Jan. 112011 - 8:40 am
Moveover billionaires Stephen Schwarzman and David Rubenstein. Eat yourheart out Goldman Sachs. One of the greatest private equity dealsgoing, Molycorp, belongs to a little-known private equity firm basedfar from Wall Street. Resource Capital Funds is headquartered inDenver. Its chief and co-founder, James McClements, actually lives inAustralia.
Resource Capital has not realized a penny from its investment inMolycorp, which aims to produce rare earth minerals at a previouslyshuttered mine in Mountain Pass, Calif. But on paper the investment isstaggering. In the last two years, Resource Capital has invested $110million in Molycorp. At Molycorp’s recent share price that investmentis now worth $1.5 billion. In the private equity business, that doesn’thappen very often, especially with figures as big as these. Bycomparison, one of the most legendary private equity deals ever sawThomas H. Lee buy Snapple for $135 million in 1992 and sell it twoyears later to Quaker Oats for $1.7 billion, reportedly making $900 million on the investment.
Resource Capital still needs to execute the selling part of thisequation while keeping Molycorp successful, a detail not lost on RossBhappu, the Resource Capital partner who put the investment togetherand is the chairman of Molycorp. “We don’t want to count ourchickens before they hatch,” says Bhappu. “It would be hard not to beexcited about it, everybody is really pleased about the performance ofMolycorp and that is shared around the office and our (investors) arealso equally very happy and we get calls about it from them all thetime.”
Resource Capital, which exclusively invests in metals and mining,may move soon to start to realize some of its paper gains. The lock-uppreventing Molycorp insiders from selling shares expires in Februaryand Bhappu says “if an opportunity arises we would look to monetizesome of the position, but we don’t want to disrupt the company and theincredible run it has been on.”
“We are weighing our options and evaluating them, I don’t know thatwe have made any clear decisions on it yet,” says Bhappu. “If we dosell any shares it would be a relatively small stake.”
Bhappu’s decision not to sell any shares in Molycorp’s initialpublic offering in July looks pretty smart. In fact, Resource Capitalbought shares in the IPO. Goldman Sachs went in another direction.Originally part of the investment group led by Resource Capital thatpurchased Molycorp from Chevron in 2008, Goldman Sachs sold its stakein the company in the spring of 2010. Molycorp’s stock has nearlyquadrupled since the IPO.
The story of how Bhappu, 50, engineered this deal goes all the way back to his childhood,when he used to spend summers hanging around Molycorp’s mines while hisfather did consulting work for the company. He invested in Molycorpbecause he believed demand for rare earth minerals would rise, but hedid not know that China, which mines 97% of global supply, would moveto restrict its exports like it has in recent weeks.
Is Molycorp part of a rare earth minerals bubble? Could the pricesof rare earth elements collapse as quickly as they have risen? “Givenwhat the Chinese are doing these commodity prices are very sustainableand those prices are well above what we are using in our financialmodels,” says Bhappu. “It’s hard to predict what the sustainable priceis for these commodities, but given the supply and demand relationshipswe are pretty comfortable that these prices are sustainable for thenear term.”
Meanwhile, Molycorp has been executing on things in its control. Itrecently secured a final required construction permit and entered intoan agreement with Sumitomo for the $130 million Molycorp needs tofinish funding its business plan. Sumitomo also committed to purchasingcertain rare earth elements from Molycorp, even though that won’tprevent Molycorp from continuing to generate financial losses for atleast two or three more years.
To get a sense of what all this currently means for Resource CapitalFunds, consider Resource Capital Fund IV, the fund that holds a bigchunk, but not all, of its Molycorp stake. Resource Capital Fund IVraised $526 million from investors in 2006. Its current stake inMolycorp alone is worth almost $1.2 billion. If you add just one moreof its successful deals, an investment in Talison Lithium, Fund IVholds $1.35 billion in paper assets from just two of its investments.
But investors are never satisfied. When Resource Capital’s investorscall Bhappu these days they want to know what he is going to do next.“They want to know where the next Molycorp is,” he says.