estonia, which is automatically renewed annually unless one of the parties or both parties desire to modify the contract that was last amended in February 2012.
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We have not experienced any work stoppages at our Molycorp Mountain Pass or Molycorp Silmet facilities due to labor disputes, and consider our overall employee relations to be good.
Environmental, Health and Safety Matters
Our operations are subject to numerous and detailed international, national, federal, state and local laws, regulations and permits affecting the mining and mineral processing industry, including those pertaining to employee health and safety, environmental permitting and licensing, air quality standards, greenhouse gas, or GHG, emissions, water usage and disposal, pollution, waste management, plant and wildlife protection, handling and disposal of radioactive substances, remediation of soil and groundwater contamination, land use, reclamation and restoration of properties, the discharge of materials into the environment and groundwater quality and availability. Most of our efforts to comply with environmental laws, regulations and permits relate to our mining and processing operations at the Molycorp Mountain Pass facility. Our operations at Molycorp Silmet are subject to the environmental laws, regulations and permits applicable in Estonia, whose requirements are shaped by Estonia's membership in the European Union. We are also subject to Chinese, Canadian and Thai national and local environmental protection regulations with respect to our operations in those countries.
These international, national, federal, state and local laws, regulations and permits have had, and will continue to have, a significant effect on our results of operations and competitive position and have become increasingly stringent over time. Future laws, regulations or permits, as well as the interpretation or enforcement of existing requirements, may require substantial increases in capital or operating costs or otherwise delay, limit or prohibit our current or future operations.
We retain, both within Molycorp and outside Molycorp, the services of reclamation and environmental, health and safety, or EHS, professionals to review our operations and assist with environmental compliance, including with respect to product management, solid and hazardous waste management and disposal, water and air quality, asbestos abatement, drinking water quality, reclamation requirements, radiation control and other EHS issues. Despite our emphasis on compliance, through training and established policies, there is no assurance that we have been or will be at all times in compliance with such requirements.
Environmental Expenditures
We have spent, and anticipate that we will continue to spend, financial and managerial resources to comply with environmental requirements. At our Molycorp Mountain Pass facility, we incurred approximately
$25.9 million
and
$26.8 million
in 2013 and 2012, respectively, and expect to incur approximately
$8.9 million
in 2014, for ongoing operating environmental expenditures, including salaries, monitoring, compliance, reporting and permits. Included in the 2013 and 2012 amounts above are approximately
$21.0 million
and
$22.1 million
, respectively, for the removal and disposal of wastewater generated in excess of the existing evaporation capability of all ponds. The expenditures for removal and disposal of excess wastewater were incurred to allow the facilities under construction at Molycorp Mountain Pass to become fully operational. We estimate that we will incur approximately
$5.3 million
for wastewater transportation and disposal costs in 2014.
The costs we anticipate to incur as part of our on-going mine reclamation activities at the Molycorp Mountain Pass facility, which we expect to continue throughout closure and post-closure periods of our mining operations, are included in asset retirement obligation disclosure at Note 13 in Part II, Item 8 of this Annual Report on Form 10-K.
We incurred approximately
$0.3 million
and
$0.3 million
in 2013 and 2012, respectively, at our Molycorp Silmet facility, and we expect to spend approximately
$0.4 million
in 2014, for ongoing operating environmental expenditures to comply with the European Union directives and with the Estonian regulatory act governing environmental permitting and licensing. In addition to routine environmental compliance costs, we incurred approximately
$0.7 million
and
$0.5 million
in 2013 and 2012, respectively, and expect to spend approximately
$0.1 million
in 2014, to comply with the European Union's REACH program at Molycorp Silmet. We may have to incur environmental capital and operating costs associated with future possible modernization plans at our Molycorp Silmet facility.
Although we have not incurred any significant environmental expenditures at our other operating facilities, we may have to incur environmental capital and operating costs associated with future possible modernization and expansion plans related to those operations.
Permits and Approvals
Numerous governmental permits and approvals are required for our current and future operations.
We hold conditional use and minor use permits from the County of San Bernardino, which currently allow continued operations of our Molycorp Mountain Pass facility through 2042. With the exception of certain building permits we have secured all permits necessary to allow construction and operation at our Molycorp Mountain Pass facility, including permits to operate specific facilities or operating units from the Lahontan Regional Water Quality Control Board and the Mojave Desert Air Quality Management District.
To obtain, maintain and renew these and other environmental permits, we may be required to conduct environmental studies and collect and present to governmental authorities data pertaining to the potential impact that our current or future operations may have upon the environment. We may be unable to obtain additional permits unless we are able to avoid or mitigate those impacts. The permitting processes and development of supporting materials, including any environmental impact statements, may be costly and time consuming. Any failure to obtain, maintain or renew required permits may delay, limit or prohibit current or future operations. Consequently, the expansion and modernization of the Molycorp Mountain Pass facility may be delayed, curtailed or prevented, particularly in the event that any environmental impact statement is required in connection therewith. These permit processes and requirements, and the interpretation and enforcement thereof, change frequently, and any such future changes could materially adversely affect our mining operations and results of operations.
Our Molycorp Silmet facility has an Integrated Environmental Permit, which controls its operations in general, and Radiation Practice Licenses for the management of radioactive materials. The Integrated Environmental Permit is renewed annually or in between annual renewals when and if we expand our operations in that facility. The Radiation Practice Licenses for the facility have been renewed with an effective date of January 1, 2014.
Our MMA facility does not currently require an air permit or a wastewater discharge permit. As we expand our operations at that facility, any industrial processes that are added that require permitting will be reviewed and authorized by Maricopa County, Arizona, where the MMA facility is located.
Our Chinese joint ventures, Jiangyin Jia Hua Advanced Material Resources Co., Ltd., or Jiangyin, and Zibo Jia Hua Advanced Material Resources Co., Ltd., or Zibo, produce waste water from their solvent extraction processes. Both Jiangyin and Zibo were inspected in 2013 as part of an environmental audit and have received the Chinese Ministry of Environmental Protection's approval for compliance with applicable environmental laws. However, there is no assurance that Chinese national or local authorities will not impose additional regulations which would require additional expenditures that may have a material adverse effect on the profitability of the joint ventures.
Mine Health and Safety Laws
The Federal Mine Safety and Health Act of 1977, as amended by the Mine Improvement and New Emergency Response Act of 2006, and the regulations adopted by the California Occupational Safety and Health Administration, impose stringent health and safety standards on numerous aspects of mining operations, including training of mine personnel, mining procedures, blasting, the equipment used in mining operations and other matters at our Molycorp Mountain Pass facility. As a result of increasing scrutiny surrounding mine safety, federal and state legislatures and other regulatory authorities have imposed more stringent regulatory requirements on mining operations. In 2006, the Mine Safety and Health Administration, or MSHA, promulgated new emergency rules on mine safety that address mine safety equipment, training and emergency reporting requirements. The U.S. Congress enacted the Mine Improvement and New Emergency Response Act of 2006, which significantly amended the Federal Mine Safety and Health Act of 1977, requiring improvements in mine safety practices, increasing criminal penalties and establishing a maximum civil penalty for non-compliance, and expanding the scope of federal oversight, inspection and enforcement activities. MSHA published final rules implementing the Mine Improvement and New Emergency Response Act to revise both the emergency rules and the MSHA's existing civil penalty assessment regulations, which resulted in an across-the-board increase in penalties from the existing regulations.
We maintain a rigorous safety program. Our Molycorp Mountain Pass employees and contractors are required to complete 24 hours of initial health and safety training, as well as annual refresher sessions, which cover all of the potential hazards that may be present at the facility. During the training, our commitment to a safe work environment is reinforced through our Stop Work Authority program, which allows any employee or contractor at the facility to stop work that they deem to be unsafe.
The exceptional safety performance record of our Molycorp Mountain Pass facility is reflected in the following table, which compares rates for all lost time, restricted work and medical treatment incidents per 200,000 hours worked with average rates for mining operations, as determined by MSHA:
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Year Ended December 31,
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2009
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2010
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2011
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2012
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2013
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Molycorp Mountain Pass
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0.86
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1.33
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1.66
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0.00
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1.76
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MSHA Rates for Operators
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2.95
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2.83
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2.73
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2.68
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2.59
(a)
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(a) For the period January 1 - June 30, 2013.
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We believe that our commitment to a safe working environment at our Molycorp Mountain Pass facility provides us with a competitive advantage in attracting and retaining employees.
Our focus on safety extends to all of our operations. In 2013, our Total Reportable Incident Rate for our operating facilities was 1.16. This compares favorably to industry averages, such as the 2012 MSHA all incident rate for Mines, Mills and Shops of 2.68 and the 2012 OSHA Total Recordable incident rate for Natural Resources and Mining of 3.8.
Surface Mining Control and Reclamation Relating to our Molycorp Mountain Pass Facility
Our San Bernardino County conditional use and minor use permits, along with the approved mine reclamation plan and state laws and regulations establish operational, reclamation and closure standards for all aspects of our surface mining operations at our Molycorp Mountain Pass facility. Comprehensive environmental protection and reclamation standards must be met during the course of and upon completion of mining activities, and our failure to meet such standards may subject us to fines, penalties or other sanctions.
Our Molycorp Mountain Pass facility reclamation obligations require that we take certain reclamation actions concurrent with mining and that we restore the surface area upon completion of mining in 2042. Financial assurances are generally required to secure the performance of these reclamation obligations. To satisfy these financial assurance requirements, we typically obtain surety bonds, which are renewable on a yearly basis. Although we expect to continue to obtain and renew such bonds, it has become increasingly difficult for mining companies to secure new or renew existing surety bonds without the posting of partial or full collateral. In addition, surety bond costs have increased while the market terms of surety bonds have generally become less favorable. It is possible that surety bond issuers may refuse to provide or renew bonds or may demand additional collateral upon those issuances or renewals. Our inability to obtain or failure to maintain or renew these bonds could have a material adverse effect on our business and results of operations.
As of December 31, 2013, we had financial assurance requirements of
$28.8 million
related to our Molycorp Mountain Pass facility that were satisfied with surety bonds, which we have placed with California state and regional agencies.
In the second quarter of each year, we are required to provide the State of California with an updated estimate of the costs associated specifically with the mine reclamation. This estimate is reviewed and approved by the State of California, after which we are responsible for making any necessary changes to surety bonds placed with the State of California.
The United States Environmental Protection Agency, or EPA, has announced its intention to establish a new financial assurance program for hardrock mining, extraction and processing facilities under the Federal Comprehensive Environmental Response Compensation and Liability Act or the “Superfund” law, which may require us to establish additional bonds or other sureties. We cannot predict the effect of any such requirements on our operations at this time.
Asset retirement obligations for accounting purposes can be, and often are, greater than the amount of surety bonds placed with local authorities.
Water Usage and Pollution Control
The federal Clean Water Act and similar national, state and local laws and regulations affect surface mining and processing operations, including operations at our Molycorp Mountain Pass facility, by imposing restrictions on the discharge of pollutants, including tailings and other material, into waters. These requirements are complex and subject to amendments, legal challenges and changes in implementation. Recent court decisions, regulatory actions and proposed legislation have created uncertainty over the jurisdiction and permitting requirements of the federal Clean Water Act. Individual or general permits under Section 404 of the Clean Water Act are required if we discharge dredged or fill materials into jurisdictional waters of the United States. In addition, our Lahontan Regional Water Quality Control Board permit for our Molycorp Mountain Pass facility establishes treatment standards for wastewater discharges to engineered impoundments, and requires regular monitoring and reporting on the performance of the Molycorp Mountain Pass wastewater management operations. Until our chlor-alkali plant is optimized, we intend to dispose of wastewater using our existing on-site evaporation ponds and, as needed, via off-site disposal.
All of the melting and pouring operations used in the production of metals and alloys at MMA utilize vacuum induction melting, or VIM, furnaces. VIM furnace operations do not generate any significant quantities of wastewater and, therefore, there is no industrial wastewater discharge permit required for the facility.
The discharge of wastewater by Molycorp Silmet operations are governed by its Integrated Environmental Permit.
We are also subject both to Chinese national and local environmental protection regulations, which currently impose a graduated schedule of fees for the discharge of waste substances, require the payment of fines for discharges exceeding the standards, and provide for the closure of any facility that fails to comply with orders requiring it to cease or remedy certain activities causing environmental damage. Our Chinese joint ventures Jiangyin and Zibo produce waste water from their rare earths recovery operations. In the case of Jiangyin, its expansion in 1995 included an upgrading of its waste water processing and treatment procedures, as a result of which its waste water passes all environmental requirements. Jiangyin pays an agreed fee once a year for the discharge of waste waters. In the case of Zibo, the plant was designed to make use of waste water discharge facilities of an adjacent petrochemical complex, which has a variable monthly charge based on usage. Zibo is also obliged to pay a monthly environmental administration fee to the municipal government of Linzi. Waste water has met the requirements set by local authorities for all environmental standards. Both Jiangyin and Zibo were inspected in 2013 as part of an environmental audit and have received the Chinese Ministry of Environmental Protection's approval for compliance with applicable environmental laws. However, there is no assurance that Chinese national or local authorities will not impose additional regulations which would require additional expenditures that may have a material adverse effect on the profitability of the joint ventures.
Air Pollution Control
The federal Clean Air Act and similar national, state and local laws and regulations affect our surface mining and processing operations at our Molycorp Mountain Pass facility as well as our other domestic U.S. facilities, both directly and indirectly. We currently operate and maintain numerous air pollution control devices at our Molycorp Mountain Pass facility under permits from the California Mojave Desert Air Quality Management District. We generally must obtain permits before we install new sources of air pollution. The process may require us to perform air quality studies and to obtain emission offset credits, which can be costly and time consuming to procure. The increased emissions from the CHP plant and other combustion sources at our Molycorp Mountain Pass facility have triggered permit requirements under Title V of the Clean Air Act. In February 2013, we submitted the Title V application to the regulatory agency. In addition, the regulations of the California Air Resources Board will require us to retrofit or replace off-road, on-road and forklift vehicles to achieve fleet emission standards for nitrogen oxides and particulate matter.
Operations at our Molycorp Mountain Pass facility also emit GHG. Pursuant to existing GHG requirements, we are reporting annual GHG emissions from our operations. Furthermore, our GHG emissions at Mountain Pass are subject to California's cap-and-trade regulations. Additional GHG emission related requirements are in various stages of development. For example, the U.S. Congress is considering various legislative proposals to address climate change. In addition, EPA has issued regulations, including the "Tailoring Rule," that subject GHG emissions from stationary sources to the Prevention of Significant Deterioration and Title V provisions of the federal Clean Air Act. California is also implementing regulations pursuant to its Global Warming Solutions Act that establish a state-wide cap-and-trade program for GHG emissions. Any such regulations could require us to modify existing permits or obtain new permits, purchase emissions credits, implement additional pollution control technology, curtail operations or increase significantly our operating costs, any of which could adversely affect our business, financial condition, reputation, operating performance and product demand. However, such regulations might also present opportunities for our industry to the extent that they increase the demand for rare earth products used in clean-technology applications, such as hybrid and electric vehicles and wind power turbines. Our Molycorp Mountain Pass operations consume significant amounts of energy and, accordingly, are subject to fluctuations in energy costs. These costs may increase significantly in part as an indirect result of GHG and other air emission regulations applicable to third-party power suppliers.
