Molycorp expands on hedge as rare earths project advances; SanDisk, Electronic Arts gain

By Rebecca Melvin

New York, Aug. 28 - Molycorp Inc.'s 6% convertibles jumped Tuesday on an outright basis and expanded more than a point on a dollar-neutral, or hedged, basis after the Greenwood Village, Colo.-based rare earths producer said it is proceeding with the startup of its planned heavy rare earth concentrate operations at the Mountain Pass, Calif., facilities on schedule.

Sandisk Corp.'s older 1% convertibles due 2013 were on the busier side and better on what one source attributed to "window dressing" ahead of month end seen Friday. Shares of the Milpitas, Calif.-based flash memory maker were lower on the day.

Fellow yield name Electronic Arts Inc. was also a little better amid no particular news from the redwood City, Calif.-based video game publisher.

But Archer-Daniels-Midland Co., an investment-grade name, saw its 0.875% convertibles at below par.

"You don't see that all of the time," a New York-based trader said of the Decatur, Ill.-based agricultural company's high-rated paper.

Overall, trading was light as the summer lull persists. "It's super slow today," one trader said.

An East Coast-based buysider concurred, saying "It is super quiet out there. I haven't seen or heard of anything significant today."

"Many accounts are on vacation or holding pat until Labor Day," a third trader said.

The trader noted that "Risk rallied in the second half of the day, particularly equities on a continuation of easing headlines both out of the Fed and ECB."

He said that Molycorp and ADM were among the most actively traded names but that investment-grade names continue to trade in decent-sized pieces, "with outright accounts responsible for most of the activity."

"Price action in credit and convertibles was mostly flattish," the trader said.

New Molycorp opens up

Molycorp's newest 6% convertibles due 2017, which debuted in the secondary market Aug. 17, traded up to 107.438 versus an underlying share price of $10.66 on Tuesday.

Previously, the Molycorp 6% convertibles were below par, sources said.

On a dollar-neutral, or hedged, basis the issue expanded about 1.125 points or slightly more, based on a delta of about 75%, according to one sellsider.

Meanwhile, the Molycorp 3.25% convertibles due 2016 traded at 68.688, which was "slightly in" on the day, the sellsider said. Theoretical delta on the 3.25% convertibles is less than 10%, so it is trading outright for the most part.

Shares of the Greenwood Village, Colo.-based rare earth minerals producer jumped to $10.77, which was up $1.25, or 13%, on the day in strong volume.

The move was based on news that the company is starting up a planned project for heavy rare earth concentrate at its Mountain Pass, Calif., facilities. It was the sharpest stock price move since shares sank 28.5% to an all-time low earlier this month after the company warned that it will need to secure additional financing to cover a substantial portion of capital expenditures and other cash requirements this year.

The news came along with an unexpected loss reported that day.

The stock subsequently slumped lower, and Tuesday's up move marked the first substantial recovery since Aug. 3.

"The Molycorp stock is sporadic like this," a New York-based trader said.

The convertibles have pretty big ratios, so little movements in stock cause large movements in the bonds, sources said.

Molycorp said that startup of its new Project Phoenix heavy rare earth concentrate facilities at Mountain Pass, Calif., will produce heavy rare earth concentrate from freshly mined Mountain Pass ore. It will then be processed into high-purity, custom-engineered heavy rare earth products in Molycorp's globally integrated production facilities.

Molycorp also announced that its on-site Combined Heat and Power (CHP) plant will begin feeding low-cost, high efficiency electrical power and steam this week to its Mountain Pass facilities.

Molycorp's CHP plant is fueled by clean-burning natural gas fed to the facility by a recently completed natural gas lateral supply line that connects the facility to a nearby interstate natural gas pipeline operated by Kern River Gas Transmission Co.

President and chief executive Mark Smith said in a news release, "We have launched operations of Project Phoenix's heavy rare earth concentrate facilities on schedule, our combined heat and power plant is set to begin powering our new facilities this week, and we remain on track to achieve full Phase 1 production rates at Mountain Pass in the fourth quarter of this year."

"The heavy rare earth concentrate we will produce at Mountain Pass will support our production of a full range of high-purity, custom-engineered materials from light, medium, and heavy rare earths. Such vertical integration strongly positions Molycorp to compete successfully across multiple markets," Smith said.

Molycorp's heavy rare earth concentrate contains dysprosium, terbium, europium, and other elements that will be further processed by the company into rare earth oxides, metals, alloys, and magnetic materials used in such technologies as hybrid electric vehicles, wind turbines, high efficiency appliances and motors, consumer electronics, and many other important applications.

Molycorp currently produces high-purity products from the following rare earths: Cerium, Lanthanum, Praseodymium, Neodymium, Samarium, Europium, Gadolinium, Terbium, Dysprosium, Holmium, Erbium, Lutetium, and Ytterbium (with purity levels as high as 99.999% for some rare earth products). It also produces high-purity products from the following rare metals and transition metals: Gallium, Rhenium, Indium, Tantalum, Niobium, Zirconium, and Yttrium (with purities as high as 99.999999% for some of these products).

Older SanDisk better

SanDisk's 1% convertibles, which mature in May, were up a little bit at 99.1875 bid, 99.25 offered on Tuesday, with the underlying shares down 64 cents, or 1.5%, on the day at $42.31.

SanDisk's longer-dated 1.5% convertibles weren't heard in trade.

"The olds are trading a lot. I think it is just due to some 'window dressing' around month end. I don't see a real fundamental reason why they are trading in decent volume and up today," a West Coast-based trader said.

The company, which sells USB flash drives and embedded memory for mobile phones, has a strong balance sheet and is also the subject of takeout speculation.

Electronic Arts trades up

Electronic Arts' 0.75% convertibles due 2016 traded up to 92.5 on Tuesday with the underlying shares of the Redwood City, Calif.-based video game maker down 10 cents, or 0.8%, at $12.83 in light volume.

Like SanDisk, Electronic Arts is a yield-y name that trades outright, and also subject to takeout speculation.

The bonds, which are "strong on TO prospects," traded up a little on Tuesday, a trader said.

Mentioned in this article:

Electronic Arts Inc. NYSE: EA

Molycorp Inc. NYSE: MCP

SanDisk Corp. Nasdaq: SNDK

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