(Question 1) Are there other factors - such as flexibility or control over free cash flow - that better explain Molycorp's current and its target capital structure?
(Question 2) Should Molycorp issue debt, equity, or a combination of both? What are the advantages and disadvantages of such issues? How should Molycorp think about making this decision? Is it a rushed decision? And how does tax shields affect the decision?
Exhibit 4 Molycorp Balance Sheet, 2009-2012 (millions of dollars) As of December 31st 2009 2010 June 30th 2012 2011 $ $ Assets Cash & Short-Term Investments Accounts Receivable Inventory Other Assets Current Assets 6.9 $ 12 8.5 1.8 18.5 316.4 $ 16.4 18.8 1.8 353.4 418.9 70.7 111.9 37.5 639.0 369.3 118.4 319.9 105.4 913.0 66.4 94.0 Net PP&E Goodwill Intangibles Other Long-Term Assets Total Assets 0.7 561.6 3.4 3.1 47.9 1,255.1 0.6 31.5 479.6 1,153.3 505.0 4919 96.0 3,159.2 12.1 97.7 Liabilities Short-Term Borrowing Accounts Payable Accrued Expenses Current Portion of LT Debt Other Current Liabilities Current Liabilities 2.9 5.9 3.1 13.0 4.2 0.9 161.6 12.9 1.5 1.7 178.6 287.9 51.5 263.2 0.7 35.0 0.4 20.7 9.5 637.6 Long-Term Debt Deferred Tax Liabilities Other Non-current Liabilities Total Liabilities Shareholder Equity Total Liabilities & Equity 196.5 18.9 15.8 409.9 12.3 13.5 23.1 835.0 172.7 50.9 1,696.2 33.0 74.6 446.5 845.2 1,463.0 3,159.2 97.7 479.6 1,255.1 Other Items Total Shares Outstanding Current Ratio Debt-to-Total Capital (book value) 45.0 19 0% 82.3 17.1 1% 83.9 3.6 19% 109.9 1.4 43% Exhibit 3 Molycorp Income Statement, 2009-2012 (millions of dollars) Year Ending 12/31 2009 2010 6 Months Ending 6/30 2011 2012 2011 $ Revenue Costs of Goods Sold Gross Profit 7.1 $ 21.8 (14.7) 35.2 $ 396.8 28.8 154.2 6.4 242.7 $ 125.9 $ 189.0 55.1 145.3 43.8 70.8 12.7 SG&A Research & Development (R&D) Depreciation Earnings Before Interest and Tax (EBIT) 45.2 2.3 6.9 (48.1) 56.7 7.7 15.2 163.1 22.5 3.0 5.4 39.9 65.6 9.7 11.1 (42.6) 1.2 (28.6) (0.2) Net Interest Restructuring and Other Charges Profit Before Tax (PBT) 0.2 (0.2) (28.6) (0.2) 3.0 (50.8) 0.4 15.8 146.9 9.7 47.6 (99.9) 40.1 Tax Expense (Credit) Minority Interest Net Income 28.6 0.8 117.5 (6.4) 1.0 45.6 (29.5) (0.7) (69.7) (28.6) (50.8) Common Dividends 0.0 0.0 0.0 0.0 0.0 Sources: S&P Capital IQ (accessed 11/8/13), and Molycorp Annual Reports, various years. Exhibit 4 Molycorp Balance Sheet, 2009-2012 (millions of dollars) As of December 31st 2009 2010 June 30th 2012 2011 $ $ Assets Cash & Short-Term Investments Accounts Receivable Inventory Other Assets Current Assets 6.9 $ 12 8.5 1.8 18.5 316.4 $ 16.4 18.8 1.8 353.4 418.9 70.7 111.9 37.5 639.0 369.3 118.4 319.9 105.4 913.0 66.4 94.0 Net PP&E Goodwill Intangibles Other Long-Term Assets Total Assets 0.7 561.6 3.4 3.1 47.9 1,255.1 0.6 31.5 479.6 1,153.3 505.0 4919 96.0 3,159.2 12.1 97.7 Liabilities Short-Term Borrowing Accounts Payable Accrued Expenses Current Portion of LT Debt Other Current Liabilities Current Liabilities 2.9 5.9 3.1 13.0 4.2 0.9 161.6 12.9 1.5 1.7 178.6 287.9 51.5 263.2 0.7 35.0 0.4 20.7 9.5 637.6 Long-Term Debt Deferred Tax Liabilities Other Non-current Liabilities Total Liabilities Shareholder Equity Total Liabilities & Equity 196.5 18.9 15.8 409.9 12.3 13.5 23.1 835.0 172.7 50.9 1,696.2 33.0 74.6 446.5 845.2 1,463.0 3,159.2 97.7 479.6 1,255.1 Other Items Total Shares Outstanding Current Ratio Debt-to-Total Capital (book value) 45.0 19 0% 82.3 17.1 1% 83.9 3.6 19% 109.9 1.4 43% Exhibit 3 Molycorp Income Statement, 2009-2012 (millions of dollars) Year Ending 12/31 2009 2010 6 Months Ending 6/30 2011 2012 2011 $ Revenue Costs of Goods Sold Gross Profit 7.1 $ 21.8 (14.7) 35.2 $ 396.8 28.8 154.2 6.4 242.7 $ 125.9 $ 189.0 55.1 145.3 43.8 70.8 12.7 SG&A Research & Development (R&D) Depreciation Earnings Before Interest and Tax (EBIT) 45.2 2.3 6.9 (48.1) 56.7 7.7 15.2 163.1 22.5 3.0 5.4 39.9 65.6 9.7 11.1 (42.6) 1.2 (28.6) (0.2) Net Interest Restructuring and Other Charges Profit Before Tax (PBT) 0.2 (0.2) (28.6) (0.2) 3.0 (50.8) 0.4 15.8 146.9 9.7 47.6 (99.9) 40.1 Tax Expense (Credit) Minority Interest Net Income 28.6 0.8 117.5 (6.4) 1.0 45.6 (29.5) (0.7) (69.7) (28.6) (50.8) Common Dividends 0.0 0.0 0.0 0.0 0.0 Sources: S&P Capital IQ (accessed 11/8/13), and Molycorp Annual Reports, various years
