MP Materials: Approaching My Buy Zone

Summary

• MP Materials is positioning itself as a major supplier of rare earth minerals in North America, reducing reliance on China.
• The company's share price has been volatile, but it may be approaching a buying opportunity.
• MP stock has exclusive mineral rights and plays a pivotal role in supplying critical materials to industries, particularly in the growing EV market.

Jianglong Meng/iStock via Getty Images

Investment Rundown

MP Materials (NYSE:MP) is a company that has gathered a lot of attention as being perhaps the best way to get exposure to rare earth minerals mining in North America. It's a market that has been characterized as very competitive but also with a lack of diverse origins for it. China still holds a very large amount of the total deposits and open mines, but that is changing as MP is setting itself up to be a major supplier for companies in North America.

The share price for MP has been a wild ride as it reached the top back in April of 2022 reaching almost above $60. It has since come down a fair bit as the market realized the prospects of earnings were perhaps overstated in the previous valuation. Production volumes for MP have been rising steadily, but the realized price of it has been declining heavily over the past 12 months. I think investors need to account for a lot of volatility with MP and even though it has fallen since my last coverage of the business, it's not at a place where I would consider it a buy, but it's certainly approaching it very soon.

Company Segments

MP is a leading producer of rare earth materials within the Western Hemisphere and certainly in North America. The company operates in and management of the Mountain Pass Rare Earth mine and its state-of-the-art processing facility, both strategically situated in North America. Additionally, MP possesses exclusive mineral rights extending not only to the Mountain Pass mine but also encompassing the vast surrounding regions. This comprehensive control over rare earth resources underscores the company's pivotal role in supplying these critical materials to various industries.

EV Outlook (Investor Presentation)

One of the driving factors of growth has been significant EV production ramp-ups in the last few years. A lot of the required materials and minerals used in the making of those vehicles are things that MP mines and supplies. This has created a unique environment where MP is viewed as a strong opportunity for securing rare earth deposit supplies in North America and taking some global market share from China.

Rare Earth Map (Massachusetts Institute)

The US is a significant market for EV cars, but so is China, and getting rid of some of the reliance on that region is a key priority for them, and MP can help do so. I think that MP will continue to see strong demand in the coming years, but perhaps from an investment point of view MP doesn't look as appealing yet as the p/e remains to be quite high I think. We have to keep in mind that mining companies often get a lower multiple given the volatility and uncertainty about the material sales prices they can receive. With MP trading at an FWD p/e of over 60, I think we can rule out a buy right now.

EPS Estimates (Seeking Alpha)

Looking beyond that though, it looks more appealing if the estimates can come true. If MP can execute its growth initiatives and the prices improve over the next few years, then perhaps an EPS of $2.78 in 2026 is possible. If the price remains the same the p/e would be under 8 and to me indicate an upside potential of 51% given a 12x earnings multiple. That is a potential realized return of 12.7% in that time. For me, I think I would want to look for some more improvements in the market conditions before going in, or a better potential return as well, somewhere closer to an annual return of 15%. That might sound high, but I think there are some inherent risks associated with commodity-driven companies that need to be baked into the valuation.

Earnings Highlights

Operating Metrics (Investor Presentation)

From the last report, I think it has become clear the MP can consistently ramp up the production levels, but perhaps not as able to raise the EPS as fast. MP is still at the mercy of the market and the demand for rare earth minerals that it mines for. As we can see above the realized prices for MP have been in a steady decline since last year. I think this comes as the war in Ukraine shocked a lot of the commodity markets and caused some prices to skyrocket, including the material that MP sells. I think that we will likely enter a period where prices stabilize somewhat though and MP could start seeing a further uptrend in the coming years.

Financial Metrics (Investor Presentation)

Looking at the financial performance of the company I think it's fair to say that MP has had a tough time given the softer pricing environment. For the coming quarters, I think we need to see an improvement in the pricing environment before a potential buy could be issued.

