TEXT-S&P rates Molycorp 'B' rating

Overview
-- Molycorp Inc., a U.S.-based miner and processor of rare earth
elements, has issued $650 million in senior secured notes to fund a portion of
its acquisition of Neo Materials Technologies Inc.
-- We have assigned a 'B' corporate credit rating to the company and a
'B' issue-level rating and '3' recovery rating to Molycorp's notes.
-- The stable outlook reflects our expectation that demand and pricing
for rare earth elements will remain high enough to allow the company to
complete the build out of its mine and that it will complete the Neo Material
acquisition with proceeds from the offering and existing cash resources.

Rating Action
On July 5, 2012, Standard & Poor's Ratings Services assigned its 'B' corporate
credit rating to Colorado-based Molycorp Inc. The rating outlook is stable.

At the same time, we assigned a 'B' issue-level rating (the same as the
corporate credit rating) to the company's $650 million senior secured notes
due 2020. The recovery rating on these notes is '3', indicating our
expectation that lenders can expect average (50% to 70%) recovery in the event
of a payment default. The notes have been sold pursuant to Rule 144A with
registration rights.

Molycorp will use proceeds from the notes to finance a portion of the
acquisition of Neo Materials Inc. (not rated), a Toronto-based producer and
processor of permanent magnet powders, rare earths and other metals, and for
general corporate purposes. Pending the completion of the Neo Materials
acquisition, the proceeds will be deposited into an escrow account.

Rationale
Molycorp is a miner, processor, and producer of rare earth elements, which are
a group of 17 elements generally found together in the earth's crust that are
used in a variety of high tech applications. The rating and outlook reflect
what we consider to be the combination if its "vulnerable" business risk
profile and "aggressive" financial risk profile. In our view, the company's
vulnerable business risk profile stems from exposure to volatile pricing, the
pricing and supply uncertainties resulting from China's control of the supply
of global rare earth elements, the execution risks inherent in starting up a
mining operation and integrating the Neo Materials acquisition, and reliance
on a single mine to drive future performance. Our view of the business risk
also takes into consideration the company's relatively large reserve base and
the growing demand for certain of these elements, which the risk of new
entrants and the potential reengineering of products to lower dependence on
rare earth elements somewhat offset. In our view, the aggressive financial
risk profile reflects the company's lack of operating history, high capital
spending needs, what we would consider relatively high debt levels
(considering the start up and integration risks facing its business), and, in
our assessment, the company's "less than adequate" liquidity, which could
cause the company to slow its mine development plans, resulting in
lower-than-expected cash flow.

Molycorp is aggressively pursuing a strategy to become one of the world's most
integrated producers of rare earth products, including oxides, metals, alloys,
and magnets used in high tech, defense, clean energy, and water treatment
technology. It is reopening the Mountain Pass mine, which had been inactive
for a decade, although the company continued to process ore from existing
stockpiles. This site has a significant reserve base (more than 20 years at
full production) and the potential to expand reserves on the current site. The
mine is slated to resume production by the end of 2012 at an expected rate of
20,000 metric tons per year of rare earth oxides (REO) and up to 40,000 metric
tons per year in 2013 when we expect it to complete the second phase of its
expansion. We estimate that the combined company's capital expenditures will
total about $700 million in 2012, including spending to complete both phases
of this project. The company has the majority of its 2012 output contracted at
market-based prices with average terms of three to five years.

In addition to reopening the mine, the company has made a number of
acquisitions in the past year or so to expand its processing capabilities,
including operations in Estonia and the U.S., and has recently announced it is
acquiring Toronto-based Neo Materials, producer and processor of permanent
magnet powders, rare earths, and other metals. The Neo Materials acquisition
expands Molycorp's direct exposure to China, the largest rare earth-consuming
nation. The transaction expands production capabilities to include Neo
Materials' magnet powder portfolio used to produce neodymium-iron-boron bonded
rare earth magnets, which are in high demand for use in a variety of
applications including hard disk drives, wind turbines, and drive motors for
electric vehicles. It also expands Molycorp's rare metals portfolio to include
gallium, rhenium, and indium, which are used in advanced electronics,
photovoltaic, aerospace, catalytic converters, and lighting. In our view,
integrating this acquisition--a company that is larger than Molycorp and whose
major operations are in China--could pose major challenges for management,
particularly as it is simultaneously ramping up the Mountain Pass operation.

