MP Materials: The Rare Earths Hype Is Real But Fading

Summary

• Subsidies and war have moved to bring forward secular demand for NdPr-powered EVs and green energy.
• This comes as Tesla announces a move away from rare earth magnets for its next-generation EVs.
• However, demand for NdPr will still be dramatic and sustained, with MP Materials set to continue to realize sustained profits in the decade ahead.

weisschr/iStock via Getty Images

MP Materials' (NYSE:MP) investor sentiment has ebbed from high euphoria to semi-astute contentment, even as the future of its core demand drivers is set to be turbocharged by subsidies and war. Russia's war on Ukraine has seen energy security and the green transition become near-visceral factors in the post-pandemic zeitgeist. Countries are now rushing to boost renewable generation, with the US set to see a boom in onshore and offshore wind. Rare-earths neodymium and praseodymium (NdPr) enable the conversion of electrical energy into motion via permanent-magnet motors. These motors are the critical building block of the machinery of the green energy future from electric vehicles to wind turbines.

Joint Research Centre

NdPr demand growth is expected to be pertinent over the next decade, with the high-demand scenario set to see a 4.5x increase in demand from 2018. However, this scenario by the EU's Joint Research Centre assumes that the current dominant EV motor technology sees only minor improvements and global reliance on renewables for primary energy production shifts to near-100 percent. That's why large-scale US Inflation Reduction Act subsidies and Russia's war on Ukraine will become so consequential by catalyzing a faster ramp of green energy. US government production tax subsidies will boost onshore wind capacity by 40% by the end of the decade, with an extra 85 GW of new onshore wind capacity expected to come online. This will see an incremental $160 billion of investments to push the total onshore wind capacity to 280 GW by 2030.

Alternatives And The Possible Fading Of Rare Earth Hype

A key assumption of the high-demand scenario is the absence of competing technologies. Indeed, most commercial electric traction motors are centered on permanent magnet motors. This holds a 90% to 93% EV market share, with its higher efficiency driving adoption over competing technologies. Permanent magnet generators used for wind turbines allow for high power density and the most optimal efficiency at all wind turbine speeds. This offers high annual production of wind energy with a low lifetime cost and powers the bulk majority of onshore and offshore wind turbines.

Hence, the enthusiasm around MP Materials stock can be contextualized against forecasts for permanent magnets in EV power trains increasing at 17.5% per year from 2021 through 2030. However, there are alternatives, and Tesla's (TSLA) Investor Day on Wednesday, where it announced that its next-generation motors will not use rare earth metals, will likely represent somewhat of a watershed moment. Not using rare earth for EV motors is not a new development by any means. Renault uses wound rotor motors in its EVs, and Tesla's earlier models used induction motors. Tesla still intends to use a permanent magnet motor but will divest from NdPr. What does this mean for MP Materials? Nothing yet.

Whilst Tesla did not release detail on its future rare earth-free permanent magnet, there are a number of private companies working on relevant technology. For example, Minneapolis-based Niron Magnetics is using iron nitride to build high-strength magnets. The technology is still quite a while away from commercial-scale production but it's real and Tesla's weight behind something similar will likely see it come to market quicker. Most other replacements for permanent magnets are not as efficient and hence are not viable replacements.

The Fourth Quarter Earnings

MP Materials recently released earnings for its fiscal 2022 fourth quarter saw revenue come in at $93.25 million, a 5.9% decrease from the year-ago period but still a beat by $15.98 million on consensus estimates. This was driven by a 12% increase in sales volume to 10,816 MT, albeit offset by a 16% decline in the price realized by MP Materials for its mined rare earth oxides to $8,515 per MT.

MP Materials

For the full year, total revenues rose 59% to reach $527.5 million on the back of record production of 42,500 metric tons of REO in concentrate. Net income for the quarter was $67 million, or $0.36 per share. This was a 38.5% increase from $49 million, or $0.26 per share in the year-ago comp. Net income for the full year came in at $289 million and was more than double fiscal 2021.

Trading Economics

Whilst prices for neodymium have pulled back from their record highs, they're still elevated and MP Materials should be able to continue to realize strong cash flows. Indeed, cash flow from operations during the fourth quarter was $29.1 million. This helped offset capital expenditure of $112 million to leave the company's balance sheet in a position described as a fortress by management during their upbeat earnings call. Cash and equivalents as of the end of the quarter at $1.18 billion, only down sequentially from $1.26 billion in the third quarter.

The company's bulls are clear about the long-term rationale of their position. Long-term demand for NdPr combined with MP Materials' fundamental transformation and shift up the value chain to produce its own magnetic alloy in Fort Worth will help create an intrinsically more profitable business. Hence, bears, which form the 11.4% short interest in the company, face some risks here. However, the move by Tesla will likely dampen some hype around NdPr as traction motors were meant to be a core driver of long-term growth and as other automakers are likely to follow Tesla's lead. I'm neutral.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Jay.S]

I think there are 2 comments to this nice report. The first about the market of any rare materials (are there any non-rare materials in this world?): the world-wide demand for any metals and in particular RE metals will not succumb because Tesla does or does not use (read announce or not announce the use ...) one or the other technology. Tesla will hardly become the one and only car maker, and cars will hardly become the only needed techno product in the future. If not a single car was made anymore with RE metals in their engine, there'd still be plenty of other applications. Can these other applications (existing and new) pay the price needed to justify production in the U.S. - no doubt, unless China and the U.S. become best friends again.
The hype was and is rather about Tesla, and less about RE metals or MP. That said, it is good (for share holders of MP) that MP's PE shows a steady decline early 2021. Should it go back to 13-16 in the near future, I'd be happy to add to my position.

