MP Materials: A Different Way To Benefit From The EV Boom

Summary

• 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.

temizyurek

Investment Rundown

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.

EV Demand (Earnings Presentation)

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.

Risks

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.

Shares Outstanding (macrotrends)

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.

Financials

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.

Cash Flow Development (Investor Presentation)

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.

Valuation

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.

Final Words

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.

Market Position (Investor Presentation)

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.

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

[driefler]

That was a weird call. They did not give guidance on production, price or demand. The best guidance was on the interest earned on the balance sheet cash. I suppose it is ok as a strategic hold as they do seem to be in a unique position within a supply security context. 4 billion market cap with a 1 billion cash balance. What is the future earnings power of this company? It’s profile for modeling and pricing as a public company is difficult.

[TAS]

CNBC touted thus stock heavily on August 4th over a thirty second time period....by one regular panelist.

Take that for what it is worth. As for me, pass. This stock harkens the promise, and disappointment -- of EVGO in the EV charging station race. All the qualities, but getting blown out of the water by facts on the ground with major players elsewhere.

[Investor since ‘73]

@TAS The other player in this space is China, MP being the ONLY player in America for neodymium, vital for EVs, wind turbines etc. China would prefer to keep a stranglehold on the market and avoid competition but can’t stop MP. The next best thing to a near monopoly? Buy it for 1/3 it’s value on the open market and the way to do that? Simply reduce the price of neodymium to lower MP’s #s, taking the stock down from 60 to 20. Sure it’s only a few billion$, but easy money for their government funded cyber ops that focuses on targeting US businesses. A few billion here, a few billion there and pretty soon it’s real money, as they say.

[SR1978]

In addition to consolidating 6 rare earth companies to 2, it looks like China is cracking down on illegal mining. All of these should help boost the global price of rare earth.

www.reuters.com/...

BEIJING (Reuters) - China’s Ministry of Emergency Management said in a meeting that it would take action to prevent mining accidents being covered up and to crack down on illegal mining, state media said on Monday.

[Investor since ‘73]

@SR1978 China controls the world market for neodymium and can raise or lower the price as it sees fit. Right now, it’s to their benefit to temporarily keep prices low so that they can depress MP earnings and buy up the stock for $20 a share instead of $60. They can’t eliminate their only competition but they can buy it on the open market. I’m staying very long MP because this can’t last too much longer. We knew that they already had 8% of the company long ago, I’m betting that they’re using straw men via their govt funded military cyber ops program that targets US businesses. Even checker players can sometimes see a couple of moves ahead, no need to be a master level chess player to see this coming.

[lateralgs]

Cash flows have been affected by capex for on-site processing plant and equipment recommissioning and new construction at the mine site. There have also been substantial commitments for the magnet manufacturing and materials facility north of Ft. Worth. These are investments for future profitability, not wasted cash burn. It is all growth related. Yet, the balance sheet is very strong, with more than adequate liquidity, not to mention government support at various levels. Finally, the company has reported a number of consecutive quarters of positive earnings in spite of the capex outlays.

There really is not a significant execution risk. It’s not rocket science. The technologies are well understood and will be well implemented with new, state-of-the-art facilities.

To me, the biggest risks are the future growth rate in the demands for the products, and the prices for the underlying commodities. MP should be well positioned if demand does continue to grow. It’s not for nothing the U.S. D.O.D. has supplied funding. The materials being produced have many applications in both the private and public spheres, all the way up to and including critical national defense applications.

[Hugh Arhue]

$MP buy America; w/7.7% of Float shorted.

[Hugh Arhue]

@Hugh Arhue $MP, American RE source; $23.36 ; w/9.95% of float shorted.

[Burt Rothberg]

Mp is transitioning from a mining company to a specialty chemical company. The mining was the easy part. The processing and conversion into magnets is the hard part. If you look closely at their documents, you will see that there are over a dozen steps that have to be done, some of them quite tricky.
Also remember that this processing is new to N. America, even tho we developed the tech years ago.
So there is a real execution risk. OTOH, I wouldn't worry about China buying them cheap. This is a strategic priority of the West. We will see more of this type of stuff: www.bis.doc.gov/...

[Investor since ‘73]

A couple of observations. First, comparing MP’s P/E to the overall mining sector has little meaning to my thinking regarding it’s valuation because there is literally no other miner on the continent mining vital rare earths. Also, the deposit at Mountain Pass has concentration levels that are several magnitudes greater than other known deposits. Lastly, MP is now refining ore at it’s operational Phase 2 plant and soon, the magnet plant in Texass will be in operation too.

Then we get to the price of the rare earths being depressed, despite raging demand for EVs and wind turbines. Hmmm, why is that? The Chinese currently have near total control of the rare earth market. They realize that they can’t stop the competition from MP but they can buy it on the open market. MP stock was sailing along at 60, last year they owned 8% of the company but by using their well documented military cyber ops and online trolls, targeting US businesses to manipulate the price of the commodity down, they could drive the price of the stock price down with it. What an easy way to buy this company at a huge discount! Rest assured, once they’re done accumulating shares the price of rare earths stock return to previous levels. Sure it’s just a few Billion$ but as they say, a few billions here and a few billions there, pretty soon it’s real money.

I believe MP is a raging value at anything close to current price levels. It’s overweight in my portfolio and I have no doubt that in 2 years it’s going to be trading much higher.

[Bogie 1]

@Investor since ‘73 I’m so glad our government was right on top of this. Great job.SMH

[Investor since ‘73]

@Bogie 1 MP got the permits, went public, reopened the mining operation, began building out the phase 2 refining plant all before the Inflation Reduction Act provided $ for any of MP’s moves to help us break the total dependence upon China for the rare earths. Any additional funding made available recently is welcome but after the fact. We’re finally past that dark time when clownish bluster and posturing pretending to be tough on China, all while the boss’s kids were being granted all kinds of copywrites, see link:

apnews.com/...

[JohnReno]

@Investor since ‘73 The China cyber ops impact on the price is often overlooked and significant. For investors with conviction, it simply presents a buy opportunity.

[JohnReno]

This is a long play and requires patience. But they have a strong plan and have been executing it well to date.

[Long Island Dan]

What about stage 2, and stage 3 in your valuation? How does that change the p/e outlook when MP moves up the value added chain? Would they still be expected to keep in line with the p/e of miners?