The Integrated Environmental Permit issued to Molycorp Silmet regulates the discharge of air pollution in accordance with the requirements of Estonian laws and regulations. Our operations in China, Canada and Thailand are subject to the air pollution control provisions of those countries.
Hazardous and Radioactive Substances and Wastes
We generate and manage solid and hazardous waste at our operations.
In reference to operations at our Molycorp Mountain Pass facility, the federal Comprehensive Environmental Response Compensation and Liability Act, known as CERCLA, and analogous federal and state laws impose liability, without regard to fault or the legality of the original conduct, on certain classes of persons that are considered to have contributed to the actual or threatened release of a "hazardous substance" into the environment. Persons who are or were responsible for such releases of
hazardous substances under CERCLA, which can include waste generators, site owners, lessees and others, may be subject to joint and several liability for the costs of remediating such hazardous substances and for damages to natural resources. Accordingly, we may be subject to liability under CERCLA and similar federal and state laws for properties that we currently own, lease or operate or that we or our predecessors have previously owned, leased or operated, and sites to which we or our predecessors sent waste materials. Pursuant to a 1998 clean up and abatement order issued by the Lahontan Regional Water Quality Control Board, we have conducted and are continuing to conduct various investigatory, monitoring and remedial activities related to contamination at and around our Molycorp Mountain Pass facility. These activities include groundwater investigations, soil remediation and the operation of groundwater monitoring and recovery wells, installation of water treatment systems and evaporation ponds. Also, prior to our acquisition of the Mountain Pass facility, leaks in a wastewater pipeline from the facility to offsite evaporation ponds on the Ivanpah dry lake bed caused contamination. However, that contamination is being remediated by Chevron Mining Inc., who retained ownership of the ponds and has completed remediation of the pipeline. Chevron Mining Inc. continues to work with the relevant state and federal agencies to complete the remediation work associated with the offsite evaporation ponds.
Although Chevron Mining Inc. is obligated to indemnify us for certain potential environmental losses associated with activities that occurred prior to our purchase of the Molycorp Mountain Pass facility, the amount of such indemnity is limited and may not be sufficient to cover such losses.
In 2009, the EPA announced that it is developing financial responsibility requirements under CERCLA for certain facilities within the hardrock mining industry. If applicable to our current or future operations at our Molycorp Mountain Pass facility, these requirements could impose on us significant additional costs or obligations.
REEs contain naturally occurring radioactive substances, such as thorium and uranium. The mining and processing of REEs involves the handling and disposal of such substances. Accordingly, we are subject to extensive safety, health and environmental laws, regulations and permits regarding radioactive substances. Significant costs, obligations or liabilities may be incurred with respect to such requirements, and any future changes in such requirements (or the interpretation or enforcement thereof) may have a material adverse effect on our business or results of operations. One such permit pursuant to which our Molycorp Mountain Pass facility currently operates is a Radioactive Materials License issued and administered by the California Department of Public Health Radiologic Health Branch. The license is a broad scope license, which provides for the safe management of radioactive materials at our Molycorp Mountain Pass facility under the direction of the Radiation Safety Officer with oversight from a Radiation Safety Committee. A failure to maintain or renew this license could materially adversely affect our business or results of operations. The current license expires in 2020.
Demolition of structures in connection with the expansion and modernization of a manufacturing facility generates waste in addition to that associated with processing and ongoing remediation activities. The current modernization and expansion of our Molycorp Mountain Pass facility, and possible future modernization and expansion of other facilities we own around the world, we will incur additional costs to handle, store and dispose of such wastes.
The storage and disposal of low-level radioactive wastes by our Molycorp Silmet operations are governed by the Radioactive Practice Licenses issued in Estonia. Radioactive materials are present at our Molycorp Silmet facility, and we incur costs to manage and dispose of such materials. In addition, the long history of industrial operations at Molycorp Silmet may have caused soil, surface water and groundwater contamination at and around the facility. The facility was constructed in 1948 and has since been used for, among other industrial purposes, the processing of uranium ore and alum shale.
As part of the recycling of gallium, indium, and rhenium scrap into saleable metal, a significant degree of waste material is generated during the leaching and ion-exchange-barren process. We have adequate procedures in place to ensure that waste generated from these processes are appropriately contained and disposed of in a safe and responsible manner. Our Rare Metals operations in Ontario, Canada are subject to provincial regulation under the Ontario Ministry of Environment and must periodically submit documentation to validate the waste disposal process throughout the year. In 2013 and for the period from June 12, 2012 to December 31, 2012, waste disposal costs related to our operations in Ontario, Canada totaled
$0.6 million
and
$0.8 million
, respectively.
Endangered Species Act Relating to our Molycorp Mountain Pass Facility
The federal Endangered Species Act and counterpart state legislation protect species threatened with possible extinction. Such laws and related regulations may have the effect of prohibiting or delaying us from obtaining mining permits and may impose restrictions on pipeline or road building and other mining or construction activities in areas containing the affected species or their habitats. Several species indigenous to Mountain Pass, California, including the desert tortoise, are protected under the Endangered Species Act and California Endangered Species Act.
Use of Explosives Relating to our Molycorp Mountain Pass Facility
In connection with our surface mining activities at our Molycorp Mountain Pass facility, we use explosives, which are subject to regulation, including under the federal Safe Explosives Act. Violation of these regulatory requirements may result in fines, imprisonment, revocation of permits and/or seizure or forfeiture of explosive materials.
Other Environmental Laws
We are required to comply with numerous other international, national, federal, state and local environmental laws and regulations in addition to those previously discussed. These additional laws include, for example, the California Environmental Quality Act, the National Environmental Policy Act, the Emergency Planning and Community Right-to-Know Act, the California Accidental Release Prevention Program and various Estonian, Chinese, Thai and European Union requirements.
Executive Officers of the Registrant
The following table sets forth certain information regarding our executive officers as of March 3, 2014.
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Name
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Age
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Position
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Geoffrey R. Bedford
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46
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President and Chief Executive Officer, and Director
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Michael F. Doolan
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61
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Executive Vice President and Chief Financial Officer
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Kevin W. Johnson
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57
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Executive Vice President and General Counsel
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Geoffrey R. Bedford
was appointed President and Chief Executive Officer and a member of our Board Directors in December 2013. Previously, he served as Executive Vice President and Chief Operating Officer, which followed his role as Executive Vice President of Molycorp’s Rare Earths and Magnetics segment. Mr. Bedford served as Executive Vice President and Chief Operating Officer of Neo Material Technologies until Molycorp acquired Neo Materials in June 2012. Prior to that, he served as Executive Vice President of the Performance Materials Division of Neo Materials from 2005 to 2011, and as Executive Vice President, Finance, and Chief Financial Officer, from 1999 to 2005. Before joining Neo Materials, Mr. Bedford held successively senior financial positions with The Woodbridge Group and Champion Road Machinery. He began his professional career with Price Waterhouse and has a broad range of operating, management and financial experience. He is a Canadian Chartered Accountant holding a Bachelor of Science degree from the University of Western Ontario and a Masters of Business and Administration from Northwestern University through the Kellogg-Schulich Executive Masters of Business Administration program.
Michael F. Doolan
was appointed Executive Vice President and Chief Financial Officer in June 2012. Previously, he was Executive Vice President, Finance, and Chief Financial Officer of Neo from 2005 until 2012. He also served as Senior Vice President and Chief Financial Officer of Falconbridge Limited of Toronto, a natural resources company involved in the exploration, mining, processing, and marketing of various metal and mineral products, since 2002, prior to its merger with Noranda, Inc. Mr. Doolan has over 25 years of experience in all aspects of financial management with specific expertise in international mergers and acquisitions, offshore financing structures and international treasury management.
Kevin W. Johnson
was appointed Executive Vice President and General Counsel on March 22, 2013. Previously, he was the Company's Vice President and Deputy General Counsel from July 2011 to March 2013. From January 2004 through July 2011, he was a partner of Holland & Hart LLP, a law firm with headquarters in Denver, Colorado. From 1999 to 2003, he was Of Counsel to Holland & Hart. From 1985 to 1999, he was a lawyer for The Dow Chemical Company, a specialty Chemicals company, serving in various positions in the United States and Europe. Mr. Johnson received a Bachelor of Arts degree, with honors, in History and Government from Harvard University in 1980, a Master of Science degree in Industrial Relations from the London School of Economics in 1983, and a Juris Doctor degree from the J. Reuben Clark Law School at Brigham Young University in 1984. Mr. Johnson is licensed to practice law in the State of Colorado.
Website access to company reports
We use our Investor Relations website, www.molycorp.com, as a channel for routine distribution of important information, including news releases, analyst presentations and financial information. We post filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the U.S. Securities and Exchange Commission, or SEC, including our annual, quarterly, and current reports on Forms 10-K, 10-Q, and 8-K; our proxy statements; and any amendments to those reports or statements. All such postings and filings are available on our Investor Relations website free of charge. In addition, this website allows investors and other interested persons to sign up to automatically receive e-mail alerts when we post news releases and financial information on our website. The SEC also maintains a website, www.sec.gov, that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The content on any website referred to in this Annual Report on Form 10-K is not incorporated by reference into this Annual Report on Form 10-K unless expressly noted.
ITEM 1A. RISK FACTORS.
The following are certain risk factors that could affect our business, financial position, results of operations or cash flows. These risk factors should be considered along with the forward-looking statements contained in this Annual Report on Form 10-K because these factors could cause our actual results or financial condition to differ materially from those projected in forward-looking statements. The following discussion is not an all-inclusive listing of risks, although we believe these are the more material risks that we face. If any of the following occur, our business, financial position, results of operations or cash flows could be negatively affected.
Risks Related to Our Business
The production of rare earth products is a capital-intensive business and our ongoing modernization and expansion efforts at our Molycorp Mountain Pass facility will require the commitment of substantial resources. Any unanticipated costs or further delays associated with our ongoing modernization and expansion efforts at our Molycorp Mountain Pass facility could have a material adverse effect on our financial condition or results of operations.
We have encountered cost pressures during the modernization and expansion efforts at our Molycorp Mountain Pass facility that have led to significantly higher costs than previously expected. We previously implemented mitigation efforts to maintain costs within our estimates in response to cost pressures and continue to experience additional cost pressures. In addition, our estimated expenses may increase as consultants, personnel and equipment associated with advancing development and commercial production are added. The progress of our modernization and expansion efforts at our Molycorp Mountain Pass facility and the amounts and timing of expenditures will depend in part on the following:
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the replacement of a significant portion of the existing process, plant and equipment that consists of aging or outdated facilities and equipment, retooling and development and the preparation of the mine pit for renewed production of ore;
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the results of consultants' analysis and recommendations;
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•
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maintaining required federal, state and local permits;
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•
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completing infrastructure and construction work and the completion of commissioning and integration of all of the systems comprising our Molycorp Mountain Pass facility;
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•
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negotiating sales and off-take contracts for our planned production;
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•
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the execution of any joint venture agreements or similar arrangements with strategic partners; and
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•
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other factors, many of which are beyond our control.
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Most of these activities require significant lead times and must be advanced concurrently.
In addition, we have experienced delays associated with our modernization and expansion efforts at our Molycorp Mountain Pass facility. As a result, our production in 2013 and 2012 was substantially lower than expected, which led to lower than expected production volumes, revenues and cash flows, and delayed our realization of the benefits of our vertical integration strategy while our other operations continued to purchase raw materials from third parties rather than accepting delivery of products from our Molycorp Mountain Pass facility. We expect production to continue at a lower level over the next several months. In addition, our chloralkali plant was not turned over to operations until February 2014, which has delayed our expected realization of lower production costs related to chemical reagents and process wastewater. Moreover, the final unit of our multi-stage cracking plant, which is part of a multi-stage chemical process designed to increase the facility's rare earth recovery rates, boost production throughput, and contribute to lower unit production cost, completed commissioning and became operational in late December 2013. Therefore, we have not yet realized our expected lower production costs, and any difficulties or delays in the optimization of the chloralkali plant and other plants that are expected to improve our operational efficiency at the Molycorp Mountain Pass facility would delay such cost reductions and negatively impacting cash flows. Any unanticipated costs or other further delays associated with our optimization efforts at our Molycorp Mountain Pass facility could have a material adverse effect on our financial condition or results of operations and could require us to seek additional capital, which may not be available on commercially acceptable terms or at all.
We may be unsuccessful in generating, securing and raising the necessary capital to execute our current business plan.
While we have initiated measures to mitigate certain adverse cost trends and are continuing to re-evaluate the impact of cost pressures on the budget, we will incur additional costs if our mitigation measures are not successful.
We expect to finance the remaining capital expenditures and other capital expenditures related to operations at the Molycorp Mountain Pass facility and all other operating facilities, our selling, general and administrative expenses, the execution of our business plan, as well as our working capital requirements with the net proceeds from our October 2013 equity issuance, cash on hand, anticipated cash flows from operations at certain segments (before debt service) and potential proceeds from revolving credit facilities or certain equipment financing. We have no firm commitments for any revolving credit facilities or additional equipment financing and can provide no assurances that we will be able to obtain any commitments on acceptable terms or at all. Additionally, the full funding of our current business plan continues to be dependent on (i) the accuracy of our cost estimates for capital expenditures, (ii) our ability to ramp up run rates at our Molycorp Mountain Pass facility pursuant to our expectations without further delays, and to achieve lower cash costs of production as a result of the commissioning of our chloralkali plant and further optimization of our multi-stage cracking unit, (iii) stable or improved market conditions, (iv) our ability to sell our production of rare earths (including our ability to sell our cerium through market acceptance of SorbX™ or otherwise) and (v) the absence of payments on current and future contingent liabilities. If these assumptions prove inaccurate, our estimates could prove incorrect and we may need additional financing.
As part of our cash management procedures, we continue to evaluate opportunities to improve our liquidity, including potential proceeds from revolving credit facilities, and lease and loan financing for certain equipment, although we do not have any firm commitments for such revolving credit facilities.
In the event that we are unable to obtain additional financing or we are not successful in curtailing and/or deferring capital expenditures we would have a liquidity shortfall and would be unable to execute our current business plan.
The actual amount of capital required to optimize our Molycorp Mountain Pass facility may vary materially from our current estimates, in which case we would need to raise additional funds, which may delay operations and have a material adverse effect on our business and financial condition.
The anticipated funding required to optimize operations at our Molycorp Mountain Pass facility is based on certain estimates and assumptions we have made about the time and effort required to complete such activities and other factors required to optimize operations at the project. If any of these estimates or assumptions change, the actual timing and amount of capital required to optimize operations of our Molycorp Mountain Pass facility, including any future expansions, may vary materially from what we anticipate. Additional funds may be required in the event of significant departures from our current plan, unforeseen delays, cost overruns, engineering design changes or other unanticipated expenses. There can be no assurance that additional financing will be available to us, or, if available, that it can be obtained on a timely basis and on commercially acceptable terms.
There is no assurance that we will be able to successfully complete the expansion and modernization of our Molycorp Mountain Pass facility within our current timetable, that the actual costs of completion will not exceed our current estimated costs or that we will be able to secure off-take agreements for the incremental production capacity, and we cannot provide any assurance as to the actual operating costs once we have completed the capacity expansion.
