- MP Materials, a mining and processing company for rare earth materials, aims to reduce global dependence on China for these materials, essential for advanced technologies.
- Despite lower prices for rare earth materials, MP has remained resilient, benefiting from the trend of reshoring to North America and the increasing demand in the EV market.
- The company faces risks such as negative cash flows and share dilution, but its strong financial position and the potential for price appreciation due to material shortage are positive indicators.
MP Materials Corp. (NYSE:MP) specializes in mining and processing critical materials required for advanced technologies, such as electric vehicles, wind turbines, and defense systems. Their focus is on rare earth materials and their extraction. Their operations are based in California and they operate the largest rare earth materials production facility in North America. Their goal is to reduce global dependence on China for these materials, which are essential for many industries. This trend is further fueled by companies starting to reshore to North America and have a more Made In America view on their productions. Prices are lower than last year for rare earth materials, but that hasn't stopped MP from still having strong margins in the business, which I think proves the resilience and durability of the company for the long term. I believe that MP will be able to ride the trend of reshoring to North America and also gain a massive audience to sell to as companies want to be less associated with China. I will keep a hold rating for MP, as I think there might be more downside in terms of the share price.
Reshoring Is A Tailwind
In recent years there have been a lot of developments in the EV space which has led to a massive increase in demand for rare earth material, a vital product used in the making of these vehicles. Where MP is able to sell itself well is as a Made In America type of supplier which plays perfectly into the current trend of companies reshoring and starting up manufacturing in America again. Moving away from countries like China and India.
The EV market in the US has set the market on fire and we saw massive price increases in recent years for these materials. Now they have come down but is impressive that a company like MP is still able to maintain very strong margins.
Besides there just being a strong demand, there is a shortage also which should help fuel price appreciation for this material as it will take a lot of time to saturate the market properly. So far it is only MP who can offer companies a fully integrated Western rare earth supply chain. This will be a major tailwind for them in my opinion. Sealing their product at perhaps a slightly higher market price should be possible as companies are able to cut down on shipping costs to get the goods.
One of the major risks I see with MP is the cash flows still being negative. This has led to share dilution over the years, which has hurt investors on top of the depreciation the stock price has seen from its highs of close to $60 per share. I think there is a strong case to be made that dilution will continue to happen as long as cash flows remain negative.
Seeing such dilution should worry most investors in my opinion, and this is part of why I think the company is a hold for now. I think they should be able to leverage the assets and mines they have to start generating positive cash flows which should greatly help make the company trade a valuation similar to the sector's average of 13.
Looking at the financials of the company they seem to be moving in the right direction with the cash position appreciated a far bit from the year before. An increase of more than $500 million is no small feat and I think this makes the financial state of MP a lot more sleek and should help them in investing continuously in their business without the long-term debts of $683 million becoming an issue.
This strong position has even netted the company a negative net debt currently which I think really highlights the low risk of financial issues in the company for the coming years at least if they just keep up operations as they are and ore prices don't see much of an appreciation. A negative $483 million in net debt highlights the solid financial position of the company. Inventories aren't seeing that much of an increase which makes me believe the company is able to get their materials out on the market very efficiently and it means they are able to keep an ROA above 10% too.
Looking at the coming quarters I will especially be looking at the way the cash position is developing. I want to continue seeing a trend upwards and no large increase in debts. A focus on getting positive cash flows will be enough in my opinion.
Seeing as MP is the only company in the North American region doing what they are doing, mining rare earth minerals at this scale you can't necessarily find a great comparison. But looking at the valuation that mining companies typically get the p/e lands around 13 - 14. MP is trading at a 229% premium to this. MP hasn't been traded publicly for a very long time and the historical averages haven't had time to develop. But I think a valuation more in line with the sector, around 13 - 14 p/e seems rather fair. MP does carry some risk with volatility as the revenues are determined by the market and the demand. Looking at the future estimates, however, the p/e quite quickly drops to around 19 in 2024 as the company is expected to have an EPS of $1.23. If MP can prove themselves able to grow cash flows efficiently I can see MP being a buy around that multiple too.
Demand for MP is fueled by a demanding EV market where the materials that MP mines are essential parts of that process. China is the largest supplier of these rare earth minerals, so an investment in MP would be a bet against that and a hope that America can take some of the global market share. Ore prices have been volatile and are at much lower levels than last year, which has meant that MP has seen a YoY decrease, but the outlook does remain strong. I think MP is a hold for now until we see some form of stability, there's no rush buying when the forward p/e is still around 44.
MP being the largest producer in North America, I think they will face challenges with more and more companies entering the space. But I don't fear the market will become saturated as there is still a quite significant shortage of rare earth materials. MP will have a thriving market to be a part of and I expect them to deliver quite a significant share appreciation over the coming years.
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