Molycorp extends hedged gain on Mountain Pass news; ADM weak; Alpha Natural 'in' some

By Rebecca Melvin

New York, Aug. 29 - Notable in the generally sleepy convertible bond market on Wednesday was another robust move higher in Molycorp Inc.'s 6% convertibles.

The Molycorp convertibles jumped another 10 points outright on the heels of about a 7-point outright move on Tuesday. They also expanded another 0.625 point to 0.75 point on a dollar-neutral, or hedged, basis after opening up a point to 1.5 points on swap on Tuesday.

The moves' driver was news that the Greenwood Village, Colo.-based rare earths producer is proceeding with startup of its Mountain Pass, Calif., operations to produce heavy rare earth concentrate.

Molycorp's older 3.25% convertible, which trades outright, moved up another point or so to about 70.

"The MCPs were on the move again, but otherwise it was pretty slow," a New York-based trader said of Wednesday's session.

Market players are waiting for zest to return to the markets after the Labor Day holiday, when summer is unofficially over.

Another name extending its Tuesday trend was Archer-Daniels-Midland Co., which saw its 0.875% convertibles due 2014 down another 0.5 point or so to 99.

The short-dated, investment-grade issue, viewed as a cash surrogate, looks to be out of favor compared to other issues of its ilk such as those of Transocean Ltd., SanDisk Corp. and Prologis Inc.

Coal names have been quiet of late, although Peabody Energy Corp. and Alpha Natural Resources Inc. have improved some in the last couple of weeks from weakness in July. But Alpha Natural was "in" a bit on Wednesday, a New York-based trader said.

Bond investors may have been reacting to word from the Bristol, Va.-based coal producer that is pushing its analyst day to March from September, citing insufficient visibility into the markets in 2013, the trader said.

Overall, convertibles trading was light, with equities eking out small gains. The Commerce Department said Wednesday that U.S. gross domestic product looked to have expanded at a slightly better 1.7% annual rate in the second quarter, compared to 1.5% pace of growth initially estimated by Commerce last month.

Internationally, India's Jaiprakash Associates Ltd. priced $150 million of five-year foreign currency convertible bonds, with a coupon of 5.75% and a 10% initial conversion premium.

The Jaiprakash convertibles have an upsize option of $50 million and were sold via Barclays Bank plc and Standard Chartered Bank as joint lead managers.

Meanwhile, the international convertible market in general was seen being dominated by macro news in the coming month, according to commentary published by Barclays in London.

"We highlight the key events as seen by our macro strategists. They do not expect QE3 to be announced on Sept. 13, though this assumes that the recent improvement in data is sustained, said Barclays convertible bond analysts Luke Olsen, Heather Beattie, Angus Allison and Kim Berg in their published report.

Molycorp on the move again

Molycorp's 6% convertibles due 2017, which priced earlier this month, traded up to 117.5 bid, 118.1125 offered versus the closing share price of $12.23. That gain was about 10 points outright and better by 0.625 point to 0.75 point on a hedged basis on the day, a trader said. He said the Wednesday expansion was on top of what he had as a 1.5 point improvement on Tuesday.

Molycorp's older tranche, a 3.25% convertible due 2016, traded up to 70 from 68.688 on Tuesday.

Shares of the Greenwood Village, Colo.-based rare earth minerals producer jumped another $1.48, or 14%, to $12.23in strong volume, on top of a 13% rally on Tuesday.

"The shares were propelled up 25% on the positive news out of Mountain Pass," a trader said before the market close Wednesday.

He said that it was difficult to know whether the gains would stick or not. "The older tranche is right around 70 cents on the dollar, so the credit is a little bit improved sentiment wise," he said. Nevertheless, market players were modeling the paper earlier this month at "north of" 1,200 basis points above Libor and with a 45% vol. "So I'm not going to say that this is going to be a700 credit any time soon," he said.

"There was a little bit of improvement, but I think it's going to be wait and see," he said.

The sharp moves upward have been based on news that the company is starting up a planned project for heavy rare earth concentrate at its Mountain Pass, Calif., facilities on schedule. The news is well received since the company slashed its guidance Aug. 3 and had warned that it may need to secure additional financing to cover a substantial portion of capital expenditures and other cash requirements this year.

ADM weak

ADM's 0.875% convertibles due 2014 traded at 99, which was down 0.9 point on the day, according to Trace data.

Shares of the Decatur, Ill.-based agricultural company added 21 cents, or 0.8%, to $26.58, and during the session they had been 1% higher.

The convertible is 1.5-year paper, and at 99.5, it's only a 1.2% yield to maturity.

"If people are looking for cash surrogates, they'd be better served by any number of similar investment-grade type stuff with yield north of 1.5%," a trader said.

"It's a question of let's pick the best and get rid of the ones that are tying up the balance sheet," he said. "It would be different if the coupon were higher, but it's not."

It's less attractive on a yield basis to other cash surrogate investments, and the 0.875% convertibles don't have very much optionality to entice hedged players, but if one's view on the shares is that they are going to go to $37 from $26 and the stock got above $30, it might be a time to get involved, the trader said.

Alpha Natural 'in' some

Alpha Natural's 2.375% convertibles traded 'in' about a 0.75 point to 85.25 bid, 85.5 offered on Wednesday, which was opposite the general trend in this name in recent weeks.

The Alpha Natural 3.25% convertibles due 2015 were seen a 89.75 bid, 90.5 offered on Wednesday, which compared to Monday's 90.5 bid, 90.75 offered level.

Alpha Natural shares closed up a nickel, or 0.8%, at $6.14 in average volume on Wednesday.

"Investors have been nervous about coal," a trader said, citing Patriot Coal Corp.'s Chapter 11 bankruptcy last month.

If the coal company itself cannot figure out its view on 2013 it might be difficult for investors to. For his part, he feels that some of the coal stocks are down so much, the bottom could be near.

The Patriot Coal convertibles haven't been trading recently but were seen at about 12, the trader said.

Jaiprakash sells $150 million

India's Jaiprakash Associates priced $150 million of foreign currency convertibles with a $50 million upsize option, which was shy of the $250 million that the company had been approved for by the Reserve Bank of India.

Proceeds will be used to repay a part of its existing overseas bonds with $523.6 million outstanding, which mature Sept. 12.

The new issue came at the cheap end of initial premium talk of 10% to 20%.

There is mandatory conversion after three years and 21 days subject to a 130% share price trigger.

There are also investor puts in the event of change of control or delisting.

Jaiprakash is an industrial conglomerate focused on engineering and infrastructure.

Mentioned in this article:

Alpha Natural Resources Inc. NYSE: ANR

Archer-Daniels-Midland Co. NYSE: ADM

Jaiprakash Associates Ltd. Bombay: 532532

Molycorp Inc. NYSE: MCP

Peabody Energy Corp. NYSE: BTU

Prologis Inc. NYSE: PLD

SanDisk Corp. Nasdaq: SNDK

Transocean Ltd. NYSE: RIG

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