Our Molycorp Mountain Pass facility is the foundation for our vertical integration strategy and is the largest, most fully developed rare earths mine outside of China. It has been producing rare earth products for approximately 60 years. Our Molycorp Mountain Pass facility has a design capacity of 19,050 mt of REO (including LREC). Actual production of REO (including LREC) at our Molycorp Mountain Pass facility has been lower than expected, as a result of production interruptions while we continue to optimize operations. We produced
1,099
mt and
1,000
mt of REO (including LREC) at our Molycorp Mountain Pass facility during the third and fourth quarters of 2013, respectively. Actual production of REO (including LREC) during January 2014 was
412
mt, and we estimate that production of REO (including LREC) at our Molycorp Mountain Pass facility will be approximately
400
mt in February 2014. We are currently targeting to gradually increase our production capacity during the remainder of 2014 to an annualized production rate of REO (including LREC) of approximately 23,000 mt during the fourth quarter of 2014, although actual production during the first half of the year is expected to be below the design capacity of 19,050 mt on an annualized basis. Actual production of REO (including LREC) during 2014 will depend on internal requirements for our Chemical and Oxides segment and our Magnetic Materials and Alloys segment and external customer demand as well as our success in ramping up and operating our Molycorp Mountain Pass facility. We recently turned over to operations our chloralkali plant and the final unit of our multi-stage cracking unit. We continue to optimize the operation of our Molycorp Mountain Pass facility. Upon optimization, we expect our Molycorp Mountain Pass facility to be able to operate at its design capacity and, depending upon the volume of rare earths production, we expect our Molycorp Mountain Pass facility to have production cash costs that are competitive with the lowest cost producers of rare earth products globally, but we can provide no assurances. Although the modernization and expansion of our Molycorp Mountain Pass facility was planned to allow a design capacity increase of up to 40,000 mt of REO (including LREC) per year, we will not expand production to the expanded 40,000 mt run rate (although we believe it will be able to produce in excess of 19,050 mt) unless market demand,
product pricing, capital availability and financial returns justify such production. Our actual production rate will be influenced by customer demand and end-market conditions, among other factors.
We do not believe we will need to obtain additional permits for the future expansion and modernization of our Molycorp Mountain Pass facility, other than air and certain building permits and the modification of existing permits after 2021 in connection with the expansion of the pit boundary at our Molycorp Mountain Pass facility. However there is no assurance that we will not, in the future, learn of permits that we will be required to obtain or existing permits that we will be required to modify.
We may not be able to realize the benefits of the expansion and modernization of our Molycorp Mountain Pass facility or be able to produce at the costs we are expecting. In particular, we will not be able to achieve anticipated production costs until the chloralkali plant and our multi-stage cracking unit are optimized, and any delays in such optimization will further exacerbate our higher cost structure. Any failure to successfully implement the expansion and modernization of our Molycorp Mountain Pass facility due to insufficient funding, delays or unanticipated costs, or to realize the anticipated benefits of the expansion and modernization of our Molycorp Mountain Pass facility, including securing off-take commitments for the incremental production, could have a material adverse effect on our business, financial condition and results of operations.
Our growth depends in large part on the completion of the modernization and expansion of our Molycorp Mountain Pass facility, which is our only rare earths mining facility.
Our only rare earths mining facility at this time is our Molycorp Mountain Pass facility. Our continued viability is based on successfully implementing our strategy, including completion of the expansion and modernization of our Molycorp Mountain Pass facility in accordance with our expected timeframe. The deterioration or destruction of any part of our Molycorp Mountain Pass facility may significantly hinder our ability to reach or maintain full planned run rates within the expected time frame or at all. If we are unsuccessful in reaching and maintaining full planned run rates for rare earths at our Molycorp Mountain Pass facility, within expected time frames or at all, we may not be able to build a sustainable or profitable business.
We may not be able to develop sufficient internal and external sources of demand for the rare earth products manufactured at our Molycorp Mountain Pass facility.
We are working to establish stable internal and external sources of demand for the rare earth minerals and products we manufacture through our Resources segment at our Molycorp Mountain Pass facility. We intend to allocate a portion of such rare earth minerals and products to our Chemicals and Oxides segment and our Magnetic Materials and Alloys segment as feedstock for our fully integrated downstream manufacturing facilities. We intend to enter into purchase orders and short-term sales contracts, and long-term sales contracts, with existing and new customers for planned production of rare earth minerals and products manufactured through our Resources segment and not allocated internally, but currently do not have binding contracts for a material portion of the planned production. Our ability to execute this strategy depends on the extent to which we are able to generate sufficient demand for downstream products manufactured by our Chemicals and Oxides segment and our Magnetic Metals and Alloys segment to cover the allocation of feedstock intended for these segments, and our ability to enter into contracts with existing and new customers for the unallocated portion of the rare earth minerals and products manufactured through our Resources segment.
A substantial portion of our current production from the Resources segment is cerium, which is in surplus and prices for which have declined significantly since 2011. In 2013, we completed a number of case studies at various plants using SorbX™, a cerium-based product, to remove contaminants from water. Based on the results from these case studies, we currently are working with some of our initial customers to use their plants to demonstrate the benefits of using SorbX™ to remove contaminants, including phosphates from wastewater. In 2013, we entered into a distribution agreement for SorbX™ for the removal of phosphates in the municipal and industrial wastewater markets, and have since sold limited quantities of SorbX™ directly to third-party customers. Beginning in 2013, we have been selling limited but consistent volumes of PhosFIX™, also a cerium-based product for recreational water applications.
The failure to enter into additional binding contracts, or the failure to meet the conditions necessary for customers to commence or continue purchasing under existing agreements, or the failure to allocate production of rare earth minerals and products for use in our downstream facilities in the amounts intended, may have a material adverse effect on our financial position and results of operations.
We may be adversely affected by fluctuations in demand for, and prices of, rare earth products.
Because our primary source of revenue is the sale of rare earth minerals and products, changes in demand for, and the market price of, rare earth minerals and products could significantly affect our profitability. The value and price of our securities and our financial results may be adversely affected by declines in the prices of rare earth minerals and products. Rare earth minerals and product prices fluctuate and are affected by numerous factors beyond our control such as interest rates,
exchange rates, inflation or deflation, fluctuation in the relative value of the U.S. dollar against foreign currencies on the world market, global and regional supply and demand for rare earth minerals and products, and the political and economic conditions of countries that produce rare earth minerals and products.
As a result of the global economic crisis, rare earth product prices declined by approximately 50% between 2008 and the end of the third quarter of 2009 before increasing during 2010 and most of 2011 and then declining since then. Pricing for REEs has experienced significant volatility over the past several years due to a number of factors: the recent global financial crisis; a severe contraction by China, beginning in 2010, of rare earths it allowed for export; China's continuing efforts to institute stronger environmental reforms across its rare earths industry, force industry consolidation, and constrict rare earths production; a build-up of stockpiles by rare earths consumers and government entities; and a general lack of certainty among rare earths customers regarding the reliability of the future supply of REEs. Although current prices for all REEs other than lanthanum and cerium remain significantly higher than historic (pre-2010) levels, sales prices for REEs, as well as demand for REEs, began to weaken in the second quarter of 2012 and continued to decline through the end of that year, with further declines in 2013. For example, average prices for lanthanum oxide and cerium oxide have decreased significantly from their peak in July 2011 due, in part, to a reduction in reported speculative buying of rare earth materials in China, to flooding in Thailand leading to slower production in Asia and to a global economic slowdown. We believe the persistent global economic weakness combined with falling prices for REEs (which generally results in a very conservative purchasing pattern by our customers) unfavorably impacted the volume of products we shipped at our Molycorp Mountain Pass, Molycorp Canada and Silmet facilities in the fourth quarter of 2012 and in fiscal 2013, and negatively affected our revenue and cash flows from operations. Protracted periods of low prices and demand for rare earth minerals and products such that we saw in 2012 and 2013 could significantly reduce revenues and the availability of required development funds in the future. This could cause substantial reductions to, or a suspension of, rare earths production operations, impair asset values and reduce our proven and probable rare earth ore reserves.
Demand for our products may be impacted by demand for downstream products incorporating rare earths, including hybrid and electric vehicles, wind power equipment and other clean technology products, as well as demand in the general automotive and electronic industries. Lack of growth in these markets may adversely affect the demand for our products, which would have a material adverse effect on our business and results of operations.
In contrast, extended periods of high commodity prices may create economic dislocations that may be destabilizing to rare earth minerals supply and demand and ultimately to the broader markets. Periods of high rare earth mineral market prices generally are beneficial to our financial performance. However, strong rare earth mineral prices, as well as real or perceived disruptions in the supply of rare earth minerals, also create economic pressure to identify or create alternate technologies that ultimately could depress future long-term demand for rare earth minerals and products, and at the same time may incentivize development of otherwise marginal mining properties. We believe this occurred recently, when rising prices in 2011 and the first half of 2012 prompted such industrial substitution. For example, automobile manufacturers have recently announced plans to develop motors for electric and hybrid cars that do not require rare earth metals due to concerns about the available supply of rare earths. If the automobile industry or other industries reduce their reliance on rare earth products, the resulting change in demand could have a material adverse effect on our business.
Conditions in the rare earths industry have been, and may continue to be, extremely volatile, which could have a material impact on our company.
Conditions in the rare earths industry have been extremely volatile, and prices, as well as supply and demand, have been significantly impacted by a number of factors, principally changes in economic conditions and demand for rare earth materials and changes, or perceived changes, in Chinese quotas for export of rare earth materials. As a result of the global economic crisis, rare earth product prices declined by approximately 50% between 2008 and the end of the third quarter of 2009. According to Metal-Pages, from the beginning of the fourth quarter of 2009 through the end of 2011, average prices for rare earths rose by approximately 1,100%. Furthermore, over the same period, average prices for some of the most common rare earths (cerium oxide, lanthanum oxide, neodymium oxide, and praseodymium oxide) rose by more than 1,000%. Average prices for lanthanum oxide and cerium oxide decreased by approximately 50% during the second half of 2011 due, in part, to a reduction in reported speculative buying of rare earth materials in China, flooding in Thailand leading to slower production in Asia and a global economic slowdown. Prices continued to decline though 2013. If conditions in our industry remain volatile, our stock price may continue to exhibit volatility as well. In particular, if prices or demand for rare earths were to decline, our stock price would likely decline, and this could also impair our ability to find purchasers for our products at prices acceptable to us.
We operate in a highly competitive industry.
The rare earths mining and processing markets are capital intensive and competitive. Our Chinese competitors may have greater financial resources, as well as other strategic advantages to maintain, improve and possibly expand their facilities. Additionally, the Chinese producers have historically been able to produce at relatively low costs due to domestic economic
factors. Even upon successful implementation of the new processing technologies and capabilities at our Molycorp Mountain Pass facility, if we are not able to achieve anticipated costs of production, then any strategic advantages that our competitors may have over us, such as lower labor costs, could have a material adverse effect on our business.
The success of our business will depend, in part, on the establishment of new uses and markets for rare earth products.
The success of our business will depend, in part, on the establishment of new markets by us or third parties for certain rare earth products that may be in low demand. For example, cerium is, and is expected to remain, in global surplus. Although we have developed a proprietary line of cerium-based water treatment products, including SorbX™ and PhosFIX™, these products have been sold only in limited commercial quantities and have yet to be fully commercialized. In addition, although we are developing rare earth products for use in NdFeB magnets, which are used in critical existing and emerging technologies, such as hybrid and electric vehicles, wind power turbines and compact fluorescent lighting, the success of our business depends on creating new markets and successfully commercializing rare earth products in existing and emerging markets. Any unexpected costs or delays in the commercialization of any of the foregoing products and applications could have a material adverse effect on our financial condition or results of operations.
An increase in the global supply of rare earth products, dumping and predatory pricing by our competitors may materially adversely affect our profitability.
The pricing and demand for our products is affected by a number of factors beyond our control, including growth of economic development and the global supply and demand for rare earth products. According to IMCOA, it is estimated that China accounted for approximately 86% of global rare earths production in 2012. China also dominates the manufacture of metals and NdFeB magnets from rare earths, a capacity that is not currently found in the United States. Once we reach full planned run rates for rare earths and other planned downstream products, the increased competition may lead our competitors to engage in predatory pricing behavior. Any increase in the amount of rare earth products exported from other nations and increased competition may result in price reductions, reduced margins and loss of potential market share, any of which could materially adversely affect our profitability. As a result of these factors, we may not be able to compete effectively against current and future competitors.
Changes in China's export policy may adversely affect our financial condition and results of operations.
In 1999, the government of China introduced an export quota system for the rare earths industry. The Chinese government heightened international supply concerns beginning in August 2009 when China's Interior Ministry first signaled that it would further restrict exports of Chinese rare earth resources. Citing the importance of the availability of REEs to internal industries and the desire to conserve resources, the Chinese government has announced export quotas, increased export tariffs and introduced a "mining quotas policy" that, in addition to imposing export quotas and export tariffs, also imposes production quotas and limits the issuance of new licenses for rare earths exploration. According to IMCOA, China's export quotas have decreased from approximately 65,000 mt of rare earth products in 2005 to approximately 30,184 mt of rare earth products in 2011. The Chinese Ministry of Foreign Commerce, or MOFCOM, increased China's export quota slightly in 2012, up to 30,996 mt of rare earth products, or approximately 3% from 2011. In 2008, China imposed export taxes of up to 25% on selected rare earths (primarily heavy separated rare earth oxides) and up to 15% for all other rare earths (primarily light rare earth oxides).
On March 13, 2012, the United States, the European Union and Japan filed a complaint with the World Trade Organization over the Chinese export policy on rare earths. If this challenge to the Chinese export policy is successful, there could be increased supply in the world market for rare earths, which could cause the price of rare earths to decrease. If the price of rare earths decreases, our financial condition and results of operations could be adversely affected.
Molycorp Canada has operations in China and its ability to export is subject to certain quotas based on its export history and export value. Historically, Molycorp Canada has been able to secure sufficient quotas to meet its demands. While export quotas have become less relevant to the business of Molycorp Canada, any restrictions to the quota grants or policy could have a material impact on the results of Molycorp Canada.
Changes in China's policy or the interpretation of China's policy on rare earths production or the import of rare earth feedstock may adversely affect our financial condition and results of operations.
Our ability to capture the expected cost reductions in the production of rare earth products at Molycorp Canada's operations in China depends on our ability to import rare earths into China produced from our Molycorp Mountain Pass facility. Restrictions by China on the production of rare earth products in China or the import of rare earths into China for the production of rare earth products would adversely affect Molycorp Canada's ability to process rare earths produced from our Molycorp Mountain Pass facility in its operations in China, and have an adverse impact on the results of Molycorp Canada.
We may not successfully establish or maintain collaborative, joint venture and licensing arrangements, or establish new ones, which could adversely affect our ability to develop and commercialize our rare earth products.