Risks

A significant concern I have regarding MP Materials is the persistently negative cash flows. This ongoing cash flow issue has resulted in share dilution over time, which has compounded the challenges for investors, especially considering the stock's decline from its previous highs of nearly $60 per share. It's reasonable to anticipate that share dilution may persist as long as negative cash flows remain a concern for the company. This aspect of MP's financials warrants careful consideration for potential investors.

Cash Flows (Seeking Alpha)

The ongoing share dilution should be a cause for concern for most investors, in my view. This is one of the reasons why I consider the company to be a hold at this point. I believe that MP has the potential to utilize its existing assets and mines to transition toward generating positive cash flows. For that to happen I think we need to see better production cost levels for MP, meaning a decrease from the current levels and also stronger realized price sales, which should hopefully over time be trending upwards in my opinion. For the moment though, I think that the management of MP is more focused on growing their portfolio of mines and projects rather than quickly raising the FCF. This will likely result in a continuation of diluting shares though.

Final Words

Back in July, I covered MP as well, and the rating I had for it was a hold. I tend to hold the same view now but I do think the price is approaching where I could consider it a buy. If it drops under $17 - $18 per share I think the potential rewards outweigh the risks and jumping in seems reasonable. For the moment though I think a hold rating seems fitting as the market processes are still deteriorating and lower EPS is certainly a possibility. A reversal is needed before a higher rating can be applicable.

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

[bobsar]

With new discoveries in Wyoming. MP doesn't look so hot and China will have less heft. It turns out "rare earth" isn't actually all that rare.

[Workaholic54]

@bobsar Good point but it remains to be seem what the quality of this property actually is. Rest assured that if the price of rare earths move up substantially there will be increased output from Mr. XI as was the case in the MCP days.

[CincinnatiRick]

@Workaholic54 "there will be increased output from Mr. XI as was the case in the MCP days"

While "this time is different" have often proven to be famous last words, there is at least some probity to the thesis that national security concerns may trump the "low cost provider" if said provider cannot access the market.

[Investor since ‘73]

@bobsar Even if the ore body is high quality, between permitting and construction this mine would not be producing anything for at least 3-5 years.

[Investor since ‘73]

Here in America we have a saying, ‘Don’t fight the Fed.’

The Chinese version must now be ‘don’t fight the dictator.’

This is a ridiculous situation, where one man (who has demonstrated a very shaky understanding of economics to date) literally controls the world’s market for neodymium and therefore the value of this stock. I won’t give up and will hold my position. There will come a day when supply and demand once again is allowed to determine the price of these rare earth commodities.

[RockNBlues]

@Investor since ‘73 Xi is in San Francisco next week. Hope that Joe is well rested and up to it!😑

[Workaholic54]

@Investor since ‘73 if the price rises substantially he will just put an extra one million miners to work regardless of conditions and flood the market as was done to Molycorp which put them out of business. Even if export restrictions are imposed to the USA the goods will find their way out as they always do ....wish you good luck but MP is up against a formidable foe

[RockNBlues]

@Workaholic54 Especially since the current administration seems to be in china's pocket

[Investor since ‘73]

Welp, my limit buy order filled this morning at an absurd 18. Immediately placed my GTC limit SELL order in at 21 for those shares, keeping my core position for the long haul. I’m not above making some easy money from short term trades.

[lateralgs]

@Investor since ‘73

I bought a few more between $18.38 and $17.88 myself. Just waiting for the chance to sell some more out of the money covered calls on the next big leg up…

[bobsar]

@lateralgs I've capitulated so maybe you can scoop mine at below 17. I'll come back in six months and take a look. Maybe iron based batteries has something to do with it.

[lateralgs]

@bobsar

I probably did! Added more in the $16s this afternoon. Sorry to see you exit, but I understand why a person might.

I don’t think iron batteries development is related. These materials are critical in all sorts of applications where weight and power density are major design concerns.

Personally, I expect the company to do well longer term. I see the current downturn as more macro-related. Time will tell!

