MP Materials: Demand Fears Overblown

Summary

• MP Materials Corp. reported a solid Q4 and continued their strong track record of operational and financial execution.
• The stock got hit recently on concerns about Tesla, Inc. transitioning to a motor that does not use rare earths.
• Demand for rare earths is estimated to increase meaningfully over the next few decades, and this will likely still be true even if some end products no longer require them.
• The bull thesis remains intact, and MP Materials is well-positioned to benefit from the "green transition."

Photofex/iStock via Getty Images

Thesis

MP Materials Corp. (NYSE:MP) is executing well, but the stock got hit because of fears surrounding long-term demand sparked by Tesla's Investor Day. We view this selloff as unwarranted because demand is estimated to increase meaningfully over the long term. MP Materials is strategically positioned to meet the needs of their U.S.-based customers and is continuing to build out a vertically integrated supply chain, using their domestic presence as a competitive advantage. The bull thesis remains intact, and MP Materials is well-positioned to benefit from the "green transition."

Fourth Quarter Results

MP Materials stock reported a strong fourth quarter. Some highlights include:

• Increased production 2% year-over-year to 10,485 metric tons of REO.
• Improved sales volumes 12% year-over-year to 10,816 metric tons of REO.
• Began commissioning Stage II assets and producing roasted concentrate.
• Advanced heavy rare earth front-end engineering design and long-lead procurement.

James Litinsky (the CEO) had this to say in their earnings release:

"The MP team executed really well in 2022. Stage I operations again set records for production and sales volumes, we began commissioning Stage II assets, and we made substantial progress in our Stage III magnetics business. In addition, we achieved record financial results and positive free cash flow, even as we made significant growth investments throughout the year,"

"For 2023, the MP team is driving towards run rate production of separated rare earths at Mountain Pass and the first production of magnetic alloy in Fort Worth. As we transform our business, MP is uniquely positioned to capitalize across some of the most critical and exciting verticals of today's global economic landscape."

MP Materials saw a great deal of operational and financial success in the fourth quarter. Of financial importance is the 37% increase in net income year-over-year and the $1.2B/$492M of gross/net cash on the balance sheet (as of the end of the year). MP Materials has plenty of cash to continue to fund their expansion plans and is operationally self-sufficient from a cash flow perspective. This makes it unlikely that MP Materials will need to tap the debt or equity markets unless there is a massive opportunity available.

Fourth Quarter 2022 Financial and Operating Highlights (MP Materials' Q4 Earnings Release)

2022 and YTD Accomplishments (MP Materials' Q4 Earnings Presentation)

Fourth Quarter Operating Metrics (MP Materials' Q4 Earnings Presentation)

Fourth Quarter Financial Metrics (MP Materials' Q4 Earnings Presentation)

Tesla Announcement

During Tesla's Investor Day, it was revealed that as part of their next-gen vehicle platform, Tesla plans to design a new powertrain. This powertrain will feature a permanent magnet motor that will not use new rare earths. This sent the stock of MP Materials lower, but this seems like a knee-jerk reaction. Tesla has accomplished many incredible feats, however, Elon Musk has a history of making ambitious goals and not all of them pan out as expected. Even if Tesla is able to achieve this technological advancement, rare earths are used in many other end products, and demand is expected to grow substantially over the next few decades.

Long-Term Rare Earth Demand

MP Materials is strategically positioned as the main U.S. player in the rare earths supply chain. They are seeking to meet the growing domestic demand for rare earths and are focused on building out a vertically integrated supply chain in the U.S.

According to the IEA, by 2040 demand for rare earths is set to increase 3-7x from 2020 levels. Even if supply growth keeps up with demand, MP Materials should be able to succeed financially because they will be able to serve their U.S.-based customers better than competitors that are not based in the U.S. Even if some end products reduce or eliminate reliance on rare earths, there will still be enough demand to support rare earth companies.

This is a personal opinion, but I believe that rare earths are not very high on companies' lists of metals to reduce reliance on. In my mind, lithium and cobalt are probably at the top of that list. Companies' concerns around lithium have to do with the supply/demand imbalance, and their concerns around cobalt have to do with labor concerns, geopolitical concerns, and supply/demand dynamics. All things considered, for the time being, rare earths seem relatively safe against the threat of technological innovation reducing their value.

Growth in Demand For Selected Minerals (IEA)

Price Action

MP Materials has rebounded sharply in 2023, but shares are still reasonably far below their 52-week-high. Investors who are bullish on the name can use this recent selloff as a buying opportunity.

Data by YCharts

Valuation

MP Materials trades at a slight P/E premium to the market, and investors buying at these levels likely expect earnings to continue to grow at a robust pace. We view the MP Materials Corp. valuation as being reasonable here, but not as screaming of a buy as it was at the beginning of the year.

