MP Materials Corp. (NYSE:MP) is an interesting company to monitor in the mining industry. It has a strong economic moat, its business with the U.S. government gives it a strategic buffer and it has achieved a great milestone very quickly: it has reached profitability from the first quarter since it went public. Is MP stock a buy?
I personally didn’t know much about MP Materials at all until recently, so before we get into my analysis of the company, we should look at some key facts about MP Materials you should know.
Here’s the key bullet points:
MP Stock Key Highlights
- Sector: Basic Materials
- Industry: Other Industrial Metals & Mining
- Market Cap: $4.5 billion as of May 25
- Stock price: $25.88 as of May 25
- Year-to-date return: -19.55%
- 3-month return: -40.55%
- Business operations: According to Yahoo! Finance, “MP Materials Corp. engages in the ownership and operation of integrated rare earth mining and processing facilities. It owns and operates the Mountain Pass facility located in the Western Hemisphere. The company holds the mineral rights to the Mountain Pass mine and surrounding areas, as well as intellectual property rights related to the processing and development of rare earth minerals. It offers neodymium and praseodymium that are rare earth elements, which in combination form neodymium-praseodymium.”
- Date of incorporation: 2017
- Headquarters: Las Vegas, Nevada
- SPAC info: The company made its debut on the New York Stock Exchange after completing a SPAC merger with Fortress Value Acquisition in late 2020
MP Stock’s Unique Economic Moat
Not all SPACs are the same, and not all stocks are the same. The key is true value rather than enthusiasm. That’s my opinion about in a nutshell, which I’ve summarized before. In general, I do not like SPACs, mostly for the reason they are often too overvalued. Is MP stock different? Yes and no.
The company mines rare earth materials used to develop batteries, which can power several important industries, including the automotive, clean energy, military, and digital technologies industries.
What is MP’s strong economic moat? As Carl Surran, writing for Seeking Alpha explains, “MP Materials’ Mountain Pass site contains one of the richest rare earth deposits in the world, with average ore grade of ~8%, and includes state-of-the-art processing and separation facilities.”
Why is this so important? And why does it add so much value to MP Materials?
Chemistry Basics: The Value of Rare Earth Materials
According to the American Geosciences Institute, “Rare-earth elements (REEs) are used as components in high technology devices, including smart phones, digital cameras, computer hard disks, fluorescent and light-emitting-diode (LED) lights, flat screen televisions, computer monitors, and electronic displays. Large quantities of some REEs are used in clean energy and defense technologies.” As Statista explains, most REE reserves are located in China, while the United States has significant reserves, along with Russia, Vietnam, and Brazil.
This raises an interesting question: as China has the majority of these rare earth metals, does this not pose a monopoly problem for all other countries and global industries relying on these metals? It does.
A 2019 Reuters article describes China’s REE supply as a “vital bargaining chip” for trade.
As there are 17 rare earth metals, and MP Materials operates Mountain Pass, North America’s only integrated rare earth mining and processing site, it is apparent that support and protection of this facility is of strategic importance to the U.S. government. This could mean subsidies, loans to expand production and mining operations, and even another opportunity for a trade war between China and the U.S. For now, the company relies on China to process rare earth metals from its U.S. mining facility.
It also means that MP Materials could increase the price of these rare earth metals and improve its margins and profitability at a fast pace. It is a monopoly provider of these metals in North America. That’s not bad for a private company that went public in late 2020. MP’s potential for profitability seems excellent.
Beating the Estimates
In early May 2021, the Q1 earnings were strong beating the estimates based on a mix of rising output and pricing as well.
The company “reported a first-quarter net income of $16.1 million, or 9 cents per share, compared with $1.9 million, or 3 cents per share, in the year-ago quarter, when it was a private company.
“Excluding one-time items, such as $5.7 million in stock-based executive compensation, the company earned 13 cents per share, topping analysts’ expectations of 8 cents per share, according to IBES data from Refinitiv.”
Furthermore, MP’s first-quarter earnings report showed that its revenue grew 189% year-over-year (YOY) to $60 million, their adjusted net income grew 801% YOY to $23.2 million, and their adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) grew 537% YOY to $33 million.
Not bad at all for a company that went public in late 2020. The financial results were very strong. But should you get excited about MP stock?
If we assume that the first-quarter revenue of $60 million will be matched in the remaining quarters of 2021, then with $240 million in revenue for 2021, MP’s price-to-sales ratio would be 18.8, which seems too high for a company with such a short history since going public. I consider MP stock too expensive at the moment, even with the recent dip of about 50% from its 52 week high of $51.77.
It’s also worth considering that MP Materials could be a target for acquisition. That could be from another U.S. company rather than a Chinese one due to the importance of its business and its rare earth metals.
MP Stock: Bottom Line
The stock seems promising, I like the beat on most recent earnings, and I consider there is room for improved profitability as the company has a very strong pricing power for these rare earth metals. It could also be acquired by another company. The only fact I do not like now is the price, I consider it too high even based on these strong earnings results. But for sure it is a very promising stock to monitor.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.