The one thing I’ve learned as the special purpose acquisition company (SPAC) bonanza has played out is that most of the de-SPACs (mergers) that happen aren’t worth the paper they are written on. Sometimes, however, an exception comes along like MP Materials (NYSE:MP), and MP stock restores my original enthusiasm for the investment vehicle.
Having never been asked to write about MP Materials before and not really being very familiar with it, I’ve been pleasantly surprised by what I’ve found in my preliminary research about the company.
I see three reasons why investors might be interested in MP stock.
MP Materials Has an Interesting Group of Insiders
The first thing I do when I know very little about a company is to find out about the insiders, management, and board. Some of what I’m writing here might be old news for some of you, but it helps me construct an understanding of the people behind a particular business.
MP Materials’ de-SPAC was completed in November 2020. In this combination, MP Materials, the largest rare earth materials producer in the Western Hemisphere, merged with Fortress Value Acquisition Corp. The SPAC raised $300 million in April 2020 to combine with a business that could benefit from the sponsor’s investment and operational expertise.
The sponsor — Fortress Acquisition Sponsor LLC — was made up of senior people from Fortress Investments’ credit funds business. Fortress was founded in 1998, was named Hedge Fund Manager of the Year by Institutional Investor in 2014, and acquired by SoftBank Group (OTCMKTS:SFTBY) in December 2017.
I personally remember Fortress for butchering its $2.8 billion purchase of Intrawest Corp. in 2006. Intrawest owned the Whistler Blackcomb resort at the time. It’s now owned by Vail Resorts (NYSE:MTN).
While that wasn’t the investment firm’s finest moment, it obviously was attractive enough for SoftBank CEO Masayoshi Son to pay $3.3 billion for the company. And clearly, it had a sizable credit business.
Interestingly, MP Materials founder and CEO James Litinsky worked for Fortress until he founded JHL Capital Group in 2006. JHL Capital was part of the creditor group that bought the Mountain Pass mine out of bankruptcy in 2017. I won’t bore you with all the M&A details.
Suffice to say, that’s how three of the seven MP Materials directors came to be. The three directors, directly and indirectly, own 83 million shares or 48.5% of the company.
Add in Richard Myers, the former chairman of the Joint Chiefs of Staff from 2001 until his retirement from the military in 2005; Maryanne Lavan, the general counsel for Lockheed Martin (NYSE:LMT); and Randall Weisenburger, the lead independent director of Carnival (NYSE:CCL), and you’ve got quite an interconnected group.
MP Minerals Is Quite the Business
Considering this business was created from bankruptcy, its first-quarter results are very impressive. On the top line, sales grew 189% to $60 million from $20.7 million a year earlier, while its adjusted net income was $23.2 million during the quarter, 801% higher than in Q1 2020. Its operating margin was a healthy 38.6%, up from 12.4% a year earlier.
While it sold 18% more rare earth oxide (REO) in Q1 2021 versus Q1 2020, the 132% increase in price per metric ton of REO due to increased demand drove the revenue increase. Whether REO prices can maintain their upward trajectory is up to the supply and demand gods.
However, even at last year’s prices, MP was still making money. How many SPAC mergers involve profitable companies these days? It wins major marks for that alone.
The company’s expansion plans at the Mountain Pass mine, combined with the future potential of REO in electric vehicles (EVs), make MP stock a very attractive long-term investment.
As Litinsky stated in MP’s Q1 2021 conference call, EVs are only getting started.
“A recent IEA report stated that while it took 10 years to reach 10 million EVs on the road in 2020, they expected that over the next 10 years, by 2030, this number would climb to 145 million. This may seem like staggering growth, but that would only be about 7% of the global fleet,” Litinsky stated on May 6.
“And this excludes two and three wheelers, where there is also huge potential for electrification.”
If you want to read more about the company’s Stage II and Stage III expansion plans at its mine, I recommend you read the Q1 2021 conference call transcript. It does a good job laying out the future potential of the mine.
Stage II is expected to be completed by 2022 and Stage III by 2025 or later. The revenues from these two expansions aim to accelerate the company’s revenue generation considerably. However, I’ll be more confident about this after further study over the next few weeks.
The Bottom Line on MP Stock
Since the de-SPAC was completed in November, MP stock is up 95% through May 18. That’s some performance. But it could have a lot more in the tank.
The de-SPAC presentation estimated 2021 revenue of $171 million. However, if you annualize the Q1 2021 revenue, it’s more like $240 million. Based on 170.75 million shares outstanding as of May 1 and a market capitalization of $4.69 billion, that’s a price-to-sales ratio of 19.5.
I know that seems exceptionally high, but given its first-quarter gross margin was 75% based on a realized price of $5,891 per metric ton of REO, it’s actually quite reasonable.
I wouldn’t bet the farm on MP, but if you’ve got some fun money, it’s an excellent risk/reward proposition.
On the date of publication, Will Ashworth 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.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.