Data by YCharts

Data by YCharts

Data by YCharts

Risks

A risk to the bullish thesis for MP Materials is if technological innovations do indeed reduce the long-term demand for rare earths. While this is entirely possible, as of now rare earths are expected to see such a large increase in demand that even if some end products no longer require them, there will be enough use cases to make the overall supply/demand dynamics compelling for producers.

Another risk is that MP Materials gets cut off from some of their business partners in China and are unable to fully onshore their supply chain in time. This particular risk is temporary in nature. MP Materials is committed to creating an entirely domestic supply chain, and every day that passes gets them closer to that goal, further reducing geopolitical-related risks.

All things considered, we view the MP Materials Corp. risk/reward as favorable.

Key Takeaway

MP Materials Corp. is continuing to execute well operationally, financially, and strategically. We believe that fears around long-term demand are overblown and the MP Materials Corp. bull case remains intact.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of MP either through stock ownership, options, or other derivatives. 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.

UFD Capital Value Fund, LP owns shares of MP.

Comments

[Brian T]

It's like the death of a thousand cuts, every day down another two or three percent. If the selling conviction was so strong why didn't everyone just sell it on the day that they had the selling conviction? Why this day after day after day after day decline?

[Investor since ‘73]

For what it’s worth, Jim Cramer just had a very positive shout out for MP on his show today. Said the most recent dive based on decreased demand from Tesla was absurd.

[Gregory Holter]

@Investor since ‘73 I wish Jim Cramer were taking the other side. I often find his comments to be negative indicators.

[Bogie 1]

It’s been said the Chinese do not have to fire one bullet. They can destroy us as they are slowly and using our own capitalist games. Our government is a disgrace with a governmental overhaul desperately needed. The Chinese sleep well at night with a smile on their faces

[Investor since ‘73]

@Bogie 1 The Chinese realize that corporations run our government now that Citizens United made unlimited and undisclosed money legal. They’re simply taking advantage of the knowledge that the corporations want cheap labor and a market of 1.3 billion people. Apple, Tesla and so many other giants are now deeply intertwined with them. Nothing will change for the better with our government until we get the money out.

[nomobailouts]

If we assume Musk is correct and that all but the most extreme elecric motors will no longer need rare earth, one wonders if that leaves enough demand for other uses to keep RE prices high for years to come. It's an unknown at present, at least to the avg Joe like me.

[Investor since ‘73]

Here’s a link to an excellent article regarding rare earth metals, mining and national security in Salon today.

www.salon.com/...

I continue to believe that Chinese cyber ops have identified MP as a competitor that they can’t prevent and so the strategic decision to purchase ownership of as many shares, as cheaply as possible has been made and implemented. Driving down the price by posting negative agent and bot articles in every possible forum is obviously part of that. Shorting shares is part of that. They’ve been incredibly successful, virtually cutting the price in half despite 9 consecutive quarterly upside surprises in earnings, despite news of phase 2 refining capabilities being commissioned, despite news of GM partnering in the phase 3 magnet plant, despite news that the Fed government has provided funding!!

This stock has the single best risk to reward factor that I know of. If anyone knows of an opportunity that is even in the same ballpark, and actually has facts, not just opinions, PLEASE let me know about it!

[Investor since ‘73]

Was just thinking, if US stocks were allowed to get the Tic Tok treatment that prevented Chinese ownership of MP, this stock would be trading for double it’s current share price. Ah, if only we lived in a perfect world….at least we can always dream. At least we have a great opportunity to add down here, they can’t hold it down forever while they accumulate ownership of this company for half price.

At some point, the burgeoning earnings will force the price back up. By then, I bet the Chinese will have increased their ownership from 8% to 25% or more and their cyber army will have taken advantage of the US yet again. Unable to stop their only competitor, they were able to drive the price down by 60% and profit from the competitor. Kudos to them for understanding how easy it is to take advantage of the open market using their bots.

[Investor since ‘73]

Today is a gift, what a great day to add MP. Absolutely nothing negative for the business of MP but stock back near 27? Absurdly mispriced and it’s both a short and long term opportunity. Panic is a wonderful thing when you’re not doing it but instead taking advantage of it.

[Burt Rothberg]

@Investor since ‘73 Tesla is the premier EV maker. Their technology is years ahead of the competition. We have to see what they are doing. If they are just making an economic decision to use a lower performance motor and make up the difference elsewhere, then you are right. But they may have made a breakthrough.If so, this is a really big negative.
I cut my position back on the news, but am still long (and wrong, for now).

[Investor since ‘73]

@Burt Rothberg Tesla is far from the only consumer of rare earth metals and EVs are only a small part of the demand. The list of industries that utilize rare earths is long and varied. MP will see demand for their products outstrip their ability to produce them for decades to come.

Now that phase 2 is being commissioned, MP profits will explode and when that number is reported, it’s off to the races despite China’s best efforts. I believe that the Chinese cyber operatives will be making their maximum effort to drive prices down before then and today’s price directly reflects their efforts.

