You may have heard about rare earth materials and wanted to invest in them by purchasing a stock. Investors can do this by buying the shares of mining company MP Materials (NYSE:MP). MP stock is highly liquid and has a reasonable valuation.
Rare earth materials are, I believe, an underappreciated class of commodities. As we’ll see, there are some highly significant uses for these materials.
Moreover, there’s tension between the U.S. and another world superpower, which could increase demand for MP’s rare earth minerals.
The best strategy, then, could be to take an early position in MP Materials before the crowds catch onto its substantial potential.
A Closer Look at MP Stock
Let’s rewind a bit now. The public debut of MP stock took place on Nov. 18, 2020. The shares became available to the public through a special purpose acquisition company (SPAC) deal rather than via a traditional initial public offering (IPO).
The shares traded in the $15 area on their first day of public trading. The stock was an immediate hit with investors and even rocketed up to $39 and change on Dec. 22.
But that’s not even the end of the story. Amazingly, the buyers bid the MP stock price up to a 52-week high of $51.77 on March 2, 2021.
In hindsight, that rally was probably a case of “too far, too fast.” Therefore, a retracement by the stock was almost inevitable.
Earlier this afternoon, MP stock was trading at just under $32, which is quite far from its peak price.
Long-term investors should be patient and expect the share price to rise slowly but steadily as the year progresses.
A Major Imbalance
On May 4, it was announced that America’s trade deficit with China had increased by 22% just during the month of March.
That brought the trade imbalance with China to a whopping $36.9 billion. Most Americans would probably find this to be unacceptable, if they were aware of it.
And without a doubt, the U.S. government is keenly aware of the lopsided trade dynamic between the two nations. America’s importation of rare earth materials from China contributes to the shortfall.
A recent article on a widely read financial website declared that China is holding rare earths hostage.
Here are some fast facts, just to give you a primer on these essential but misunderstood minerals:
- There are 17 rare earth metals
- You’ve probably never heard of any of them (do yttrium and lanthanum ring a bell?)
- They’re frequently used in high-tech products, for both civilian and military applications
- China has actually threatened to use rare earth materials as a means of fighting its trade war with the U.S.
Reducing America’s Reliance
Furthermore, China has demonstrated that it’s not afraid to hold these materials hostage.
Case in point: in 2010, China’s export quota on rare earth materials was 31,310 metric tons; however, the country slashed that quota to 14,446 metric tons in 2011.
Activist Saket Gokhale recently tweeted, “About 95% of rare earth minerals are exported by China.” I can’t confirm that this is true, but one thing I do know is that there’s a vast addressable market in rare earth materials.
Indeed, the global rare earth elements market, according to Grand View Research, is projected to reach $5.62 billion 2025.
And as I learned from InvestorPlace contributor Sarah Smith (with assistance from Chris MacDonald), MP Materials is a major player in this lucrative market:
“MP Materials currently produces a concentrate that contains 15% of the annual rare earth element consumption. By 2022, it will be separately producing neodymium and praseodymium.”
The Bottom Line
It’s probably a safe bet that trade tensions between China and the U.S. won’t be resolved anytime soon.
Is China weaponizing rare earth minerals in the ongoing trade war between the two nations? I’ll let you decide for yourself.
But investors should realize the importance of these materials for today’s tech products – and MP Materials’ prominent position as a change agent in this market.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.