[Investor since ‘73]

@Jay.S Eight comments total. Calling for the stock to be cut another 60%, even while trading 50% below it’s recent highs. Interesting screed after 9 consecutive earnings beats, just as phase 2 is being commissioned, which will see see MP earnings explode just as the costs of construction for that project ends. It’s almost as though this is part of a coordinated effort to drive the stock down even further from $60. I could be wrong but if I were to place a bet, I would bet that this was posted by someone wearing a Chinese military uniform.

https://www.cisa.gov/china

[dwrightsd]

The environmental impacts of rare earth mining are acidic water runoff and long half-life radioactive waste tailings containing thorium and uranium. For people who think these tailing have economic value they look at this as an opportunity. A number of companies have designed molten salt advanced nuclear reactors that are walk-away safe and can burn thorium and uranium fuels to produce much needed electricity. Excess process heat could also be used to economically purify the acidic wastewater as well, turning lemons into profitable lemonade.
Rare earths like NdPr are added to molten Fe in trace amounts. Using very precise cooling and annealing cycles, the NdPr fills gaps in the Fe crystal lattice and keeps the molecules more constrained than in their pure iron state. This allows the magnets to attain much higher magnetic field densities that don't decrease as easily over time. Other materials have been tried, but their field strength and stability are not as good.
The most recent material, tetrataenite, is a mineral that was found in ferrous asteroids and acted like a rare earth to increase their magnetic properties. Getting this from asteroids is a non-starter, but scientists have recently been able to manufacture it using Fe-Ni alloys with trace amounts of phosphorous (P). Seems like a while before this tech hits the market and I'm skeptical that it could compete with mined minerals especially if they can also get cheap electricity from the thorium and uranium waste tailings.

[lateralgs]

@dwrightsd

And just a tangential additional comment to add to your excellent post….MP is recycling something like 99%+ of all the water utilized in their activities at Mountain Pass, and they say they are in full compliance with all environmental and permitting requirements. In other words, they have invested in and fully committed to long-term sustainability for their operations.

[Investor since ‘73]

MP is the closest thing to an actual no brainer that I know of in today’s market. The demand for domestic production of rate earths will be strong for decades to come regardless of Tesla’s potential development of alternatives. Meanwhile, phase 2 ore processing will eliminate the need to ship that ore half way around the world and then shipping the refined products back. That cost savings will drop directly to MP’s bottom line. Phase 3 will see magnets produced in Texass with GM already awaiting them.

Meanwhile, MP moves very predictably up/down in big leaps that are easy to take advantage of. This makes MP both a great long term investment and lucrative trading vessel.

[waterman57]

@Investor since ‘73 you don't see what's really going on with in the executive office and how the principals are dumping huge chunks of stock. Rosenthal is on the take with the Chinese. His wife is a Chinese National. Traitor much?

[lateralgs]

@waterman57

Conspiracy theory much?

[Investor since ‘73]

@waterman57 I have no doubt that the Chinese, unable to prevent MP from becoming their only US competitor are simply manipulating the price lower so they can buy the competition for 1/2 price.

The title of this article refers to “the hype” of MP, which I find a bit comical, given the fact that despite 9 consecutive quarterly upside surprises and the immediate prospect of profits blowing up thanks to commissioning of phase 2 ore processing, the stock currently trades about 50% below it’s recent highs! Seems to me that if MP was being hyped, the price would be higher, not lower. But then, English is my native language.

[lateralgs]

I have been trying to explain some of the same technical matters discussed in this article in posts elsewhere.

I’m long MP and have been for a while now. It’s been a great options trading vehicle, although I’ve limited my trading to writing covered calls on the big upswings in share price. If that very profitable volatility were to greatly dissipate, given the potential future competition, I’d hafta’ reconsider my long position…at some point maybe just take the profits and move on.

I have a sense currently, however, that moment may be some fair time away yet. However, if a usurping technology appears, with all that implies, the impact on MP’s share price (and on rare earths pricing as commodities, generally) could be relatively sudden. Much would depend on how any development occurs. If news just trickles out incrementally, time to exit will be adequate. If someone comes out with a more definitive “going to production on a grand scale” announcement, the hit could be sudden and deep. We saw a hint of that on just a simple and less than completely definitive announcement by Tesla.

@Pacifica Yield , thanks for the article. Succinct, informative, and fair.

[Burt Rothberg]

Thanks for the article, Pacifia; you are a voice of rationality.
Musk framed the move away from NdPr as an environmental decision. For most the determination to use NdPr is a business decision that depends on the price of Nd among other things. Tesla apparently thinks not using it is worth the reduced performance, especially since it can be made up in other ways. Remember that Tesla has about a 10K cost advantage over its competitors, so it has a lot of room to play with.
More generally, decarbonization will require electrification of many sectors of the economy. Electrification means motors and generators which mean more rare earths.

[joelav]

Being the only domestic producer of Rare Earth metals and with political tensions with China heating up and the military needs of Rare Earth metals - I expect a long positive trajectory and expect SP to double in 3-5 years.

[Pacifica Yield]

@joelav Yes, there could still be upside around MP's strategic geopolitical position.