U.S. bankruptcy judge refuses Molycorp request for loan

WILMINGTON, Del. (Reuters) - Molycorp Inc MCPIQ.PK failed to get approval from a U.S. Bankruptcy judge on Friday to borrow about $44 million at the rare earth producer's first bankruptcy hearing.

Samples of rare earth elements are converted to glass discs inside the testing building at the Molycorp Minerals Mountain Pass Mine in Mountain Pass, California August 19, 2009. REUTERS/David Becker

Judge Christopher Sontchi agreed with the objection by an affiliate of Oaktree Capital Management that Molycorp could not justify its need for the money, which would deepen the company’s insolvency.

The company will discuss with its creditors how to structure the loan and will return to court on Thursday at 10 a.m., according to Sontchi’s chambers.

Molycorp, which filed for bankruptcy on Thursday, sought the money for its operations and to signal to customers and employees that the company would meet its commitments. Molycorp was seeking the money on an interim basis and had planned to return to court to seek approval to borrow up to $225 million.

Oaktree, which had loaned the company about $250 million in September, argued Molycorp was essentially two businesses, a profitable developer and distributor known as Neo and the unprofitable Mountain Pass mining operation in California.

Oaktree’s loans are guaranteed by the Neo business. It objected to the additional borrowing, arguing it was burdening the profitable business with unnecessary debt to finance the development of Mountain Pass.

Molycorp’s chief financial officer, Michael Doolan, testified that the Neo business could survive without the bankruptcy loan. He also said Mountain Pass provided less than 30 percent of Neo’s raw material and acknowledged the board considered closing the mine.

“Neo would be wounded, no question,” he said, speculating on the impact of not getting the loan. But “it would not be a fatal blow in and of itself,” he added.

Molycorp’s value swelled in 2011 with a commodities boom and export restrictions on rare earths by China, the world’s leading producer of the elements used in smartphones and automobiles.

In 2012, the company bet on vertical integration and acquired Toronto-based Neo Material Technologies Inc, a leading processor and distributor of rare earth products.

The Mountain Pass side of the business had issued $650 million in senior secured notes, and the investors holding those notes had committed to providing the $225 million bankruptcy loan.

Molycorp plans to swap ownership of the company to the secured bondholders in return for their debt.

In the past year, a slowdown in China’s economy and slumping commodity prices pushed many mining companies into bankruptcy, including Allied Nevada Gold, iron ore producer Magnetation and Patriot Coal Co.

Reporting by Tom Hals in Wilmington, Delaware; Editing by Leslie Adler and Chris Reese