Molycorp Inc. is seeking looser debt terms from lender Oaktree Capital Group LLC that would give the unprofitable miner of rare-earth minerals access to cash to support a turnaround effort, two people with knowledge of the matter said.
The Greenwood Village-based company is seeking to borrow about $150 million in revolving credit that’s available as part of a $400 million financing package Oaktree gave it in September, said the people, who asked not to be named because the negotiations are private.
The discussions center around the use of the funds as Molycorp looks for money to pay down $193.5 million of 3.25 percent convertible notes maturing June 2016 and for operational cash, said the people. Oaktree would need to waive two financial targets it had required the miner to meet before disbursing most of the funds still available under the revolving credit agreements, said the people.
Molycorp, which has suffered from declining commodity prices, risks default if it fails to retire all but $40 million of the convertibles by April 2016. A greater amount outstanding would trigger an immediate maturity of the Oaktree loans, which totaled $250 million on Dec. 31, according to a March 16 regulatory filing. The company, may not be able to continue as a “going concern” if it cannot restructure its debt, according to the filing.
Jim Sims, a spokesman at Molycorp and Carissa Felger, a spokeswoman for Oaktree at Sard Verbinnen & Co., declined to comment.
Molycorp shares dropped 7 percent to close at 35 cents Thursday.
Oaktree’s investment is protected by a make-whole clause. If Molycorp restructures, the loan agreement may require the company to pay a premium to the New York investment fund run by Howard Marks, compensating the lender for principal and unpaid interest.
The rescue financing provided in September pays 12 percent interest, comprising 7 percent cash and 5 percent pay-in-kind, which is paid with more debt, according to the filing. Oaktree was also offered warrants to buy as many as 24.5 million Molycorp shares. Warrants covering 18.4 million shares are priced at a penny each, while an additional 6.1 million are exercisable at $2.04, according to a Sept. 11 regulatory filing.
Meanwhile, Molycorp, whose products are used in wind turbines and smartphones, plans to consider other options to address the convertible notes, said one of the people. One possibility is to exchange the debt into equity, the person said.
Owners of the 3.25 percent convertible notes are close to hiring Blackstone Group LP and law firm Paul Weiss Rifkind Wharton & Garrison LLP to advise them on restructuring talks, people familiar with the matter told Bloomberg last week. Apollo Global Management LLC owned more than half the securities at the end of last year, according to data compiled by Bloomberg.
The debt last traded at 16.75 cents on the dollar on Feb. 24, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bonds, sold in June 2011, can be converted into Molycorp stock at $71.40 a share.
If discussions with the holders of the convertibles are successful, the $150 million remaining Oaktree credit can be channeled to Molycorp’s capital expenditures for the year. That investment is crucial to company’s finances as production at its Mountain Pass facility is expected to increase, said one of the people.
Mountain Pass, a rare-earth mine and processing plant located in California’s Mojave Desert that the company has called a “core component” of its strategy, has been slow in raising production because of a series of delays caused by construction issues related to leach systems. Production last year was 4,769 metric tons, according to the March 16 filing.
The current loan agreement requires production to exceed 4,000 metric tons a quarter for two consecutive periods by the first quarter of next year, according to the Sept. 11 filing. Molycorp will also need to generate at least $20 million in adjusted earnings before interest, tax, depreciation and amortization for the same two quarters to borrow the rest of the Oaktree funding.
The rare-earth elements are chemically similar metals, such as lanthanum, neodymium and dysprosium. They are used in iPads made by Apple Inc., BlackBerry’s namesake mobile devices, General Motors Co.’s plug-in Volt, Toyota Motor Co.’s Prius and Tomahawk cruise missiles made by Raytheon Co.
While rare-earths are relatively abundant in the earth’s crust, finding deposits large enough to mine is less common, according to the U.S. Geological Survey.
They are also expensive for producers to extract and are often laced with radioactive elements.
Lanthanum oxide, a rare earth used to refine gasoline, which peaked at $25,375 per metric ton in 2011, was quoted at $2,054 on Wednesday, according to Shanghai Steelhome Information data. Cerium oxide, used in glass polishing, fell to $1,933 from $32,049 four years ago, the data show.
