case5-Molycorp-CaseMotivation.pptx
Go8
Monash Business School
Case Motivation One:
MOLYCORP: FINANCING THE PRODUCTION OF RARE EARTH MINERALS
Business and Economics
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LEARNING OBJECTIVES
The review of a wide range of topics: DCF valuation, financial strategy, optimal capital structure. identification of relevant cash flows.
The critical assessment financing strategy and the development pf a comprehensive financing plan to address a funding shortfall.
Valuation analysis, with a focus on equity valuation
The interaction of business and financial strategies
MBA9005-LEC01
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CASE SYNOPSIS
Molycorp, the western hemisphere’s only producer of rare earth minerals (REM), was in the middle of a $1 billion capital expenditure project (project Phoenix) as part of its strategy to become a low-cost, vertically integrated supplier of REM.
Falling REM prices and subsequent fall in revenues and stock prices created significant challenges for Molycorp’s management team including a serious funding shortfall. They needed additional cash to finish Project Phoenix and to repay debt obligations that were falling due.
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CASE SYNOPSIS CONTINUED
To address the funding shortfall, management had to develop a financing plan that answered three questions: how much capital to raise, what kind(s) of capital to raise, and when to raise it.
These decisions would determine not only Molycorp’s capital structure, but also its ability to implement its business strategy, and ultimately, its value.
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Potential Questions to be addressed in report submission
What are the key elements of Molycorp’s business plan? What are the key risks facing Molycorp as it implements its plan?
What is a reasonable (market value) leverage ratio for Molycorp? In your opinion, is Molycorp currently at its optimal leverage ratio?
What is Molycorp’s external financing need from July 2012 through to 2013?
Is Molycorp’s equity fairly priced at $11.49 per share? Assume a WACC of 14.7% and a corporate tax rate of 35%.
Develop a comprehensive funding plan to meet Molycorp’s financing needs. Specifically, of the three alternatives listed on page 5 of the case, which one or ones would you recommend, in what amounts, and when? Explain your reasoning.
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Submission (Case 5: Molycorp)
Penalties will apply if we spot collusion or observe high commonality with regards text matching and if you exceed the required word count by more than 10%.
You must document:
– The assumptions you have made if any that are not in the case– Show calculations and results as an appendix (not always required)
Depending on your formatting, about 3 pages and not exceeding 1,000 words (excluding executive summary and appendix). All reports must adopt the following formatting requirements; 1.5 spacing and 12 point font.
Submission Due Date: Sunday 3rd April 11:55pm (This is a milestone event and hence late submissions will be graded 0/10)
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Sample Template
Key points facts and problems:
Executive Summary (excluded from word count)
1. What are the problems and the key issues that arise
2. Address the given discussion points or questions
3. Conclusions and recommendations if any
Appendix (excluded from word count)
Do Not use a Q and A answer format : make this a business type briefing
and avoid simply restating what is already in the case
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