[pgace123]

Fair assessment. Good job pointing out FCF risk, which is what is holding me back from buying more. I think this company and its stock will outperform significantly, the question remains when that will happen

[Investor since ‘73]

I honestly didn’t want to increase my exposure to MP, as I am already above my usual discipline of limiting any single issue to 5% but I did put in a GTC limit buy order today just below the day’s low print. It’s way too low and neodymium prices will certainly be increasing now that the Chinese have no doubt added to their ownership of the only company that can challenge their monopoly.

[RockNBlues]

@Investor since ‘73 Doesn't exactly reduce our dependence on China, if China owns the company. There is a Canadian miner, POWER Metals, owns only cesium mine outside China. Canada made Chinese investor divest. USA should do the same here IMO.

[CincinnatiRick]

@RockNBlues Agree with the strategic imperative but Canadian and US constitutional protections for individual rights, including property rights, are different.

[Investor since ‘73]

@RockNBlues The last number reported was that the Chinese owned 8%, I’m betting that it’s more like 25% now, much of which is held in shell companies and straw men.

[YCJT 2022]

MP free cash flow in 2022 was on the order of positive $10M. It was not negative as the article states. Strong commodity pricing essentially paid for $300M in growth capex!

[charly333]

@YCJT 2022 $10M is not much. If you substract $31.8M SBC you are in the red. In most cases it makes no sense to add back SBC to CF.

Anyway TTM FCF is -$145M even including SBC.

Based on SA numbers, during 5 years (2018 to 2022) FCF was also negative on average.

Technically MP is in a downtrend since the top.

[lateralgs]

@charly333

It’s been negative primarily due to the significant growth cap ex investments. These guys wrestled a dead mining facility to the ground and have recommissioned and updated and built brand new infrastructure on-site which will allow them (and North America) to stop relying on China for processing of these essential materials.

Add to that the expenditures to design and construct and outfit the new magnet manufacturing plant and adjoining lab in Ft. Worth.

Ya’ gotta’ spend money to make money….especially in a pure growth mode.

[TheChemistxx]

Can someone show me where you can chart/track the price of NdPr? I can't seem to find it anywhere.

[YCJT 2022]

@kman22
Asianmetal.com - it is generally behind a paywall but on occasion it is highlighted. If you happen to have a Bloomberg terminal use: Index Shrapnox.

[Lord Krungharr]

@kman22 I found some random site called strategicmetalsinvest.com Seems to have updated prices on many REES on the prices page.

strategicmetalsinvest.com/...

[Natturner1966]

It trades just like any commodity trades. Good time to buy and hold. Just take your profits before it goes back down.

Support zones:

Zone 1: $19.55 (held today at $19.52)
Zone 2: $19.31
Zone 3: $19.09

Fair value range $16.37 to $25.27

[gibby33]

@Natturner1966 I would think when magnet manufacturing begins this will trade like an industrial.

[Lord Krungharr]

@Natturner1966 What if you are averaged to $30/share? Hold or run for the hills and lick our wounds and wait for META/TSLA/etc to dip and buy there instead?

[Natturner1966]

@Lord Krungharr

I was holding at around $21 and was just a swing position for me. I sold it at $19ish. Not because of anything they did wrong but because of the rates issue. I still believe in the company long term. If I was long the stock and holding a small position at $30, I would double down once the selling stops. If I had a overweight position I would take the loss and buy it back cheaper after 30 days. That’s if you still believe in the potential. Or you can just keep what you have and wait it out. Either way it’s a tough decision.

[zito]

Thanks for the analysis; good work.
I believe rare earth mining is a losing business as long as China controls the pricing, even with higher demand going forward.
I'm long MP because of their move into processing where they can get 100% of the rare earth profits that are now going to China. It will take a year for MP's processing to have a big impact on their P&L.

The wildcard here is US/China relations. If China withholds rare earths the US will have to fund MP as a strategic supplier. This is a very complex story, but good risk/reward.

[CincinnatiRick]

The real risk here is that the low cost provider (China) has been able in past to drive competitors out of business and can be counted upon to attempt to do so again. While there has been something of an awakening, due to national security concerns, to see that this dangerous dependence not continue, there always remains a question as to the resolve and effectiveness of intervention/support in an open society that is ultimately committed to market forces. Unfortunately, whatever the collateral costs, autocracy is far more efficient in this regard.