China controls the supply of rare earths. It produces about 95% and consumes
about 70% of rare earths used globally. Beginning in 2010, China began to
severely limit exports, partially reflecting depleting supply and
environmental concerns as well as putting further pressure on users of rare
earths to site their operations in China. These restrictions resulted in
skyrocketing prices in 2011, creating a market characterized by speculation
and users of rare earths scrambling to ensure supply. Although prices have
since moderated, they seem to have stabilized at levels significantly higher
than historical levels.

However, in our view, China's control of supply creates pricing risk, since it
could release supply under political duress (the U.S. filed a recent World
Trade Organization case), lowering speculative demand and easing supply
shortages. Moreover, over the longer term, high prices could encourage new
entrants or cause end users to reengineer products, thus creating oversupply.
However, based on Molycorp's assessment, only one other new entrant has a mine
that is close to production. In our view, developing, permitting, and
financing a new mine could take several years, and for some applications,
there are no suitable substitutes. As a result, we anticipate that pricing
will be volatile, based on perceptions of China's policies, but should on
average be high enough for the company to generate free cash flow once the
mine is complete.

Both Molycorp and Neo Materials lack a history of strong operating results.
The Mountain Pass mine has only recently resumed production and has been
processing ore from prior mining activities. Given strong prices in 2011,
Molycorp posted about $182 million in EBITDA, which was in stark contrast with
EBITDA losses from 2008 through 2010. Neo Materials' results also improved in
2011, with EBITDA increasing to about $299 million compared with an average of
about $65 million per year during the prior five years. In light of this lack
of operating history, we feel that the total debt level contemplated, totaling
about $865 million, is somewhat aggressive. In addition, the proposed
financing increases fixed cash outflows in a period of heavy capital spending
and operating challenges.

We expect the combined company to generate between $350 million and $400
million of EBITDA in 2012, which would result in debt to EBITDA between 2x and
3x, and funds from operations (FFO) to total debt between 25% and 30%, which
we would consider strong for the rating. However, in our view, delays and cost
overruns related to the completion of the Mountain Pass mine or
higher-than-expected costs, lower prices, or difficulties in integrating Neo
Materials could dramatically weaken these ratios.

Liquidity
We view the company's liquidity position as less than adequate. Key aspects of
our liquidity assessment reflect the following expectations:

-- We estimate that by year-end 2012 liquidity will likely fall below
$100 million;
-- Liquidity sources will exceed uses by less than 1.2x in 2012;
-- In our view, because of the importance of completion of the mine to
future performance, the company is unlikely to materially scale back its
capital program in the coming year or so, even if industry conditions show
signs of weakening, and, therefore, the company would be unlikely to absorb
low-probability adversities; and
-- The company has limited bank relationships and would likely have to
rely on share issuance, which may not be available if market conditions
weaken, to fund cash shortfalls.

The company is relying on external financing as it builds out its business. We
expect combined cash flow from operations to be between $225 million and $300
million in 2012. We expect capital spending to be about $700 million and the
Neo Materials acquisition and associated costs to approximate $1.2 billion
(net of equity consideration). To fund the capital and acquisition spending,
the company is planning to use balance sheet cash (including the proceeds from
an already completed privately placed equity offering) and proceeds from the
bond issuance. This leaves minimal cash cushion to finance a cash shortfall,
in our view.

Recovery analysis
For the complete recovery analysis, see our recovery report on Molycorp,
published May 16, 2012, on RatingsDirect.

Outlook
The outlook is stable. Although market conditions for the company's products
remain relatively strong, which should allow the company to complete the
reopening of its mine and begin to generate cash flow in 2013, the company is
subject to commodity price fluctuations, execution risks and operating risks
inherent in reopening the mine, and integration risks associated with the Neo
Materials acquisition.

We could raise the ratings if the company completed its growth platform and
gained sufficient operating traction to improve liquidity and demonstrate the
sustainability of its business, without operating significant leverage to do
so.

We could lower the ratings if the company ran into delays, cost overruns, or
operating difficulties in opening and operating the Mountain Pass operation,
leading to weak liquidity and deterioration in credit metrics.

Related Criteria And Research
-- Issuer Ranking: North American Metals And Mining Companies, Strongest
To Weakest, April 13, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Methodology And Assumptions On Risks In The Metals
Industry, June 22, 2009
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
New Rating; Outlook Action

Molycorp Inc.
Corporate Credit Rating B/Stable/--

New Rating

Molycorp Inc.
Senior Secured $650 mil nts due 2020 B
Recovery Rating 3

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