Wednesday, November 12, 2014

Notes On Molycorp Quarerly Results $MCP

A correspondent wrote in with some thoughts on the Molycorp quarterly results:

There is more evidence in here that they are worried about product quality issues.  Notice all the focus on consistency of operations and meeting spec, this is a big change in focus from prior quarters. If you read this through from start to finish, they are very gun shy about giving any forward guidance on production except, of course, that they will meet the Oaktree financing bogey of 4000 tons for Q4 15 and Q1 16, undoubtedly because they will run out of money if they don’t!

Notice their language about the ramp of the facility has changed markedly compared to August, they have walked back expectations significantly. It appears that the leach system went badly off track in the second half of Q3 compared to expectations. On the one hand, they state very clearly that HCl constraints were the cause of Q3’s production shortfall:

"In the third quarter, production volumes in Mountain Pass was 691 metric tons. This lower-than-expected volume was driven primarily by one factor, lack of sufficient supplies of hydrochloric acid otherwise known as HCl."
However, they then go on to say that HCl will not be a constraint in Q4 even as it increases from Q3:
"And right now in the fourth quarter, we don't see hydrochloric as being a limit[ing] factor in that ramp. But just to be clear, we're not planning to go from 0 to 100 here, we really do want to have a methodical ramp ups. So from our perspective, we do see the ability to increase from here because we have made progress with our hydrochloric facility."
But instead of a step function increase in production, you see that the phrase 'methodical ramp becomes a mantra throughout the call. Contrast that with this discussion from the August call when they were confident that Leach 2.0 would open the doors to full Phase I production of 5000 tons per quarter at Mountain Pass:
A: So now that once we commission Leach 2.0 we'll see that capacity expand that will open the door to the Phase I production levels that we've been talking about, so quite confident about that.

Q: Okay. It did sound like you're confident that you're putting yourself into position to have this sort of step function change in production out of Mountain Pass. You've got the temporary issue around Chlor-Alkali and reagents in Q3 it sounds like. So is it really Q4 where we maybe start to see that pick back up in terms of the volume production aspect of Mountain Pass?

A: Yes, that's what we're thinking today
So here is what they had to say about the leach system today. I suspect this is what was preventing them from meeting production goals earlier in the year - the rare earth grams per liter in the solution was not high enough to get them to their goal. So they had to put another leach system in. Note they state that they haven’t gotten to their theoretical target. Is this a problem with the ore body or with the process itself? As you read through further, there concern with the quality of their output is evident – clearly they aren’t very confident that the plant can deliver what was advertised.  Oh, and they’ve had some 'construction issues' with Leach 2.0 as well:
Q: I was wondering if you guys have been able to test the leaching unit after you had commissioned the entire equipment set and test it at full scale capacity?

A: So the leach equipment went into production, went into service in September. So that system is a big consumer of hydrochloric acid. So, to answer your first question, we have not run that system at full capacity for any extended length of time.

We have experienced some, what I would call, construction-related issues in that system, which we now are in the process of cycling back and repairing. That system was designed in a way that it's a series of cascading tanks, and was designed in a way that we can be working on one tank, taking it out of the chain while we're continuing to operate the others or two tanks or so.

So again, we don’t see this as significantly impacting our ability from our ramp in that point of view. Fundamentally though, more importantly from a technology point of view and how it's working, if you recall, the objective of this process was to first increase volume, but more importantly, it was going to increase the rare earth content in the solution that was moving downstream.  And we have absolutely seen that our rare earth grams per liter in that solution have increased. We have not gotten to the theoretical target that we're looking at, but we're certainly above where we were, and we can see the progression once we're able to run this system and optimize it to get to, more close to what we hope to see out of that.

So, from a process point of view or sort of from a technical point of view, at this point we've seen what we are hoping to see out of that unit. Although we are having to circle back on some of the construction items as we ramped up and repair and replace a few things as we go along.
And here is an example of how they are ducking any kind of production forecast for Q4 2014 or Q1 2015:
Mark Malcan: Okay. And then I don't know if you mentioned this at the beginning of the call, but what's your monthly production right now at Mountain Pass?

A: Yeah. We're not giving our monthly production numbers. Certainly, not looking forward and we're grouping the quarterly production at this point. We're not giving monthly production numbers.

Q: Okay. But, with respect to the past quarter, should we expect that this is a complete reset back to a lower level, and you're going to be ramping from that on a monthly basis or are you able to, is it going to bump back up to kind of where you were at, say April of this  year?

A: Yeah, understood. I mean, Q3 is definitely not a run rate for our business in our view. So, we are looking now to begin ramping up production. And one of the reasons we're hesitant to give out specifics around where we're trying to get to is because, as I said, we want to do this in a way that, if things are working well, we will be a little more aggressive and push production up. And if we're starting to see things that we need to step back and understand, we'll slow things down.

So, the goal here is as I said, Q3 is not a run rate. We're going to grow from there. And we're going to continue to grow into 2015 with the ultimate target as we said, a minimum of 4,000 metric tons in the last quarter of 2015 and the first quarter of 2016. So, we feel pretty confident right now in our ability to ramp our production, I will say that. And with the HCL issues now somewhat behind us, that really does open the door for us.
Note the change in tone from the August 7 conference call: 
Now with regard to Mountain Pass, we remain on track to produce higher  volumes in the second half of this year compared to the first half. This increased production will be driven both by our ongoing success in process optimization, as well as our newly expanded leach system. We plan to begin commissioning that system, which we call Leach 2.0, in this quarter. Once fully commissioned, it should enable a significant step change upward in production… Our intent is to complete this production ramp as quickly as possible]

Q: I just wanted to follow-up a little bit more on the previous question as well. I think in Q2, you guys were able to produce somewhere around 1,600-metric tons for Mountain Pass. In terms of a methodical increase, is it fair, appropriate for us to build off of kind of that Q2 number or are you talking about really building off of the 600 metric ton number, which clearly is an anomaly?

A: Again, so the 600mt number we would agree is an anomaly. And that's where we are right now, and we just put the new Leach 2.0 system, as you know, online, and we're working through that. So, without giving specific production numbers here, Q3 is definitely anomaly. It's a run rate, but that's where we're starting from, and we're going to go from there. And we feel very confident that we can do that.

Q: Okay. But, I mean, given the issues that did occur and dramatically impacted production, isn't it fair just to give kind of a little bit more guidance just on the immediate term as to where we should be expecting on a level set basis you guys to be now and then, again, continue to build from there as the year progresses?

A: Well, I guess what we're trying to do here is we're, our focus is about building a process, a sustainable process to make a quality product, not hitting a particular number in the next quarter, because when we look to the financing and the funding we receive from Oaktree, that really did allow us to sort of step back and think about this in different  terms. That's not to say that we're not going to try and ramp this aggressively as we can, and we have all the confidence that we could do that. But having said that, it's moved us away from saying we absolutely have to be at this number by this month in the next six months because we have the ability to make sure that we're running this thing properly, and that's  really what we want to do. I mean, we've learned some lessons what we've seen happening in chlor-alkali and some of those other units that we need to go slowly and we need to be careful here. And that's our plan going forward.

Q: What are the limiting factors right now as you kind of plan out how you're going to be increasing production at Mountain Pass?

A: Well, the limiting factors it's the we don't know what we don’t know type of, where we're going, we've got a ramp plan. I mean, to be clear internally, we have a very clear ramp plan of what we're trying to do here. And when we look at some of the constraints we have in the past which were higher hydrochloric and capacity of leach and those things, we see that we've  dealt with a lot of those issues. But as we ramp this facility, we're going to be sending a lot more product downstream and that will then put further burden on those units, and we'll have to see, our plan is we fully expect that they will ramp positively, but we need to run through that and we need to be methodical as we do that.

So, the constraints as we sit here today really are constraints we're putting on ourselves to make sure that we don't end up with product that's coming at the other end that's not exact or that we're having issues with things failing that are going to hurt us later.
I think that was an extremely important comment.  They are basically saying they are worried about putting off spec product into a downstream process with a much bigger cost base that is then going to have to be scrapped because their rare earth material is bad.  Either they are not confident about the quality of their output and are worried about product liabilities issues or their customers have looked at what they are turning and have concluded they can’t trust it. Contrast that comment with this one from the August call:
As I mentioned earlier, every molecule we shipped downstream from Mountain Pass is ultimately sold in a higher value form. In particular, we have been steadily growing downstream shipments for Mountain Pass of light rare earth concentrate, what we call LREC, to feed our Sillame and Zibo plants.

Q: So, I guess, to summarize, financing provides you a runway and you have a business plan in place and an operating plan in place that is going to get you to where you need to be at a pace that you think is appropriate.

A: Absolutely. Absolutely. And again, we need, two consecutive quarters is one thing, but what we really need is consistent quarter-over-quarter production that we can count on because taking it back to the fundamental strategy of what we're trying to do here. But our view was, is that the rare earth market wanted stability in supply and price visibility and all those types of things. And we can provide that. But we can only do it if we have products coming out there that are in spec consistently that we can count on. And if we can demonstrate that to the market, that's the end game here. And when we do that, we're going to see that, I think we're going to see a very positive reaction from our customers.

So, I hear and I understand why we need to be thinking about next quarter and the quarter after, but the long-term strategy really is here for us to be  able to talk to customers and demonstrate, we've got these process figured  out, you can count on it, and now let's talk about volumes and supplies and pricing, et cetera. So, that's where we're trying to go here.
I think the best way to understand why Molycorp isn't working is the article "You Don't Bring a Praseodymium Knife to a Gunfight" which I talked about yesterday.

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