- 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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