A key element of our business strategy is to utilize vertical integration through further downstream processing of our rare earths into rare earth metal alloys and finished magnets for clean-energy, high-technology and defense applications. Our acquisitions of Molycorp Silmet and MMA, our joint venture agreement with Mitsubishi and Daido, and the Molycorp Canada acquisition reflect this strategy. To implement this vertical integration strategy successfully, we may need to form other joint ventures with existing magnet producers for the final production of finished rare earth magnets. In addition, other licenses that may be necessary for some of these downstream processing steps have not yet been obtained. Any failure to establish or maintain collaborative, joint venture or licensing arrangements for the production of downstream products on favorable terms could adversely affect our business prospects, financial condition or ability to develop and commercialize downstream rare earth products.
We face a variety of risks associated with acquiring and integrating new business operations that could have a significant negative impact on our business, financial condition and results of operations.
We acquired Molycorp Canada in 2012 for its proven leadership in the development, processing and distribution of technically advanced rare earth products and to achieve greater exposure to China, one of the world's largest and fastest-growing rare earths consuming market. In 2011, we acquired Molycorp Silmet in order to increase our production capacity for rare earths and rare earth metals, and acquired MMA in order to provide us with the capability to immediately begin manufacturing and selling rare earth alloys for the production of NdFeB and samarium cobalt, or SmCo, magnets, as well as a variety of other specialty alloys and products. We may in the future pursue other strategic acquisitions that we believe would expand our product offerings and capabilities or complement our business. We have limited experience making such acquisitions. Any acquisition that we make will be accompanied by the risks commonly encountered in acquisitions of businesses. The process of integrating acquired businesses, products or technologies may create unforeseen operating difficulties and expenditures. We may have difficulty integrating and assimilating the operations and personnel of any acquired companies, realizing anticipated synergies and maximizing the financial and strategic position of the combined enterprise. We may incur costs necessary to reorganize, expand or otherwise modify existing operations to meet future production needs, and we may also incur closure, demolition and carrying costs for portions of properties, for which we have no operational uses. We may also have difficulty maintaining uniform standards, policies and controls across the organization. The process of integrating acquired businesses may also result in a diversion of management's attention and cause an interruption of, or loss of momentum in, our activities. Additionally, any acquisition that we make may result in the assumption of material liabilities. Businesses and properties we acquire may be in an unexpected condition and may subject us to increased costs and liabilities, including environmental liabilities. The costs and liabilities associated with known risks may be greater than expected, and we may assume unknown liabilities, either of which could have a material adverse effect on our business, financial condition and results of operations. Foreign acquisitions involve risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries. As a result of these risks, the anticipated benefits of these acquisitions may not be fully realized, if at all, and the acquisitions could have a material adverse effect on our business, financial condition and results of operations.
We have a significant amount of goodwill, and any future goodwill impairment charges could adversely impact our results of operations.
Following goodwill impairment charges of approximately $289.9 million and
$11.0 million
that we recognized in 2012 and 2013, respectively, we had goodwill of
$228.8 million
at December 31, 2013. The occurrence of potential indicators of impairment affecting any of our reporting units, such as a longer than anticipated soft rare earths pricing environment, loss of some end-markets for our products, a material negative change in relationships with significant customers, strategic decisions made in response to economic or competitive conditions, weak growth for some of our new applications, and delays in optimizing operations at our Molycorp Mountain Pass facility that may defer our ability to enter into longer term contracts, could result in further goodwill impairment charges, which could adversely impact our net results of operations. We have suffered and continue to suffer from soft pricing environments and increased stock price volatility, and, in connection with the ordinary course preparation of our financial statements, will evaluate if we will need to record additional impairment charges as required under generally accepted accounting principles.
Our business will be adversely affected if we do not successfully implement new processing technologies and capabilities.
Our processing technologies and capabilities are key components of our competitive strengths and are expected to contribute to low operating costs and increasing the life of the ore body at our Molycorp Mountain Pass facility. In the second quarter of 2010, we began to process bastnasite concentrate from our stockpiles in an effort to significantly improve these technologies and capabilities and optimize recovery rates. Although this effort has been successful at pilot-scale level with over
95% recovery, we may not be able to scale the new technology and recovery rates to commercial levels at our Molycorp Mountain Pass facility, or may not be able to do so as planned. We are also working to optimize other steps in our production process including our multi-stage cracking unit and chloralkali facility. Any failure may affect our ability to achieve the expected benefits of the new technologies and may have a material adverse effect on our financial condition or results of operations.
Markets for Molycorp Canada's rare earths, zirconium or other minor metal-based products are highly competitive and characterized by rapid technological change. Molycorp Canada's future successes depend upon its ability to continue to provide products that achieve market acceptance. As technologies develop, substitutes may be developed for Molycorp Canada's products that may have an adverse impact on the marketability of Molycorp Canada's products. Since Molycorp Canada specializes in a limited number of products, there is a risk that their replacement by other products may have a material adverse impact on Molycorp Canada's sales.
Power shortages at our Molycorp Mountain Pass facility may temporarily delay mining and processing operations and increase costs, which may materially adversely impact our business.
Due to its position on the regional electric grid, our Molycorp Mountain Pass facility faces occasional power shortages during peak periods. Instability in electrical supply in past years has caused sporadic outages and brownouts and higher costs. Such outages and brownouts have had a negative impact on production. We have installed a natural gas powered co-generation power plant as part of our modernization and expansion of our Molycorp Mountain Pass facility to reduce energy costs at our Molycorp Mountain Pass facility as well as minimize or eliminate our reliance on the regional electric power grid. If this co-generation power plant is unable to provide sufficient power for the operation of our Molycorp Mountain Pass facility, we will remain subject to the effects of occasional power outages and brownouts and could experience temporary interruptions of mining and processing operations. We then may be unable to fill customer orders in a timely manner and may be subject to higher power costs at our Molycorp Mountain Pass facility. As a result, our revenue could be adversely impacted and our relationships with our customers could suffer, adversely impacting our ability to generate future revenue. In addition, if power to our Molycorp Mountain Pass facility is disrupted during certain phases of our rare earths extraction process, we may incur significant expenses that may adversely affect our business.
Increasing costs or limited access to raw materials may adversely affect our profitability.
We use significant amounts of hydrochloric acid and sodium hydroxide as chemicals to process rare earths. We ultimately intend to produce our own hydrochloric acid and sodium hydroxide at our Molycorp Mountain Pass facility. However, the technology we developed to internally produce hydrochloric acid and sodium hydroxide has to be further optimized in order to produce sufficient volumes of those chemical reagents. Accordingly, we still purchase hydrochloric acid and sodium hydroxide in the open market and, as a result, we could be subject to significant volatility in the cost or availability of these chemicals. We may not be able to pass increased prices for these chemicals through to our customers in the form of price increases. A significant increase in the price, or decrease in the availability, of these chemicals before we produce them on site could materially increase our operating costs and adversely affect our profit margins from quarter to quarter.
Molycorp Canada is vulnerable to any volatility in the prices of raw materials because it does not currently have long-term supply contracts. The Chinese government is aggressively monitoring and regulating rare earth mining operations. In some cases, it is shutting down or curtailing illegal or environmentally damaging mining activities. This could have an adverse impact on rare earth raw materials supply. Although we believe there is an adequate supply of rare earths feedstock for Molycorp Canada's processing facilities, there is no assurance that the prices of such rare earths feedstock will not rise dramatically, in which case the increased cost of production may have a material adverse effect on the profit margins of Molycorp Canada. Such rises in the prices of rare earths feedstock may be offset by increasing the prices of Molycorp Canada's rare earth related products; however, there is no assurance that the market will bear such price increases and even if the market will bear such increases, the Molycorp Magnequench business will have an increased cost of production since rare earths are a primary raw material. In addition, if market prices for mixed rare earth oxides and zirconium products decline, there is no assurance that raw material prices will decline sufficiently or in tandem to offset the decline in selling prices. The above could have a material effect on Molycorp Canada's profit margins. Molycorp Canada is also dependent on being able to secure an adequate supply of gallium, indium or rhenium bearing scrap at economic prices, to maintain and grow its recycling business.
Fluctuations in transportation costs or disruptions in transportation services could increase competition or impair our ability to supply rare earth minerals or products to our customers, which could adversely affect our results of operations.
We transport cerium, lanthanum, neodymium, praseodymium and didymium oxide products from our Molycorp Mountain Pass facility to our Molycorp Silmet and MMA facilities, and to some of our Molycorp Canada facilities around the world. Finding affordable and dependable transportation is important because it allows us to supply customers, third parties under tolling agreements and our operating facilities around the world. Labor disputes, derailments, adverse weather conditions or
other environmental events and changes to rail or ocean freight systems could interrupt or limit available transport services, which could result in customer dissatisfaction and loss of sales potential and could materially adversely affect our results of operations.
We must process rare earths to exacting specifications in order to provide customers with a consistently high quality product. An inability to perfect the mineral extraction process to meet individual customer specifications may have a material adverse effect on our financial condition or results of operations.
We process rare earths to meet customer needs and specifications and to provide customers with a consistently high quality product and a purity higher than previously achieved in prior mining operations at our Molycorp Mountain Pass facility. An inability to perfect the mineral extraction process to meet individual customer specifications may have a material adverse effect on our financial condition or results of operations. In addition, customer needs and specifications may change with time. Any delay or failure in developing processes to meet changing customer needs and specifications may have a material adverse effect on our financial condition or results of operations.
Diminished access to water may adversely affect our operations.
Processing of rare earths at our facilities requires significant amounts of water. The technology we are optimizing at our Molycorp Mountain Pass facility to significantly reduce our need for fresh water, including the proprietary production of our own hydrochloric acid and sodium hydroxide from wastewater at our own chloralkali plant, has not yet been fully optimized. Any decrease or disruption in our available water supply until this technology is successfully developed may have a material adverse effect on our operations and our financial condition or results of operations.
Inaccuracies in our estimates of rare earths reserves and resource deposits could result in lower than expected revenues and higher than expected costs.
We base our rare earths reserve and resource estimates on engineering, economic and geological data assembled and analyzed by outside firms, which are reviewed by our engineers and geologists. Ore reserve estimates, however, are necessarily imprecise and depend to some extent on statistical inferences drawn from available drilling data, which may prove unreliable. There are numerous uncertainties inherent in estimating quantities and qualities of rare earths reserves and non-reserve rare earths deposits and costs to mine recoverable reserves, including many factors beyond our control. Estimates of economically recoverable rare earths reserves necessarily depend upon a number of variable factors and assumptions, all of which may vary considerably from actual results, such as:
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geological and mining conditions and/or effects from prior mining that may not be fully identified by available data or that may differ from experience;
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assumptions concerning future prices of rare earth products, operating costs, mining technology improvements, development costs and reclamation costs; and
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assumptions concerning future effects of regulation, including the issuance of required permits and taxes by governmental agencies.
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In April 2012, we revised our reserve estimate based on a topography as of January 4, 2012. While our probable reserves increased, our proven reserves decreased significantly. We have updated our proven reserve estimates since then by deducting our annual production from our reserves. Revised market prices and our revised operating cost estimates could impact the level of economically recoverable reserves. Any inaccuracy in our estimates related to our rare earths reserves and non-reserve rare earths deposits could result in lower than expected revenues and higher than expected costs or a shortened estimated life for the mine at our Molycorp Mountain Pass facility.
Period-to-period conversion of probable rare earths ore reserves to proven ore reserves may result in increases or decreases to the total reported amount of ore reserves. Conversion, an indicator of the success in upgrading probable ore reserves to proven ore reserves, is evaluated annually. Conversion rates are affected by a number of factors, including geological variability, applicable mining methods and changes in safe mining practices, economic considerations and new regulatory requirements.
Work stoppages or similar difficulties could significantly disrupt our operations, reduce our revenues and materially adversely affect our results of operations.
As of December 31, 2013,
237
employees at our Molycorp Mountain Pass facility were covered by a collective bargaining agreement with the United Steelworkers of America that expires in March 2015. Also as of December 31, 2013,
171
employees at our Molycorp Silmet facility were unionized employees. A work stoppage at either or both our Molycorp Mountain Pass or
Molycorp Silmet facilities could significantly disrupt our operations, reduce our revenues and materially adversely affect our results of operations.
A shortage of skilled technicians and engineers may further increase operating costs, which may materially adversely affect our results of operations.
Efficient production of rare earth products using modern techniques and equipment requires skilled technicians and engineers. In addition, our expansion efforts will significantly increase the number of skilled technicians and engineers required to successfully operate our business. In the event that we are unable to hire and train the necessary number of skilled technicians and engineers, there could be an adverse impact on our labor costs and our ability to reach full planned production levels in a timely manner, which could have a material adverse effect on our results of operations.
We depend on key personnel for the success of our business.
We depend on the services of our senior management team and other key personnel. The loss of the services of any member of senior management or a key employee could have an adverse effect on our business. We may not be able to locate, attract or employ on acceptable terms qualified replacements for senior management or other key employees if their services are no longer available.
Because of the dangers involved in the mining of minerals and the manufacture of mineral products, there is a risk that we may incur liability or damages as we conduct our business.
The mining of minerals and the manufacture of mineral products involves numerous hazards, including:
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unusual and unexpected rock formations affecting ore or wall rock characteristics;
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ground or slope failures;
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the use of explosives in mining operations;
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the use of hazardous chemicals in manufacturing operations, including at elevated pressures and temperatures;
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periodic interruptions due to inclement or hazardous weather conditions or other acts of God; and
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mechanical equipment failure and facility performance problems.
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Although we maintain insurance to address certain risks involved in our business, such as coverage for property damage, business interruption and workers' compensation, there can be no assurance that we will be able to maintain insurance to cover these risks at economically feasible premiums. Additionally, we cannot be certain that all claims we may make under our insurance policies will be deemed to be within the scope of, or fully covered by, our policies. Furthermore, we do not maintain coverage for losses resulting from acts of terrorism. We might also become subject to liability for environmental damage or other hazards that may be uninsurable or for which we may elect not to insure because of premium costs or commercial impracticality. Additionally, these policies contain limits of coverage and exclusions that are typical of such policies generally. The payment of such premiums, or the assumption of such liabilities, may have a material adverse effect on our financial position and results of operations.
We are currently subject to litigation, including a stockholder class action litigation and derivative litigation, the unfavorable outcome of which might have a material adverse effect on our financial condition, operating results and cash flow.
From time to time, we may become subject to various legal and regulatory proceedings relating to our business.
In February 2012, a purported class action lawsuit was filed in the U.S. District Court for the District of Colorado against us and certain of our current and former executive officers alleging violations of the federal securities laws. The Consolidated Class Action Complaint filed on July 31, 2012 also names most of our Board members and some of our stockholders as defendants, along with other persons and entities. That Complaint alleges 18 claims for relief arising out of alleged: (1) securities fraud in violation of the Securities Exchange Act of 1934, or the Exchange Act, during the proposed class period from February 11, 2011 through November 10, 2011; and (2) materially untrue or misleading statements in registration statements
and prospectuses for our public offering of preferred stock in February 2011 and of common stock in June 2011, in violation of the Securities Act of 1933, or the Securities Act. Our motion to dismiss that Complaint was filed in October 2012 and is pending. We believe that this lawsuit is without merit, and we intend to vigorously defend ourselves against these claims.