That said, this time may be different...and worthy of speculation. Accordingly, long LYSCF and sniffing around here and considering MP.

[lateralgs]

@CincinnatiRick

All very true. But lowest cost no longer can be the only consideration.

We have all witnessed the carnage that supply chain disruptions can bring to effect. Suppose China institutes a virtual total ban on the export of rare earths to “some countries.” In fact it is widely accepted they have plans in place, ready to execute should the whim strike Xi and the ruling party to do just that.

What should not be too easily dismissed are the ongoing efforts to secure North American supply chains. Mexico is now our largest trading partner. The U.S. and Canada are working to secure supply chain issues where interests coincide. Among these include materials and products necessary for EV adoption, defense interests, renewable energy, electronic device manufacturing, chip manufacturing, etc.

In short, I’m not certain China holds all the aces in any price/trade-related conflict of sorts. Their economy overall needs us as much if not more than we need them. And Xi may find himself skating on thinner ice than he anticipated.

To be clear, I am not an advocate of trade wars. It’s just that in the specific case of rare earths, they are too critical to modern life for democratic nations to allow themselves to be held hostage by the “efficient autocracies” of the world.

[lateralgs]

No discussion on capex impacts on EPS. This company has been on a growth path, investing substantial sums in plant, equipment and personnel. Prior to that, substantial outlays were required just to get existing infrastructure recommissioned and operable. It has really been like starting from scratch.

They sell commodity-linked products, with finished products like permanent magnets and alloys to come soon enough. But you can’t ignore the growth investment costs and impacts on cash flow when considering a simple P/E indication.

The company’s financials are very strong, in spite of the substantial capex costs.

[bobsar]

Relying on predictions of the EV market in coming years is a tough nut. The bulk of the market is not buying into EVs and whole segments are avoiding cars altogether. EV's are the future but for my grand kids.

[sg-neophyte]

@bobsar Possibly agree about EVs for grandkids. But I do not think that the main driver of Rare Earth Elements is production of electric vehicles. It's the full panoply of their uses in all technology hardware. As for their ubiquity, how about smartphones and computers, just for a start? Is MP Materials so heavily tilted to lithium and cobalt for EVs?

[bobsar]

@sg-neophyte The article seems based on EVs. as a driver.

[Investor since ‘73]

@bobsar EVs represent virtually all growth in the auto industry and sales are increasing exponentially. Even in the backwards US.

In Europe EV sales are up over 50% y/y:
www.investopedia.com/...

EV sales are up 48% in the US. While GM and Ford EVs have stumbled, Tesla continues to hit home runs.
It’s Supercharger system is ubiquitous, grows daily and makes driving an EV effortless, even on long trips. Range anxiety is part of life for any other EV but doesn’t exist for Tesla owners.
www.coxautoinc.com/...

It’s been said EVs are also dominating in China but while we can rely on Tesla numbers because it’s domiciled in the US, so it’s books are audited and reliable, all other numbers from China are not.

My last 2 cars have been EVs, I’ve now driven them over 110,000 miles without a single out of pocket repair or a penny for maintenance and my AWD Model S will peel the paint off 99% of the cars on the road. Never going back.

MP has been driven down because the Chinese, who have nearly total control of the worldwide Neodymium market, can’t prevent MP from becoming a major competitor but by dropping the price of neodymium, they have driven the price down from 60 to 20 so that they can buy it for 1/3 it’s true value.

[Yogadad22]

No benefits from their stage 2 and 3 businesses and from being an American company?

[Billandgayle]

@Yogadad22 also no benefits from its deal with GM and the building of the new plant in Texas

[Investor since ‘73]

@Billandgayle That’s phase 3. But yes, no appreciation in the stock’s value. It’s all about the Chinese deliberately lowering the price of neodymium, which they still have virtual of, to drive this stock’s price down so they can accumulate ownership at 1/3 the value of those shares.