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This assignment serves as the final exam for the course. You should do this assi
This assignment serves as the final exam for the course. You should do this assignment entirely by yourself.
You have been hired as a consultant by Molycorp, a rare earth mineral mining company headquartered in Colorado. Your job is to evaluate a major financing decision the company faces as part of its capital expenditure program named “Project Phoenix.” You need to evaluate how much funding Molycorp will need as well as a set of financing choices available to Molycorp including internal cashflows, multiple external funding sources, and an asset sale. You will provide a report to the CFO of Molycorp about forecasted funding needs and recommended paths forward.
The CFO has provided to you the information you will need in two complementary case studies, “Molycorp: Financing the Production of Rare Earth Minerals” and “Showdown at Mountain Pass: Bidding for Neo Materials.” The Molycorp case is the main case study, while the Neo Materials case covers an acquisition that Molycorp Inc. recently completed, but Molycorp is now considering divesting it in order to reduce its financial difficulties. Read these case studies, included in your coursepack, to prepare for this assignment:
Esty, B. & Mayfield, E. (2015). Molycorp: Financing the Production of Rare Earth Minerals (A). Harvard Business School Case #9-214-054.
Esty, B. & Mayfield, E. (2019). Showdown at Mountain Pass: Bidding for Neo Materials. Harvard Business School Case #9-219-096.
You may also find the following reading note to be useful in your forecasting and evaluation of funding possibilities:
Chacko, G. & Strick, E. (2002). Convertible Securities. Harvard Business School Reading Note #9-202-129.
After reading the final case studies please respond to the prompts below to submit your final case study write-up.
Answer the following questions as you formulate recommendations for the CFO of Molycorp:
Start with a base projection of financing needs for Molycorp. Using the Molycorp case, project out Molycorp’s income statements and balance sheets and determine its funding needs at least through 2017 (though you may want to do so through 2019).
How much funding is needed and when? What problems do you foresee for Molycorp?
For simplicity, you may assume interest expense, preferred dividends, and interest income are based on beginning-of-year debt, preferred stock, and cash/investments, respectively.
For initial forecasting purposes only, you may assume a future stock price of $50 at the time of conversion of the convertible preferred stock and convertible notes issued in 2011.
You may assume that the convertible notes issued in 2011 would convert into 6.0 million shares if bondholders opt to convert at the maturity of the notes.
You may assume that the acquisitions of the two manufacturers of REOs (Santoku American and AS Silmet) were financed with minimal debt (no debt issuance and assumption of a small amount of debt)
Notes
The integration of technology from the Neo Materials acquisition to the rest of Molycorp’s mines/products will involve additional capital expenditures beyond those initially noted in Exhibit 9 of the Molycorp case. Specifically, the capital expenditure numbers in Exhibit 9 are expected to increase to $170M, $145M, $145M, $145M, and $145M in 2013, 2014, 2015, 2016, and 2017, respectively. You should use these capex values throughout your analysis of this case study.
You should incorporate the firm’s credit ratings as you determine borrowing costs.
The revenue in Exhibit 10 for Molycorp includes the Neo Materials acquisition.
“Other Expense” in Exhibit 9 is almost entirely R&D expense.
Cash and short-term investments earn the 1-year Treasury rate
Short-term borrowing is a credit line primarily for net working capital financing. The credit line is renegotiated yearly and is typically capped at 1% of the previous year’s revenue.
In Exhibit 2b of the Neo Materials case, there is a typo. The label of the second column should read “As of June 30, 2012” not “As of June 30, 2011”).
Now evaluate each of the financing choices available to Molycorp (given in the Molycorp case) separately.
Project out a separate set of financial statements (income statement and balance sheet) through at least 2017 for Molycorp for each of these choices. Based on these projections, what are costs and benefits to Molycorp of using each option relative to the others?
Again, you may assume a $50 future stock price at the time of conversion of any convertible securities.
What do you conclude about utilizing each of these financing options?
Finally, evaluate the possible financing choice available to Molycorp of an asset sale, i.e, selling its Neo Materials subsidiary (information is given in the Neo Materials case).
Do a base valuation of the business by projecting its financials, cash flows, and performing a DCF analysis.
Project Molycorp’s financials (income statement and balance sheet) through at least 2017 with this subsidiary sold off to Alchemix Asset Management at the valuation you calculate above (without using the other financing choices available to Molycorp).
Based on your projections above, what are the costs and benefits to Molycorp of using this asset sale as a financing choice?
How does the asset sale compare relative to each of the other financing choices available to Molycorp?
Formulate a recommendation for the CFO.
Based on all of your analyses above, how much and what form of financing would you recommend for Molycorp? Would you recommend a combination of financing sources?
Show a finalized set of projected financials (income statement and balance sheet) for Molycorp through 2017 utilizing your financing recommendation(s). Make sure you account for the financing choice(s) appropriately in your financial statements.
Utilizing your financing recommendations(s), what values do you project for Molycorp’s stock price immediately after the financing decision and in each subsequent year?
Submit your completed write-up and Excel spreadsheet with models by the posted due date. You should complete your final write-up and spreadsheet model individually.
You may choose to submit your write-up on the first page of the Excel spreadsheet, or as a separate Word document. Please do not submit a .zip file or PDF.
Your write-up should be no more than two pages in length.
Please note: you will only have one attempt to submit your case study. Be sure your case study is complete before submitting this assignment.
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