A consolidated shareholder derivative lawsuit filed purportedly on our behalf against us (as a nominal defendant) and certain of our current and former directors, executive officers and shareholders is pending in the Delaware Court of Chancery. In August 2012, a consolidated amended shareholder derivative complaint was filed, asserting causes of action for alleged: (1) breach of fiduciary duty, including the duties of loyalty and due care; (2) breach of fiduciary duty not to trade on or misuse material non-public information; (3) unjust enrichment; and (4) aiding and abetting a breach of fiduciary duty. On our behalf, the plaintiffs in the consolidated derivative action seek, among other things, monetary damages, restitution, and an accounting. The defendants filed motions to dismiss and motions to stay that action in October 2012. Pursuant to an order dated May 15, 2013, the Delaware Court of Chancery stayed the derivative lawsuit pending final disposition of the purported class action lawsuit. On October 9, 2013, certain plaintiffs, on our behalf, filed a Motion to Lift the Stay and for Leave to File an Amended Complaint. All briefs in respect of this motion have been filed, and a hearing on the motion was held on February 7, 2014. Two additional shareholder derivative lawsuits that were filed in the U.S. District Court in Colorado have been dismissed, but the plaintiffs in those cases pursued an appeal of that ruling in the U.S. Court of Appeals for the Tenth Circuit. On August 20, 2013, the Tenth Circuit remanded these cases back to the Colorado District Court. Both we and the plaintiffs have filed their respective briefs in the remanded proceeding and the decision of the Colorado District Court is pending. Subsequently, a different shareholder filed purportedly on our behalf a new shareholder derivative lawsuit in the U.S. District Court in Colorado on November 20, 2013. On December 11, 2013, the Colorado District Court
sua sponte
consolidated the new derivative lawsuit with the two remanded lawsuits, and permitted the plaintiff in the new derivative lawsuit to file a brief in the remanded proceeding. On December 27, 2013, the plaintiff in the new derivative lawsuit filed its brief in the remanded proceeding, and filed a motion to vacate the consolidation order. The decision of the Colorado District Court on each of the remanded proceeding and the motion to vacate the consolidation order is pending. Pursuant to an order the Colorado District Court entered on January 7, 2014, the defendants need not respond to the new derivative lawsuit until the Colorado District Court decides the defendants’ motion to dismiss or stay the remanded proceeding.
In August 2013, two purported class action lawsuits were filed in the U.S. District Court for the Southern District of New York against us and certain of our current and former executive officers, alleging violations of the federal securities laws. The purported class action lawsuits allege claims for relief arising out of alleged securities fraud in violation of the Exchange Act during the proposed class period from August 2, 2012 through August 7, 2013. Pursuant to stipulations and orders of the court dated September 25, 2013 and September 27, 2013, among other things, the deadlines for us and our current and former executive officers to respond to the lawsuits have been stayed pending appointment of a lead plaintiff under the Private Securities Litigation Reform Act. We believe that the lawsuits are without merit, and we intend to vigorously defend ourselves against these claims.
Due to the inherent uncertainties of litigation and regulatory proceedings, including the current purported class action lawsuit and derivative lawsuits, we cannot determine with certainty the ultimate outcome of any such litigation or proceedings. If the final resolution of any such litigation or proceedings is unfavorable, our financial condition, operating results and cash flows could be materially affected.
We conduct our sales and distribution operations on a worldwide basis and are subject to the risks associated with doing business outside the United States.
We sell to customers outside of the United States from our United States and international operations. The consummation of the Molycorp Canada acquisition expanded our manufacturing presence and geographic reach in Asian markets. International shipments account for a significant portion of our sales as a result of the Molycorp Canada acquisition.
There are a number of additional risks associated with international business activities, including:
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burdens to comply with multiple and potentially conflicting foreign laws and regulations, including export requirements, tariffs and other barriers, environmental health and safety requirements and unexpected changes in any of these factors;
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restrictions on export quotas granted by the Chinese government for certain Molycorp Canada production;
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to the extent cash is held outside of the United States, our repatriation of such cash is subject to the approval of foreign governments and to the potentially adverse impact of foreign and domestic tax laws;
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political and economic instability and disruptions, including terrorist attacks;
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disadvantages of competing against companies from countries that are not subject to U.S. laws and regulations, including the Foreign Corrupt Practices Act, or FCPA;
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potentially adverse tax consequences due to overlapping or differing tax structures; and
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fluctuations in currency exchange rates.
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Any of these risks could have an adverse effect on our international operations by reducing the demand for our products or reducing the prices at which we can sell our products, which could result in an adverse effect on our business, financial position, results of operations or cash flows.
In addition, we could be adversely affected by violations of the FCPA and similar worldwide anti-bribery laws. The FCPA and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. We cannot assure you that our internal controls and procedures always will protect us from the reckless or criminal acts committed by our employees or agents. If we are found to be liable for FCPA violations, we could suffer from criminal or civil penalties or other sanctions, which could have a material adverse effect on our business.
Additionally, in connection with the disclosure requirements mandated by Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, certain of our customers have requested that we certify whether any "conflict minerals" (as such term is defined in Section 1502) used in the manufacturing of our rare earth products come from the Democratic Republic of the Congo (or an adjoining country). In January 2014, our Molycorp Silmet facility received a certification by the EICC that its purchases of tantalum comply with the CFS program assessment protocol through July 2014. During the period we were conducting the analysis of our supply chain that led to this certification, we lost tantalum sales to competitors who had already received EICC certifications. Delays in resuming tantalum sales to the customers we have lost to competitors during the analysis of our supply chain could continue to adversely affect the results of operations in our Rare Metals segment in the near future.
Molycorp Canada's international operations in China and Thailand are subject to a number of special risks including trade barriers, exchange controls and restrictions on currency conversion, political risks and risks of increased duties, taxes, tariffs and governmental royalties, as well as changes in laws and policies governing operations of foreign-based companies such as embargos. A change in policies by the Chinese or Thai governments could adversely affect Molycorp Canada's investment in its production facilities by, among other factors, changes in laws or regulations or changes in the interpretation thereof. Despite the activity and progress in developing their legal systems, neither China nor Thailand has a system of laws as comprehensive as in Canada or the United States.
Molycorp Canada's financial results are reported in U.S. dollars, which is subject to fluctuations in respect of the currencies of the countries in which Molycorp Canada operates. We expect Molycorp Canada's revenues to be earned in a number of different currencies. Accordingly, fluctuations in the exchange rates of world currencies could have a positive or negative effect on Molycorp Canada's reported results on a consolidated basis. Given the constantly changing currency exposures and the substantial volatility of currency exchange rates, we cannot predict the effect of exchange rate fluctuations upon Molycorp Canada's future operating results. There can be no assurance that Molycorp Canada will not experience currency losses in the future, which could have a material adverse effect on Molycorp Canada's business, revenues, operating results and financial condition. In the event of a change in the value of the Chinese Renminbi relative to the U.S. dollar, there is no assurance, due to competitive pressure, of a corresponding change in selling prices of Molycorp Canada's products. Molycorp Canada exports a significant portion of its products produced in China. These exports are invoiced and paid for primarily in U.S. dollars.
At December 31, 2013, Molycorp Canada held cash, net of bank advances in China and Japan, of $126.6 million in the aggregate. Molycorp Canada does not hedge the impact of revaluation of the Renminbi or the Yen.
We are dependent upon information technology systems, which are subject to disruption, damage, failure and risks associated with implementation and integration.
We are increasingly dependent upon information technology systems in the conduct of our operations. Our information technology systems are subject to disruption, damage or failure from a variety of sources, including, without limitation, fire, power loss, telecommunications failures, computer viruses and disabling devices, security breaches, cyber attacks, natural disasters and defects in design. Damage, disruption, or failure of one or more information technology systems may result in interruptions to our operations. Systems failures could result in reputational damage to our business and cause us to incur significant costs and third party liability. Various measures have been implemented to manage the risks related to our
information technology systems, but our business, financial position or results of operations could be adversely impacted by such interruptions.
We could also be adversely affected by system or network disruptions if new or upgraded information technology systems are defective, not installed properly or not properly integrated into our operations. We have begun the implementation of new enterprise software that we will use for our marketing, sales, manufacturing, logistics, customer service and accounting functions. If we are not able to successfully implement our new enterprise software in a timely manner across our operating segments, including our international operations, such failure could have a material adverse effect on our business, financial position and results of operations and could adversely impact the effectiveness of our internal controls over financial reporting.
Risks Relating to Our Debt
Our substantial debt could adversely affect our financial health and prevent us from fulfilling our debt service and other obligations.
We have substantial debt and, as a result, we have significant debt service obligations. As of December 31, 2013, our total consolidated indebtedness was approximately
$1,485.8 million
(excluding capital lease obligations of
$21.6 million
and without giving effect to the equity component of convertible debt or any debt discount). Our substantial debt could have important consequences to you. For example, it could:
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make it more difficult for us to satisfy our financial obligations under our debt and our contractual and commercial commitments and increase the risk that we may default on our debt obligations;
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prevent us from raising the funds necessary to repurchase our senior secured notes tendered to us if there is a change of control, which would constitute a default under the indenture, governing our senior secured notes;
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require us to use a substantial portion of our cash flow from operations to pay interest and principal on our debt, which would reduce the funds available for working capital, capital expenditures and other general corporate purposes;
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limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other investments, or general corporate purposes, which may limit the ability to execute our business strategy;
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heighten our vulnerability to downturns in our business, our industry or in the general economy and restrict us from exploiting business opportunities or making acquisitions;
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place us at a competitive disadvantage compared to those of our competitors that may have less debt;
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make it more difficult for us to obtain goods and services on commercially reasonable terms;
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limit management's discretion in operating our business;
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limit our flexibility in planning for, or reacting to, changes in our business, the industry in which we operate or the general economy; and
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result in higher interest expense if interest rates increase and we have outstanding floating rate borrowings.
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We and our subsidiaries may be able to incur substantial additional debt in the future. If new debt or other liabilities are added to our current debt levels, the related risks that we and our subsidiaries now face could intensify.
We may not be able to generate sufficient cash to service all of our debt and may be forced to take other actions to satisfy our obligations under our debt, which may not be successful.
Our ability to make scheduled payments on or to refinance our debt obligations and to fund planned capital expenditures and expansion efforts and any strategic alliances or acquisitions we may make in the future depends on our ability to generate cash in the future and our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our debt.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our debt. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. If our operating results and available cash are insufficient to meet our debt service obligations, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We
may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them, and these proceed may not be adequate to meet any debt service obligations then due. Further, we may need to refinance all or a portion of our debt on or before maturity, and we cannot assure you that we will be able to refinance any of our debt on commercially reasonable terms or at all.
Restrictive covenants in the indenture governing our senior secured notes and the agreements governing our other indebtedness will restrict our ability to operate our business.
The senior secured indenture governing our senior secured notes contains, and agreements governing indebtedness we may incur in the future may contain, covenants that restrict our ability to, among other things, incur additional debt, pay dividends, make investments, enter into transactions with affiliates, merge or consolidate with other entities or sell all or substantially all of our assets. Additionally, any asset-based credit facility may require us to maintain certain financial ratios. A breach of any of these covenants could result in a default thereunder, which could allow the lenders to declare all amounts outstanding under the applicable debt immediately due and payable. We may also be prevented from taking advantage of business opportunities that arise because of the limitations imposed on us by the restrictive covenants under our indebtedness.
Risks Related to Intellectual Property
We may not be able to adequately protect our intellectual property rights. If we fail to adequately enforce or defend our intellectual property rights, our business may be harmed.
Much of the technology used in the markets in which we compete is protected by patents and trade secrets, and our commercial success will depend in significant part on our ability to obtain and maintain patent and trade secret protection for our products and methods. To compete in these markets, we rely on a combination of trade secret protection, nondisclosure and licensing agreements, patents and trademarks to establish and protect our proprietary intellectual property rights, including our proprietary rare earth production processes that are not patented. We intend to rely on patented products and applications, such as using rare earths for water treatment, and related licensing agreements to establish proprietary markets for low demand REEs. We are evaluating our current patent portfolio in order to focus our efforts on patents and patent applications that provide value to our businesses. As a result of this evaluation, we may abandon certain patents and decide not to pursue further certain patent applications.
These intellectual property rights may be challenged or infringed upon by third parties or we may be unable to maintain, renew or enter into new license agreements with third-party owners of intellectual property on reasonable terms. Identifying unauthorized use of our intellectual property may be difficult, and proceedings to enforce or defend our intellectual property rights could result in substantial costs. The enforcement of intellectual property rights is subject to considerable uncertainty, and patent reform laws, including the recently-enacted America Invents Act, and court decisions interpreting such laws, may create additional uncertainty around our ability to obtain and enforce patent protection for our technologies. If we seek to enforce our rights, we may also be subject to claims that our intellectual property rights are invalid or otherwise unenforceable. In addition, our intellectual property may be subject to infringement or other unauthorized use outside of the United States. In such case, our ability to protect our intellectual property rights by legal recourse or otherwise may be limited, particularly in countries where laws or enforcement practices are undeveloped or do not recognize or protect intellectual property rights to the same extent as the United States. Unauthorized use of our intellectual property rights or our inability to preserve existing intellectual property rights could therefore adversely impact our competitive position and results of operations. The loss of our patents could also reduce the value of the related products. In addition, the cost to litigate infringements of our intellectual property, or the cost to defend ourselves against intellectual property infringement actions by others, could be substantial.
Proprietary trade secrets and unpatented know-how are also very important to our business. We rely on trade secrets to protect certain aspects of our technology, especially where we do not believe that patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. Our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our confidential information to competitors, and confidentiality agreements may not provide an adequate remedy in the event of unauthorized disclosure of confidential or proprietary information. Enforcing a claim that a third party illegally obtained and is using our trade secrets is expensive and time consuming, and the outcome is unpredictable. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. Failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
In addition, Molycorp Canada's current intellectual property position is dependent primarily on the essential nature of certain fundamental patents covering bonded magnets made with NdFeB powder and Molycorp Canada's manufacturing process for NdFeB powder. The most effective of these patents expires in July 2014. While Molycorp Canada holds a wide range of additional patents and patent applications whose expiration dates extend (and in the case of patent applications, will extend, if issued) beyond 2014, none are of an equally essential nature as Molycorp Canada's fundamental patents and exclusive
rights, and therefore Molycorp Canada will have increased competitive pressure as a result of the expiration of such patents. Molycorp Canada may therefore be unable to defend against new competitors entering the marketplace or maintain its existing pricing power.
We may not be able to obtain additional patents and the legal protection afforded by any additional patents may not adequately protect our rights or permit us to gain or keep any competitive advantage.
Our ability to obtain additional patents is uncertain and the legal protection afforded by these patents is limited and may not adequately protect our rights or permit us to gain or keep any competitive advantage. In addition, the scope and enforceability of patent claims is highly uncertain due to the complex nature of the relevant legal, scientific and factual issues. Changes in either patent laws or interpretations of patent laws in the United States or elsewhere (including the recently enacted America Invents Act) may diminish the value of our intellectual property or narrow the scope of our patent protection. Even if patents are issued relating to our products and processes, our competitors may challenge the validity of those patents. Patents also will not protect our products and processes if competitors devise ways of making products without infringing our patents.
If we infringe, or are accused of infringing, the intellectual property rights of third parties, it may increase our costs or prevent us from being able to sell our existing products or commercialize new products.
There is a risk that we may infringe, or may be accused of infringing, the proprietary rights of third parties, including rights under patents and pending patent applications belonging to third parties that may exist in the United States and elsewhere in the world. Because the patent application process can take several years to complete, and patent applications may remain unpublished for 18 months or more, there may be currently pending applications, including applications of which we are currently unaware, that may later result in issued patents that cover our products and processes. In addition, our products and processes may infringe existing patents.
Defending ourselves against third-party claims, including litigation in particular, would be costly and time consuming and would divert management's attention from our business, which could lead to delays in our expansion and modernization efforts. If third parties are successful in their claims, we might have to pay substantial damages or take other actions that are adverse to our business. As a result of intellectual property infringement claims, or to avoid potential claims, we might:
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be prohibited from, or delayed in, selling or licensing some of our products or using some of our processes unless the intellectual property holder licenses the applicable intellectual property to us, which it is not required to do;
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be required to pay substantial royalties or grant a cross license to our intellectual property to another intellectual property holder; or
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be required to redesign a product or process so it does not infringe a third party's intellectual property, which may not be possible or could require substantial funds and time and ultimately result in an inferior product or process.
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In addition, we could be subject to claims that our employees, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of third parties.
If we are unable to resolve claims that may be brought against us by third parties related to their intellectual property rights on terms acceptable to us, in addition to paying substantial damages and royalties, we may lose valuable intellectual property rights and be precluded from offering some of our products or using some of our processes.
Risks Related to Environmental Regulation
Our operations are subject to extensive and costly environmental requirements; and current and future laws, regulations and permits will impose significant costs, liabilities or obligations or could limit or prevent our ability to continue our current operations or to undertake new operations.
We are subject to numerous and detailed international, national, federal, state and local environmental laws, regulations and permits, including those pertaining to employee health and safety, environmental permitting and licensing, air quality standards, greenhouse gas, or GHG, emissions, water usage and disposal, pollution, waste management, plant and wildlife protection, including the protection of endangered species, handling and disposal of radioactive substances, remediation of soil and groundwater contamination, land use, reclamation and restoration of properties, the discharge of materials into the environment and groundwater quality and availability. Our operations in Europe are subject to the environmental laws and regulations applicable to European Union member countries. These requirements may result in significant costs, liabilities and obligations, impose conditions that are difficult to achieve or otherwise delay, limit or prohibit current or planned operations. Failure to comply with these laws, regulations and permits may result in the assessment of administrative, civil and criminal penalties, the issuance of injunctions to limit or cease operations, the suspension or revocation of permits and other sanctions. Pursuant to such requirements, we may also be subject to third-party claims, including for damages to property or injury to persons arising
from our operations. Moreover, these environmental requirements, and the interpretation and enforcement thereof, change frequently and have tended to become more stringent over time. For example, GHG emission regulation is becoming more rigorous. As a result of our expansion at our Molycorp Mountain Pass facility, we are required to report annual GHG emissions from our operations and to comply with the GHG cap and trade regulations promulgated by the state of California. The U.S. Congress is considering various legislative proposals to address climate change. In addition, the U.S. Environmental Protection Agency has issued regulations, including the "Tailoring Rule," that subject GHG emissions from certain stationary sources to the Prevention of Significant Deterioration and Title V provisions of the federal Clean Air Act. Any such regulations could require us to modify existing permits or obtain new permits, implement additional pollution control technology, curtail operations or increase significantly our operating costs, any of which could adversely affect our business, financial condition, reputation, operating performance and product demand. Any future changes in these laws, regulations or permits (or the interpretation or enforcement thereof) or any sanctions, damages, costs, obligations or liabilities in respect of these matters could have a material adverse effect on our business, results of operations and financial condition.
Molycorp Canada, whose operations comprise a significant portion of the Chemicals and Oxides, Magnetic Materials and Alloys and Rare Metals segments, is subject to numerous and increasingly rigorous international, national, federal, state and local laws, regulations and permits affecting the mineral processing industry, including those pertaining to employee health and safety, environmental permitting and licensing, air quality standards, GHG emissions, water usage and disposal, pollution, waste management, plant and wildlife protection, handling and disposal of radioactive substances, remediation of soil and groundwater contamination, and the discharge of materials into the environment. Pursuant to certain environmental laws, regulations and permits, Molycorp Canada may be subject to claims for toxic torts, natural resource damages and other liabilities, as well as for the investigation and remediation of soil, surface water, groundwater and other environmental media. Molycorp Canada's failure to comply with these laws and regulations, or changes in such laws and regulations or the interpretation or enforcement thereof, and to obtain such permits could have a material adverse effect on Molycorp Canada's business, financial condition and results of operations. Specifically, Molycorp Canada is subject both to Chinese national and local environmental protection regulations that currently impose a graduated schedule of fees for the discharge of waste substances, require the payment of fines for discharges exceeding the standards, and provide for the closure of any facility which fails to comply with orders requiring it to cease or remedy certain activities causing environmental damage.
We are subject to the Occupational Safety and Health Act of 1970, the Federal Mine Safety and Health Act of 1977, the California Labor Code and regulations adopted pursuant thereto, and various regulations applicable in the other countries where we operate, which impose stringent health and safety standards on numerous aspects of our operations.
Our operations at our Molycorp Mountain Pass facility are subject to the Federal Mine Safety and Health Act of 1977, as amended by the Mine Improvement and New Emergency Response Act of 2006, and the regulations adopted by the California Occupational Safety and Health Administration, which impose stringent health and safety standards on numerous aspects of mineral extraction and processing operations, including the training of personnel, operating procedures, operating equipment and other matters. Our operations at our U.S. facilities are also subject to the Occupational Safety and Health Act of 1970. Our operations outside the U.S. are subject to local health and safety requirements.
Our failure to comply with these or other applicable safety and health standards, or changes in such standards or the interpretation or enforcement thereof, could have a material adverse effect on our business, financial condition or otherwise impose significant restrictions on our ability to conduct our operations.
Our operations may affect the environment or cause exposure to hazardous substances, any of which could result in material costs, obligations or liabilities.
Our operations currently use, and in the past have used, hazardous materials and generate, and in the past have generated, hazardous and naturally occurring radioactive wastes. Our Molycorp Silmet facility in Estonia has a long history of industrial use, including uranium ore and alum shale processing, as a result of which its operations may have impacted the environment. In addition, our Estonian operations require the management and disposal of radioactive wastes. Our Molycorp Mountain Pass facility has been used for mining and related purposes since 1952, and contamination is known to exist around the facility. We may be subject to claims under environmental laws, regulations and permits for toxic torts, natural resource damages and other liabilities, as well as for the investigation and remediation of soil, surface water, groundwater and other environmental media. Our Molycorp Mountain Pass facility is currently subject to an order issued by the Lahontan Regional Water Quality Control Board pursuant to which we have conducted various investigatory and remedial actions, primarily related to certain onsite impoundments, including groundwater monitoring, extraction and treatment and soil remediation. We are still in the process of delineating the extent of groundwater contamination at and around the facility and cannot assure you that we will not incur material costs relating to the remediation of such contamination. In addition to claims arising out of our current or former properties, such claims may arise in connection with contaminated third-party sites at which we have disposed of waste. As a matter of law, and despite any contractual indemnity or allocation arrangements or acquisition agreements to the contrary, our
liability for these claims may be joint and several, so that we may be held responsible for more than our share of any contamination, or even for the entire share. These and similar unforeseen impacts that our operations may have on the environment, as well as human exposure to hazardous or radioactive materials or wastes associated with our operations, could have a material adverse effect on our business, reputation, results of operation and financial condition.
We may be unable to obtain, maintain or renew permits necessary for the development or operation of our facilities, which could have a material adverse effect on our business, results of operations and financial condition.
We must obtain, for all our operations, a number of permits that impose strict conditions, requirements and obligations relating to various environmental and health and safety matters in connection with our current and future operations. To obtain, maintain and renew certain permits, we may be required to conduct environmental studies and collect and present data to governmental authorities pertaining to the potential impact of our current and future operations upon the environment, including the potential impact on endangered species, and to take steps to avoid or mitigate those impacts. The permitting rules, and interpretation thereof, are complex and have tended to become more stringent over time. In some cases, the public (including environmental interest groups) has rights to comment upon and submit objections to permit applications and environmental analysis prepared in connection therewith, and otherwise participate in the permitting process, including challenging the issuance of permits, validity of environmental analyses and determinations and performance of permitted activities. Accordingly, permits required for our operations may not be issued, maintained or renewed in a timely fashion or at all, may be issued or renewed with conditions that restrict our ability to conduct our operations economically, or may be subsequently revoked. Any such failure to obtain, maintain or renew permits, or other permitting delays or conditions, including in connection with any environmental impact analyses, could have a material adverse effect on our business, results of operations and financial condition.
Our inability to acquire, maintain or renew financial assurances related to the reclamation and restoration of mining property could have a material adverse effect on our business and results of operations.
We are generally obligated to restore property after it has been mined in accordance with regulatory standards and our approved reclamation plan at our Molycorp Mountain Pass facility, which is the only Molycorp operating facility where mining takes place. We are required under federal, state and local laws to maintain financial assurances, such as surety bonds, to secure such obligations. The failure to acquire, maintain or renew such assurances, as required by federal, state and local laws, could subject us to fines and penalties as well as the revocation of our operating permits. Such failure could result from a variety of factors, including:
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the lack of availability, higher expense or unreasonable terms of such financial assurances;
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the ability of current and future financial assurance counterparties to increase required collateral; and
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the exercise by third-party financial assurance counterparties of any rights to refuse to renew the financial assurance instruments.
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Our inability to acquire or failure to maintain or renew such financial assurances could have a material adverse effect on our business, financial condition and results of operations.
If the assumptions underlying our reclamation plan and mine closure obligations are inaccurate, we could be required to expend materially greater amounts than anticipated to reclaim mined property, which could materially and adversely affect our business, results of operations and financial condition.
Federal, state and local laws and regulations establish reclamation and closure standards applicable to our surface mining and other operations as well. Estimates of our total reclamation and mine closure liabilities are based upon our closure and reclamation plans, third-party expert reports, current applicable laws and regulations, certain permit terms and our engineering expertise related to these requirements. Any change in the underlying assumptions or other variation between the estimated liabilities and actual costs could materially and adversely affect our business, results of operations and financial condition.
Risks Related to Ownership of Our Common Stock
The price of our common stock may fluctuate significantly. Accordingly, stockholders could lose all or part of their investment.
The market price of our common stock has been, and is likely to continue to be, highly volatile and may be influenced by many factors, some of which are beyond our control, including:
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the extremely volatile rare earths industry;
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our quarterly or annual earnings or those of other companies in our industry;
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loss of a large customer;
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changes in accounting standards, policies, guidance, interpretations or principles;
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the failure to comply with accounting standards applicable to us or to maintain effective internal control over financial reporting;
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general economic conditions;
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the failure of securities analysts to cover our stock or changes in financial estimates by analysts;
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future sales of our common stock; and
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other factors described in this "Risk Factors" section.
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Our common stock price has been particularly affected by the volatility in the rare earths industry, as the high and the low sales price of our common stock in the period since we went public in July 2010 through January 2014 has ranged from a low of $4.51 to a high of $79.16. If conditions in our industry remain volatile, our common stock price may continue to exhibit volatility as well. In particular, if prices or demand for rare earths were to decline, our stock price would likely decline.
Reports published by securities or industry analysts, including projections in those reports that exceed our actual results, could adversely affect our stock price and trading volume.
Research analysts publish their own quarterly projections regarding our operating results. These projections may vary widely from one another and may not accurately predict the results we actually achieve. Our stock price may decline if we fail to meet securities research analysts' projections. Similarly, if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price could decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, our stock price or trading volume could decline.
Future sales, or availability for sale, of shares of common stock by stockholders could depress the market price of our common stock.
Sales of a substantial number of shares of our common stock in the public market, or the perception that large sales could occur, the exchange into shares of our common stock of the exchangeable shares issued by MCP Exchangeco Inc., a Canadian subsidiary of ours, or the conversion into shares of our common stock of shares of our mandatory convertible preferred stock, our 3.25% Convertible Senior Notes due 2016, our 6.00% Convertible Senior Notes due 2017, or our 5.50% Convertible Senior Notes due 2018 which we refer to together as our "convertible notes," or the perception that any such exchange or conversion could occur, could depress the market price of our common stock. As of December 31, 2013, we had
240,380,094
shares of our common stock outstanding. All of these shares are freely tradable, except for any shares held by our "affiliates" as defined in Rule 144 under the Securities Act. Additionally, as of December 31, 2013, up to 4,140,000 and 61,800,252 shares of our common stock, subject, in each case, to anti-dilution, make-whole and other adjustments, will be issuable upon conversion of shares of the mandatory convertible preferred stock and the conversion of our convertible notes, respectively, and up to 148,391 shares of our common stock will be issuable upon exchange of the exchangeable shares (which are exchangeable for shares of our common stock on a one-for-one basis). The common stock issuable upon conversion of the mandatory preferred stock or our convertible notes will be freely tradeable.
Certain holders of shares of common stock are entitled to rights with respect to the registration under the Securities Act of such shares of common stock. These registration rights are contained in a registration rights agreement entered into with the former members of Molycorp, LLC in connection with our Corporate Reorganization. Additionally, we are obligated to file a registration statement registering the sale from time to time of the 12,500,000 shares of common stock issued to Molymet, in connection with a securities purchase agreement, dated January 31, 2012, by and between Molycorp and Molymet.
In addition, the
2,055,435
shares reserved for future issuance under our Molycorp, Inc. 2010 Equity and Performance Incentive Plan, as of December 31, 2013, will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the price of our common stock could decline substantially.
The availability of shares of our common stock for sale in the future could reduce the market price of our common stock.
In the future, we may issue additional securities to raise capital. We may also acquire interests in other companies by using a combination of cash and our common stock or just our common stock. We may also issue securities convertible into our common stock in addition to our mandatory convertible preferred stock and the convertible notes. Any of these events may
dilute your ownership interest in our company and have an adverse impact on the price of our common stock. In addition, sales of a substantial amount of our common stock in the public market, or the perception that these sales may occur, could reduce the market price of our common stock. This could also impair our ability to raise additional capital through the sale of our securities.
We do not intend to pay dividends on our common stock, in the foreseeable future.
For the foreseeable future, we intend to retain any earnings, after considering any dividends on our preferred stock, to finance the development of our business, and we do not anticipate paying any cash dividends on our common stock. Any future determination to pay dividends will be at the discretion of our board of directors and will be dependent upon then-existing conditions, including our operating results and financial condition, capital requirements, contractual restrictions, business prospects and other factors that our board of directors considers relevant. Accordingly, holders of our common stock must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize a return on their shares of common stock.
Our ability to use our net operating loss carryforwards in the United States may be subject to limitation due to significant changes in the ownership of our common stock.
As of December 31, 2013, we had U.S. federal net operating loss carryforwards of approximately
$290.7 million
. Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an "ownership change," the corporation's ability to use its pre-change net operating loss carryforwards and other tax attributes to offset its post-change income may be limited. An ownership change is defined generally for these purposes as a greater than 50% change in ownership over a three-year period, taking into account shareholders that own 5% or more by value of our common stock. It is possible that past and future transactions involving our common stock will cause an ownership change to occur that would limit our ability to use any net operating loss carryforwards and other tax attributes.
Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.
Our certificate of incorporation and bylaws provisions may have the effect of delaying, deferring or discouraging a prospective acquiror from making a tender offer for our shares or otherwise attempting to obtain control of us. To the extent that these provisions discourage takeover attempts, they could deprive stockholders of opportunities to realize takeover premiums for their shares. Moreover, these provisions could discourage accumulations of large blocks of common stock, thus depriving stockholders of any advantages which large accumulations of stock might provide.
As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the General Corporation Law of the State of Delaware. Section 203 prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations unless the business combination was approved in advance by our board of directors, results in the stockholder holding more than 85% of our outstanding common stock or is approved by the holders of at least 66 2/3 % of our outstanding common stock not held by the stockholder engaging in the transaction.
Any provision of our certificate of incorporation or our bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.
Our board of directors can issue, without stockholder approval, preferred stock with voting and conversion rights and convertible debt that could adversely affect the voting power of the holders of common stock.
Our board of directors can issue, without stockholder approval, preferred stock with voting and conversion rights and convertible debt that could adversely affect the voting power of the holders of common stock and reduce the likelihood that such holders will receive dividend payments or payments upon liquidation, including shares of our mandatory convertible preferred stock and our convertible notes. Such issuance could have the effect of decreasing the market price of the common stock. The issuance of preferred stock and/or convertible debt or even the ability to issue preferred stock and/or convertible debt could also have the effect of delaying, deterring or preventing a change of control or other corporate action.
Our convertible notes may adversely affect the market price of our common stock.
The market price of our common stock is likely to be influenced by our convertible notes. For example, the market price of our common stock could become more volatile and could be depressed by:
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investors' anticipation of the potential resale in the market of a substantial number of additional shares of our common stock received upon conversion of our convertible notes as well as our mandatory convertible preferred stock, which converted into 4,140,000 shares of common stock as of March 1, 2014;
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possible sales of our common stock by investors who view our convertible notes as a more attractive means of equity participation in us than owning shares of our common stock; and
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hedging or arbitrage trading activity that may develop involving our convertible notes and our common stock.
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Our board of directors and management have broad discretion over the use of our cash reserves and might not apply this cash in ways that increase the value of your investment.
Our board of directors and management have broad discretion to use our cash reserves, and you will be relying on their judgment regarding the application of this cash. Our board of directors and management might not apply the cash in ways that increase the value of your investment. Until we use the cash, we plan to invest it, and these investments may not yield a favorable rate of return. If we do not invest or apply the cash in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.
We identified a material weakness in our internal control over financial reporting which, if not satisfactorily remediated, could result in material misstatements in our consolidated financial statements.
As previously disclosed, in light of a material weakness, that resulted in a restatement of our unaudited condensed consolidated financial statements for the three months ended March 31, 2013, we re-evaluated our conclusion regarding the effectiveness of our internal control over financial reporting as of December 31, 2012. During our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2012, we identified certain deficiencies that were not considered to be a material weakness, either individually or in the aggregate as of December 31, 2012. Given the subsequent identification of a material weakness for the quarter ended March 31, 2013, we considered certain internal control deficiencies identified as of December 31, 2012 to be a material weakness when considered in the aggregate. Some of those internal control deficiencies were still under remediation as of December 31, 2013. Therefore, the previously identified material weakness could result in material misstatements in our consolidated financial statements in future periods if not remediated. Specifically, as of December 31, 2013 and 2012, we did not maintain a sufficient complement of resources with an appropriate level of accounting knowledge, experience and training commensurate with our financial reporting requirements. This limited our ability, in certain areas, to ensure the necessary consistent communication, reinforcement, and application of accounting policies to make appropriate accounting adjustments and disclosure decisions and resulted in ineffective review of certain reconciliations and journal entries and errors in recording transactions in the financial records.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. A deficiency in internal control over financial reporting exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.
In response to our conclusion that we had a material weakness in our internal control over financial reporting, we have commenced remediation actions, which included hiring additional accounting and financial reporting personnel, including an Operations Controller at our Molycorp Mountain Pass facility, and devoting significant resources to improving our system of processes and internal controls. Specifically, we hired additional personnel in our accounting department, increased the number of review layers for all key accounting reconciliations and analytical procedures and are in the process of re-training the accounting staff at our Molycorp Mountain Pass facility on the performance of controls for the preparation, execution and review of the calculation of inventory and costs of sales, and controls that are intended to ensure that all accounting reconciliations and journal entries are appropriately prepared and reviewed and increased involvement and oversight from our corporate office. We are also seeking to hire additional personnel. If our actions are not effective in correcting the material weakness and we continue to experience material weaknesses, investors could lose confidence in our financial reporting, particularly if such weaknesses result in a restatement of our financial results, and our stock price could decline.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
Molycorp Mountain Pass
Background
Molybdenum Corporation of America began rare earths mining operations at the Molycorp Mountain Pass facility in 1952. Rare earths production at the Molycorp Mountain Pass facility, as well as milling and separation processes, continued under Unocal Corporation, which purchased Molybdenum Corporation of America in 1977, until 1998. In 1998, most rare earths separation operations were suspended, primarily due to leaks in a wastewater pipeline that transported waste salt water to evaporation ponds on the Ivanpah dry lake bed. Mining and milling operations continued until 2002 when those operations were also placed on standby due to softening prices for rare earths, a lack of additional tailings disposal capacity and delays in obtaining permits required for the new paste tailings storage facility. Unocal Corporation thereafter sold or otherwise disposed of substantially all of the mining equipment at the Molycorp Mountain Pass facility (e.g., loaders, haul trucks, etc.) prior to being acquired by Chevron Corporation in 2005. Rare earths separation operations resumed in 2007 when Chevron Mining Inc., a wholly-owned subsidiary of Chevron Corporation, reactivated a portion of the plant using stockpiled rare earth concentrates as a feedstock. Since 2007, the operation has produced a range of rare earth products, including products containing lanthanum, cerium, neodymium and praseodymium. On September 30, 2008, we acquired the Mountain Pass, California rare earths deposit and associated assets from Chevron Mining Inc. through Rare Earth Acquisitions LLC (which was later renamed Molycorp Minerals, LLC). The acquisition by us excluded certain assets and liabilities, including certain liabilities related to environmental and employment matters, that were retained by Chevron Corporation. Active mining at Mountain Pass recommenced in December of 2010, for the first time since 2002.
The Property
At the Molycorp Mountain Pass facility, we own an open-pit mine containing one of the world's most fully developed rare earth elements deposit outside of China. In addition to the mine, the facility includes overburden stockpiles, a crusher and mill/flotation plant, mineral recovery plants, tailings storage areas and on-site evaporation ponds, as well as laboratory facilities to support research and development activities, offices, warehouses and support infrastructures.
Our Molycorp Mountain Pass facility is located approximately 60 miles southwest of Las Vegas, Nevada near Mountain Pass, San Bernardino County, California. The facility straddles Interstate 15 and may be accessed by existing hard-surface roads, which we use to transport products to our customers using commercial vehicles. The facility consists of approximately 2,222 acres of fee land, of which approximately 809 acres are currently in use (e.g., existing buildings, infrastructure or active disturbance). The lands surrounding our Molycorp Mountain Pass facility are mostly public lands managed by the Bureau of Land Management and the National Park Service. In addition to the 2,222 acres we hold in fee, we also hold 527 unpatented lode and mineral mining claims and mill sites under the provisions of The Mining Law of 1872. We acquired mineral rights for our permitted mine operations at our Molycorp Mountain Pass facility with the purchase of the Mountain Pass, California rare earths deposit and associated assets from Chevron Mining Inc. in 2008. Our mineral rights, surface rights and mining claims are currently not subject to royalties or encumbrances, although we are responsible for making annual maintenance and tax payments on our unpatented mill sites and on our mining claims, and we pay taxes on our fee land. These mining claims and mill sites could provide land for mining, ancillary facilities and expansion capacity around our Molycorp Mountain Pass facility.
We hold conditional use and minor use permits from the County of San Bernardino, which currently allow continued operations of our Molycorp Mountain Pass facility through 2042. With the exception of certain building permits, we have secured all permits necessary to allow construction and operations at our Molycorp Mountain Pass facility, including permits to operate specific facilities or operating units from the Lahontan Regional Water Quality Control Board and the Mojave Desert Air Quality Management District.
Rare Earths Reserves and Non-Reserve Deposits
The REEs deposit at our Molycorp Mountain Pass facility is located within an uplifted block of Precambrian metamorphic and igneous rocks that are bounded to the south and east by basin-fill deposits in California's Ivanpah Valley. The two main groups of rocks in the Mountain Pass area are Early Proterozoic metamorphic rocks and Middle Proterozoic ultrapotassic rocks and carbonatites. The carbonatites hosts REEs mineralization and have been divided by geologists at Mountain Pass into six types:
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Bastnasite sövite (Bastnasite-barite sövite);
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Bastnasite beforsite (Bastnasite-barite) sövite;
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Bastnasite dolosövite Bastnasite-barite dolomitic sövite;
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White sövite (White bastnasite-barite sövite);
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Parisite sövite (Parisite sövite); and
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Monazitic sövite (Monazite-bearing carbonatite).
Mineralization occurs entirely within the carbonatitic portion of the currently drilled geologic sections, although grade distribution internal to this mineralized zone is variable. Higher grade zones (>10% REO by weight) tend to occur in lenses parallel to the hanging wall/foot wall contacts, both down dip and along strike. Continuity of mineralization internal to the carbonatite zone is well defined both along strike and down dip.
The currently defined zone of rare earth mineralization exhibits a strike length of approximately 2,750 ft (850 m) in a north-northwest direction. The down dip measurement of the mineralization is unknown due to limited amount of deep drill holes from surface. The true thickness of the >3.0% REO zone ranges between 15 to 250 ft (5 to 75 m).
The percentage of each rare earth material contained in the Molycorp Mountain Pass facility bastnasite ore is estimated to be as follows:
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Estimated Percentages
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Cerium
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48.8%
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Lanthanum
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34.0%
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Neodymium
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11.7%
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Praseodymium
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4.2%
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Samarium
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0.79%
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Gadolinium
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0.21%
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Europium
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0.13%
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Yttrium
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0.12%
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Other REE (including Dysprosium and Terbium)
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0.05%
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SEC Guidelines
The SEC has established guidelines contained in Industry Guide 7 that set forth technical, legal and economic criteria for determining whether our ore reserves can be classified as proven and probable.
"Reserves" are defined by the SEC Industry Guide 7 as that part of a mineral deposit that could be economically and legally extracted or produced at the time of the reserve determination. SEC Industry Guide 7 divides reserves between "proven reserves" and "probable reserves," which are defined as follows:
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"proven reserves" are reserves for which:
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quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling; and
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the sites for inspection sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established.
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"probable reserves" are reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.
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Methodology
Our Molycorp Mountain Pass facility has been subject to drilling since the beginning of mining operations in 1952. We also maintain detailed geologic logs, on-site assay records and databases and geologic cross-sections.When estimating proven and probable reserves, however, we rely on the interpretations made during prior mining campaigns at our Molycorp Mountain Pass facility, the U.S. Geological Survey and various consulting companies, including SRK Consulting (U.S.), Inc., or SRK Consulting, to identify the regional and mine area geology and hydrogeology, regional and local structure, deposit geology, current pit slope stability conditions and REE recoveries.
Proven Reserves.
SRK Consulting compiled a drill hole database from prior and new drilling at our Molycorp Mountain Pass facility. To be classified as proven reserves, block model blocks were estimated using a minimum of two drillholes, which are at a maximum average distance of 50ft. The sample data for proven ore reserves consists of survey data, lithologic data and assay results.
Probable Reserves.
Probable ore reserves are based on longer projections and the maximum distance between drill holes is 200 feet. Statistical modeling and the established continuity of the bastnasite ore body as determined from results of over 50 years of mining activity to date support our technical confidence in estimates of tonnage and grade over this projection distance. Where appropriate, projections for the probable ore reserve determination are constrained by any known or anticipated restrictive geologic features.
While we believe that a cut-off grade below 5.0% is economically viable, SRK Consulting decided to base the mining cut-off calculation on a grade of 5.0% REO given historical performance at the Molycorp Mountain Pass mine.
The proven and probable ore reserves are then modeled as a long-term mine plan and additional factors including recoveries, metal prices, mine operating costs and capital estimates are applied to determine the overall economics of the ore reserves.
Results
We and SRK Consulting estimated proven reserves as of January 2012 of 26.3 million pounds of REO contained in 0.156 million tons of ore, with an average ore grade of 8.45%, and probable reserves of 2.91 billion pounds of REO contained in 18.267 million tons of ore, with an average ore grade of 7.98%, in each case using a cut-off grade of 5.0% REO, at our Molycorp Mountain Pass mine. This compares with a previous 2010 estimate of proven reserves of 88.0 million pounds of REO contained in 0.480 million tons of ore, with an average ore grade of 9.38%, and probable reserves of 2.12 billion pounds of REO contained in 13.1 million tons of ore, with an average ore grade of 8.20%, in each case using a cut-off grade of 5.0%. The reduction in the proven reserves estimation and the increase in the probable reserves estimation, from the 2010 to the 2012 study is primarily due to the use of additional drilling data combined with the advantage of performing the new study from a deeper observation point at the bottom of the mine pit. The January 2012 reserve estimation of our Molycorp Mountain Pass facility includes an expanded pit boundary. The expansion of the ultimate pit boundary and the associated increase in the size of the overburden stockpiles will require the modification of our existing mining permits after 2021. Based on our estimated reserves and design annual production capacity of approximately 19,050 mt of REO, our expected mine life is in excess of 30 years. SRK Consulting made the following assumptions to arrive to the January 2012 estimates:
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•
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mine reserves are diluted;
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•
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historic cut-off grade of 5.0% REO;
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•
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metallurgical recovery factor of 65% for the mill facility and 90% for the chemical plant, and 94.1% oxide recovery;
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•
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January 4, 2012 surface topography for volume control of reserves;
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•
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historic three-year average commodity prices;
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•
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strip ratio 12.25%; and
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•
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rounded values to the nearest significant number.
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Pricing values shown in the following table were used by SRK Consulting in the estimate of our reserves. The prices reflect a combination of three-year trailing averages for REO and metals based on information from (i) Metal-Pages, (ii) IMCOA and Roskill market studies from 2009 and (iii) alloy pricing formulas.
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Rare Earth Products
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Price(1)
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(US$/kg)
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Non-Metal Products
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Lanthanum oxide
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6.60
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Cerium oxide for glass applications
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4.09
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Cerium oxide for water filters
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13.20
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SorbX
TM
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9.90
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Europium oxide
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473.00
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Metal Products
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|
Lanthanum
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13.20
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Praseodymium
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37.99
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Neodymium
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37.99
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Metal Alloys
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NdFeB
|
35.20
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Samarium cobalt
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50.60
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_______________________________________________________________________________
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(1)
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Prices for certain rare earth products have increased from those used by SRK Consulting in its engineering study.
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The prices set forth in the following table, are primarily based on information from Metal-Pages and alloy pricing formulas as of December 31, 2013.
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Rare Earth Products
|
December 31,
2013 Price
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|
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(US$/kg)
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Lanthanum Oxide
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6.00
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Cerium Oxide (Glass Products)
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6.00
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Europium Oxide
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975.00
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Lanthanum Metal
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11.00
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Neodymium Metal
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87.00
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Praseodymium Metal
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155.00
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NdFeB Alloy
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60.00
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(a)
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Samarium Cobalt Alloy
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37.00
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(a)
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_______________________________________________________________________________
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(a)
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Molycorp average market price estimates.
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Although SRK Consulting assumed pricing levels consistent with those estimated by Roskill, a 38% decrease in average REE prices from such levels, holding all other variables constant, would not materially reduce reserve estimates.
There are numerous uncertainties inherent in estimating quantities and qualities of REO reserves and non-reserve REO deposits and costs to mine recoverable reserves, including many factors beyond our control. We will regularly evaluate our REO reserve and non-reserve REO estimates. This will typically be done in conjunction with expanded, phased drilling programs. Cores are analyzed by geologists to determine mineral types and to identify geological anomalies. Samples along the length of the core are logged and analyzed for total rare earths content, rare earths distribution and mineralogy. This data is entered into a master database and statistically analyzed. The resulting information is used to enhance the mine plan. We also gain information from blast hole cuttings. The estimates of REO reserves and non-reserve REO deposits as to both quantity and quality will also be updated to reflect new drilling or other data received. Estimates of economically recoverable REO reserves, however, necessarily depend upon a number of variable factors and assumptions, all of which may vary considerably from actual results, such as:
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•
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geological and mining conditions and/or effects from prior mining that may not be fully identified by available data or that may differ from experience;
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•
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assumptions concerning future prices of rare earth products, operating costs, mining technology improvements, development costs and reclamation costs; and
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•
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assumptions concerning future effects of regulation, including the issuance of required permits and taxes by governmental agencies.
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Actual REO tonnage recovered from identified REO reserve and non-reserve REO deposit areas and revenues and expenditures with respect to the same may vary materially from estimates. These estimates may not accurately reflect our actual REO reserves or non-reserve REO deposits. Any inaccuracy in our estimates related to our REO reserves and non-reserve REO deposits could result in lower than expected revenues and higher than expected costs.
The following table reconciles our proven and probable reserves in 2012 and 2013:
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Proven + Probable Reserves
(1)
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Tons (in thousands)
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Average Grade
|
January 4, 2012
|
18,423
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|
7.98
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%
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Production
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(106
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)
|
8.10
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%
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December 31, 2012
(2)
|
18,317
|
|
7.99
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%
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Production
|
(231
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)
|
8.07
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%
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December 31, 2013
(2)
|
18,086
|
|
8.03
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%
|
(1) In dry tons
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|
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(2) Molycorp's reconciliation
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Annual Production Data
For fiscal 2011, our annual production derived exclusively from the historical stockpile of bastnasite. From January 1, 2012 through June 25, 2012, 100% of production was also from historical stockpiled material; from June 26, 2012 through July 30, 2012, 91.7% came from stockpiled material and 8.3% from new material; from July 31, 2012 through September, 27, 2012, 50% came from stockpiled material and 50% from new material; and from September 28, 2012 through December 31, 2012, 100% came from new material.
The legacy neodymium-from-bastnasite processing plant at our Molycorp Mountain Pass facility had a leach recovery rate of 56% in fiscal 2012 and 57% in fiscal 2011. The new flotation plant, which was commissioned in the second quarter of 2012, had a recovery rate of approximately 47% in fiscal 2012 and 50.2% in fiscal 2013. The 2012 recovery rate represents start-up conditions.
The following table presents statistics for our mining through flotation processes for fiscal 2012 and 2013. Tonnages are accurate to within + or - 5% for all stockpile surveys and belt scale totalizers. We did not produce any concentrate in fiscal 2011.
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Tons (in thousands)
|
Average Grade
|
Legacy ore stockpile - 12/31/11
|
36
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6.34
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%
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Ore mined
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106
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8.10
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%
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Ore milled
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(88)
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|
7.64
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%
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Ore stockpiles - 12/31/12
|
54
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|
7.40
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%
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Ore mined
|
231
|
|
8.07
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%
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Ore milled
|
(234
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)
|
7.92
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%
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Ore stockpiles - 12/31/13
|
51
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|
8.03
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%
|
|
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Concentrate production 2012
|
6
|
|
50.34
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%
|
Concentrate stockpile - 12/31/12
|
2
|
|
49.06
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%
|
Concentrate production 2013
|
10
|
|
55.34
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%
|
Concentrate stockpile - 12/31/13
|
4
|
|
55.34
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%
|
In addition to our internal production, during 2011, we purchased 20 mt of rare earth Mischmetal, 40 mt of Lanthanum Oxide and 34 mt of Cerium Oxide from third-party producers. For fiscal 2012 and 2013, we did not purchase any rare earth products from third-party producers.
Molycorp Silmet
Our Molycorp Silmet facility consists of various manufacturing, research and administration buildings located on 67 acres of land in Estonia, approximately 200 kilometers from Tallinn, the Estonian capital. At Molycorp Silmet, we transform REEs into rare earth products and have a longstanding experience in the manufacturing of niobium and tantalum rare metal products. As of December 31, 2013, we have the capacity to produce up to 3,000 mt of rare earth products and up to 700 mt of rare metals per year. The main equipment we utilized for our production at Molycorp Silmet include electron beam furnaces, vacuum induction melting furnaces, shaft furnaces for aluminothermy reduction, rotary tube furnaces, REO and rare metals solvent extraction lines, and various precipitation tanks. Molycorp Silmet is certified in ISO 9001:2000, ISO 14001:2004 and OHSAS 18001. In January 2014, our Molycorp Silmet facility received a certification by the EICC that its purchases of tantalum comply with the CFS program assessment protocol through July 2014.
MMA
The MMA facility includes various manufacturing, research, and administration buildings situated on seven acres of land in Tolleson, Arizona, which is just south of Interstate 10 about 15 miles west of Phoenix, Arizona's Sky Harbor Airport. At our MMA facility, we utilize vacuum induction melting furnaces to produce a wide variety of rare earth alloys, complex custom-made alloys, and non-rare earth products containing exotic alloys, such as Ni-based and Co-based superalloys and experimental binary and ternary alloys for universities and governmental agencies. Our MMA facility has the installed capacity to produce approximately 1,350 tons of ingot cast alloys and 750 tons of strip cast alloys per year. MMA is ISO 9001:2008 and OHSAS 18001 certified.
Molycorp Magnequench
We own two production facilities under the Molycorp Magnequench brand located in Tianjin, China, and Korat, Thailand.
Molycorp Magnequench (Tianjin) Co., Ltd., or MQTJ, is a 145,000 sq. ft. magnetic powder manufacturing facility and a 60,000 sq. ft. alloy production plant located approximately 90 km. south-east of Beijing. The magnetic powder manufacturing facility utilizes 12 proprietary, highly sophisticated meltspinning machines, or jet casters. The MQTJ facility is ISO/TS16949:2009, ISO 9001:2008, ISO 14001:2004, OHSAS18001:2007 and QC080000:2005 certified.
Molycorp Magnequench (Korat) Co. Ltd., or MQK, is a 43,000 sq. ft. magnetic powder and alloy manufacturing facility located approximately 250 km. northeast of Bangkok. In 2006, the facility changed its name from Advanced Magnetic Materials (Thailand) Co., Ltd. , or AMMT, to Magnequench (Korat) Co., Ltd. Prior to the AMR-Magnequench merger in 2005, this facility manufactured magnetic powders using a process that was similar but not identical to that used by MQTJ. Subsequent to the AMR-Magnequench merger, it was determined that this facility be retrofitted to produce magnetic powder of the same specifications as MQTJ. The retrofit, involving the replacement of existing jet casters at MQK with Magnequench jet casters, was completed in early 2007 and commercial production commenced. The MQK facility is ISO 9001:2008, ISO 14001:2004 +Cor 1:2009, OHSAS18001:2007 and Underwriters Laboratories, or UL, Product RoHS certified. MQK plans to be certified for IECQ HSPM QC 080000:2005 in 2014 and ISO/TS16949:2009 in 2015.
Molycorp Zibo
Our ZAMR facility is a rare earths and zirconium processing plant located approximately 21 kilometers from the center of Zibo, an industrial center in Shandong Province, China. The plant site consists of 18 buildings on 15 acres. ZAMR refines a light mixed rare earth carbonates and/or chloride feed and produces light rare earths of high purity. ZAMR also produces a line of high quality zirconium products and mixed oxides. ZAMR has received certifications in: ISO9001:2008, ISO14001:2004 and OHSAS18001:2007.
Molycorp Jiangyin
The JAMR facility is a rare earths processing plant, located approximately 150 kilometers from Shanghai, in the city of Jiangyin, Jiangsu Province, China. The plant consists of 25 buildings on approximately 20 acres. JAMR refines ion adsorption clay concentrates to produce a range of heavy rare earth products which are sold to customers in high-tech industries in international and Chinese markets, which manufacture products such as permanent magnets, electronic components, display phosphors and optical glass. JAMR received certifications for ISO 9001:2008, ISO14001:2004 and OHSAS18001:2007.
Molycorp Peterborough
Located in Peterborough, Ontario, Canada approximately 140 km northeast of Toronto, the plant site consists of one building on approximately 1.7 acres. It is a hydrometallurgical plant recovering gallium and indium rare metals from low grade manufacturers waste and residue.
Molycorp Blanding
Located in Blanding, Utah, approximately 500 kilometers southeast of Salt Lake City and accessible by highway, the plant site consists of three buildings on approximately 40 acres. Here, furnace technology is utilized to recover gallium from high purity gallium arsenide scrap. Purities for this secondary gallium rare metal are in the 4N to 8N range. The facility also: (i) upgrades primary gallium from the Ingal-Stade plant and other global producers into the 6N to 8N purity range; (ii) produces gallium nitrate and; (iii) produces gallium oxide. It is ISO9001:2000 certified and completed a surveillance audit in January 2010 meeting its ISO 9001:2008 qualifications.
Molycorp Gallium Compounds
Located in Quapaw, Oklahoma, the plant site consists of two buildings on five acres of land. Gallium Compounds is recognized worldwide as a leading manufacturer of gallium and tri-chloride. We own 80 percent of this production facility with the remaining 20 percent owned by the founders of Gallium Compounds.
Molycorp Hyeongok
Located in the Hyeongok Industrial Zone, this is our gallium tri-chloride production facility located in the Republic of Korea. This manufacturing facility is strategically situated in the heartland of Korea’s booming LED industry. This plant supplies Asian markets as well as serve as a back-up for the plant located in Quapaw, Oklahoma. We own 80 percent of this production facility with the remaining 20 percent owned by the founders of Gallium Compounds.
Corporate Offices
We lease the office space for our corporate offices in Greenwood Village, Colorado, Toronto - Ontario, Canada and Beijing, China. Those leases expire in November 2016, August 2015 and July 2015, respectively, all subject to renewal options.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we may become subject to various legal and regulatory proceedings relating to our business.
In February 2012, a purported class action lawsuit was filed in the U.S. District Court for the District of Colorado against us and certain of our current and former executive officers alleging violations of the federal securities laws. The Consolidated Class Action Complaint filed on July 31, 2012 also names most of our Board members and some of our stockholders as defendants, along with other persons and entities. That Complaint alleges 18 claims for relief arising out of alleged: (1) securities fraud in violation of the Securities Exchange Act of 1934, or the Exchange Act, during the proposed class period from February 11, 2011 through November 10, 2011; and (2) materially untrue or misleading statements in registration statements and prospectuses for our public offering of preferred stock in February 2011 and of common stock in June 2011, in violation of the Securities Act of 1933. Our motion to dismiss that Complaint was filed in October 2012 and is pending. We believe that this lawsuit is without merit, and we intend to vigorously defend ourselves against these claims.
A consolidated shareholder derivative lawsuit filed purportedly on our behalf against us (as a nominal defendant) and certain of our current and former directors, executive officers and shareholders is pending in the Delaware Court of Chancery. In August 2012, a consolidated amended shareholder derivative complaint was filed, asserting causes of action for alleged: (1) breach of fiduciary duty, including the duties of loyalty and due care; (2) breach of fiduciary duty not to trade on or misuse material non-public information; (3) unjust enrichment; and (4) aiding and abetting a breach of fiduciary duty. On our behalf, the plaintiffs in the consolidated derivative action seek, among other things, monetary damages, restitution, and an accounting. The defendants filed motions to dismiss and motions to stay that action in October 2012. Pursuant to an order dated May 15, 2013, the Delaware Court of Chancery stayed the derivative lawsuit pending final disposition of the purported class action lawsuit. On October 9, 2013, certain plaintiffs, on our behalf, filed a Motion to Lift the Stay and for Leave to File an Amended Complaint. All briefs in respect of this motion have been filed, and a hearing on the motion was held on February 7, 2014. Two additional shareholder derivative lawsuits that were filed in the U.S. District Court in Colorado have been dismissed, but the plaintiffs in those cases pursued an appeal of that ruling in the U.S. Court of Appeals for the Tenth Circuit. On August 20, 2013, the Tenth Circuit remanded these cases back to the Colorado District Court. Both we and the plaintiffs have filed their respective briefs in the remanded proceeding and the decision of the Colorado District Court is pending. Subsequently, a different shareholder filed purportedly on our behalf a new shareholder derivative lawsuit in the U.S. District Court in Colorado on November 20, 2013. On December 11, 2013, the Colorado District Court
sua sponte
consolidated the new derivative lawsuit with the two remanded lawsuits, and permitted the plaintiff in the new derivative lawsuit to file a brief in the remanded proceeding. On December 27, 2013, the plaintiff in the new derivative lawsuit filed its brief in the remanded proceeding, and filed a motion to vacate the consolidation order. The decision of the Colorado District Court on each of the remanded proceeding and the motion to vacate the consolidation order is pending. Pursuant to an order the Colorado District Court entered on January 7, 2014, the defendants need not respond to the new derivative lawsuit until the Colorado District Court decides the defendants’ motion to dismiss or stay the remanded proceeding.
In August 2013, two purported class action lawsuits were filed in the U.S. District Court for the Southern District of New York against us and certain of our current and former executive officers, alleging violations of the federal securities laws. The purported class action lawsuits allege claims for relief arising out of alleged securities fraud in violation of the Exchange Act during the proposed class period from August 2, 2012 through August 7, 2013. Pursuant to stipulations and orders of the court dated September 25, 2013 and September 27, 2013, among other things, the deadlines for us and our current and former executive officers to respond to the lawsuits have been stayed pending appointment of a lead plaintiff under the Private Securities Litigation Reform Act. We believe that the lawsuits are without merit, and we intend to vigorously defend ourselves against these claims.
Due to the inherent uncertainties of litigation and regulatory proceedings, including the current purported class action lawsuit and derivative lawsuits, we cannot determine with certainty the ultimate outcome of any such litigation or proceedings. If the final resolution of any such litigation or proceedings is unfavorable, our financial condition, operating results and cash flows could be materially affected.
ITEM 4. MINE SAFETY DISCLOSURES
The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in exhibit 95.1 to this Annual Report on Form 10-K.