MP - MP Materials: Demand Fears Overblown

Summary

• MP Materials Corp. reported a solid Q4 and continued their strong track record of operational and financial execution.
• The stock got hit recently on concerns about Tesla, Inc. transitioning to a motor that does not use rare earths.
• Demand for rare earths is estimated to increase meaningfully over the next few decades, and this will likely still be true even if some end products no longer require them.
• The bull thesis remains intact, and MP Materials is well-positioned to benefit from the "green transition."

Thesis

MP Materials Corp. ( MP ) is executing well, but the stock got hit because of fears surrounding long-term demand sparked by Tesla's Investor Day . We view this selloff as unwarranted because demand is estimated to increase meaningfully over the long term. MP Materials is strategically positioned to meet the needs of their U.S.-based customers and is continuing to build out a vertically integrated supply chain, using their domestic presence as a competitive advantage. The bull thesis remains intact, and MP Materials is well-positioned to benefit from the "green transition."

Fourth Quarter Results

MP Materials stock reported a strong fourth quarter . Some highlights include:

• Increased production 2% year-over-year to 10,485 metric tons of REO.
• Improved sales volumes 12% year-over-year to 10,816 metric tons of REO.
• Began commissioning Stage II assets and producing roasted concentrate.
• Advanced heavy rare earth front-end engineering design and long-lead procurement.

James Litinsky (the CEO) had this to say in their earnings release:

"The MP team executed really well in 2022. Stage I operations again set records for production and sales volumes, we began commissioning Stage II assets, and we made substantial progress in our Stage III magnetics business. In addition, we achieved record financial results and positive free cash flow, even as we made significant growth investments throughout the year,"

"For 2023, the MP team is driving towards run rate production of separated rare earths at Mountain Pass and the first production of magnetic alloy in Fort Worth. As we transform our business, MP is uniquely positioned to capitalize across some of the most critical and exciting verticals of today's global economic landscape."

MP Materials saw a great deal of operational and financial success in the fourth quarter. Of financial importance is the 37% increase in net income year-over-year and the $1.2B/$492M of gross/net cash on the balance sheet (as of the end of the year). MP Materials has plenty of cash to continue to fund their expansion plans and is operationally self-sufficient from a cash flow perspective. This makes it unlikely that MP Materials will need to tap the debt or equity markets unless there is a massive opportunity available.

Tesla Announcement

During Tesla's Investor Day, it was revealed that as part of their next-gen vehicle platform, Tesla plans to design a new powertrain. This powertrain will feature a permanent magnet motor that will not use new rare earths. This sent the stock of MP Materials lower, but this seems like a knee-jerk reaction. Tesla has accomplished many incredible feats, however, Elon Musk has a history of making ambitious goals and not all of them pan out as expected. Even if Tesla is able to achieve this technological advancement, rare earths are used in many other end products, and demand is expected to grow substantially over the next few decades.

Long-Term Rare Earth Demand

MP Materials is strategically positioned as the main U.S. player in the rare earths supply chain. They are seeking to meet the growing domestic demand for rare earths and are focused on building out a vertically integrated supply chain in the U.S.

According to the IEA , by 2040 demand for rare earths is set to increase 3-7x from 2020 levels. Even if supply growth keeps up with demand, MP Materials should be able to succeed financially because they will be able to serve their U.S.-based customers better than competitors that are not based in the U.S. Even if some end products reduce or eliminate reliance on rare earths, there will still be enough demand to support rare earth companies.

This is a personal opinion, but I believe that rare earths are not very high on companies' lists of metals to reduce reliance on. In my mind, lithium and cobalt are probably at the top of that list. Companies' concerns around lithium have to do with the supply/demand imbalance, and their concerns around cobalt have to do with labor concerns, geopolitical concerns, and supply/demand dynamics. All things considered, for the time being, rare earths seem relatively safe against the threat of technological innovation reducing their value.

Price Action

MP Materials has rebounded sharply in 2023, but shares are still reasonably far below their 52-week-high. Investors who are bullish on the name can use this recent selloff as a buying opportunity.

Valuation

MP Materials trades at a slight P/E premium to the market, and investors buying at these levels likely expect earnings to continue to grow at a robust pace. We view the MP Materials Corp. valuation as being reasonable here, but not as screaming of a buy as it was at the beginning of the year.

Risks

A risk to the bullish thesis for MP Materials is if technological innovations do indeed reduce the long-term demand for rare earths. While this is entirely possible, as of now rare earths are expected to see such a large increase in demand that even if some end products no longer require them, there will be enough use cases to make the overall supply/demand dynamics compelling for producers.

Another risk is that MP Materials gets cut off from some of their business partners in China and are unable to fully onshore their supply chain in time. This particular risk is temporary in nature. MP Materials is committed to creating an entirely domestic supply chain, and every day that passes gets them closer to that goal, further reducing geopolitical-related risks.

All things considered, we view the MP Materials Corp. risk/reward as favorable.

Key Takeaway

MP Materials Corp. is continuing to execute well operationally, financially, and strategically. We believe that fears around long-term demand are overblown and the MP Materials Corp. bull case remains intact.

For further details see: