Molycorp: Issuing the 'Happy Meal' Securities (B)

Molycorp, the Western hemisphere's only producer of rare earth minerals, was in the middle of a $1 billion capital expansion in its effort to become a vertically integrated supplier of rare earth minerals, oxides, and metals. After reporting lower than expected revenues and earnings for the second quarter of 2012, management needed to design a new funding strategy for the firm. In August 2012, Molycorp announced it would issue $120 million of equity and $360 million of convertible debt. To facilitate the issuance of convertible debt, the firm entered a "share lending agreement" with Morgan Stanley whereby Morgan Stanley would borrow shares from Molycorp in a transaction referred to as a "Happy Meal." The goal was to help convertible debt investors "hedge their respective investments through short sales." The challenge of the case is to understand why Molycorp used this financing strategy and what impact it would likely have on the firm, its prospects, and its stock price.