[Bogie 1]

@Investor since ‘73 I hope your correct but you said the same thing two quarters ago.

[Lord Krungharr]

I didn't realize MP popped up to $36...kinda wish I'd have sold then and I'd buy back now. But still a good long term hold. I've kicked myself before for selling too soon in the hopes of increasing share count. Really need it to get up to like $100 though to refill my Roth from all my bone-headed pink sheet garbage plays during Covid times...Covid-brain-fog times that is. Le sigh

[lateralgs]

@Lord Krungharr

Think about adding some high-yield dividend payers to that Roth. You can reinvest everything tax free, or take some or all of the cash being generated by those dividends and invest in other holdings in the Roth. I think a lot of people don’t take full advantage of the tax-free nature of the Roth.

As for MP, wait for the big, rapid rises in the share price, and sell way out-of-the-money covered calls with expirations 3 to 6 moths out. Collect the premiums and reinvest those. I usually start looking to do that when the share price elevates quickly and into the $40s at least.

You can also accomplish the same thing by just trading, say, 20% to 30% of the holding on the price swings. Nothin’ says you need to sell the entire holding all at once. And it’s usually not a great idea to buy the entire holding all at once, either, unless you just really get lucky. It happens, but I try not to count on being that smart (or lucky!). 😜

[Gregory Holter]

@lateralgs Trading partial holdings on price swings has been a strategy that has worked well for me on a variety of stocks, MP included.
IMHO, too many people seem to think of buy and sell as binary decisions, moving whole positions. Trimming some profits and then replacing shares at lower prices can turn substantial profits, in my experience. But there is some timing involved and you have to pay attention to what is going on to make it work.

[Investor since ‘73]

@Lord Krungharr You don’t have to be all in or all out. I keep a core position and trade about 1/2 of that number opportunistically.

[ursusfatcat20]

Thanks for your article. I agree that MP is continuing to execute well operationally, financially, and strategically. The company is so well positioned to benefit from secular growth trends, I am surprised it doesn't get more coverage by SA authors. I wanted to hear what the author and readers think of all the insider selling at MP in the last year. I know there are lots of reasons for insider selling, but Litinsky and other executives have sold so many shares in the last year. Why sell so many shares when the company is poised for such growth over the next few years.

[UFD Capital]

@ursusfatcat20 It's possible they want to diversify their net worth. This is especially important when a large amount of a person's net worth is tied to the company they work at. It's never great to see a large amount of insider selling but I wouldn't be too concerned in this particular case.

[lateralgs]

@ursusfatcat20

A lot of those “sales” are shares withheld to cover tax liabilities incurred from vesting of restricted stock shares. Another thing to consider, particularly in Litinsky’s case, is the total number of shares considered to be still beneficially owned by him. If you add up all the shares in his various partnership funds, etc, his stake still totals in the tens of millions of shares. That’s a lot of shares to be toting around just representing “theoretical money.” I would probably be realizing actual cash by strategic and regular sales of a few of those shares too, were I in his shoes. He still has an extremely substantial exposure to the company’s future success (or failure).

secfilings.nasdaq.com/...

[Burt Rothberg]

Here's a report by a cosultant that specialzes in rare earths
www.adamasintel.com/...

[lateralgs]

@Burt Rothberg

Interesting article. Thanks for posting. After a quick read, about the only quibble I might make regarding the author’s conclusions is regarding his projection of impacts on future NdPr demand should Tesla go all-in 100% to ferrite magnet traction motors. He concludes the impact would be approximately a 3% reduction in overall demand. But inherent in that conclusion is that “only” Tesla would drop use of NdPr. It seems to me that in the somewhat unlikely scenario Tesla successfully goes 100% ferrite, others might follow to one degree or another. That could result in a significantly higher reduction in demand for NdPr in permanent magnet utilization.

But I agree with his primary conclusion, which is that a widespread adoption of ferrite-based traction motors is unlikely any time “soon,” and further, that demand for NdPr in other sectors should remain strong regardless. He did not mention it, but for example, motor (or in this case, generator) weight and efficiency in wind power applications are among the paramount parameters. The same is true in military applications and in other sectors as well.

The typo in the following sentence from the article made me chuckle:

“…paradoxical postal child of electromobility and clean energy…”

[cuzin GJ]

The Musk chirping may have provided a buying opportunity for MP, as his desire to ditch the need for rare earths is still decades away. Friday’s price reversal for MP signals overreaction.

[Jamjack]

Almost the same as: solar panels and wind mills will replace another mineral. No more Coal needed now.

[Investor since ‘73]

Seems to be a reasonable and very conservative assessment. I believe that after 9 consecutive quarterly upside surprises, phases 2 and then 3 will add to those bottom line numbers in a big way.

[Gregory Holter]

Mr. Market seems to be figuring this out. Check share price movement today.

[13427872]

Two good moves for sure this week were buying more MP yesterday on the dip and adding more ABML on Tuesday after the large lithium find news broke.