MP - With Many Tailwinds for MP Materials There Is Plenty of Upside
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MP Materials (NYSE:MP) is a company I’ve had my eye on for a while now. I believe the company is a good way to invest in the upcoming electric vehicle revolution. For a bit over two months from its all-time highs in March, MP stock had been trending down.
However, in late May, MP stock began to rise. It bounced off its lows to break above its 50-day moving average on June 2.
Opening on June 15 at $33.10, long-term investors should consider this price as a possible entry point.
Rare Earth Minerals are Vital for National Security
I believe that there is a broad secular trend that can provide further upside to MP stock.
Geopolitical tensions are continuing to rise between the U.S. and China. These tensions, started during the time of President Donald Trump’s administration, are starting to evolve into a new “Tech Cold War.” President Joe Biden’s administration has continued this firm stance against Beijing, to the surprise of Wall Street. China controls a large portion of the supply chain for technology products. A key advantage for China is that it has essentially cornered the market for rare earth minerals.
Rare earth minerals are used in the production of incredibly important technologies such as batteries, microchips, and renewable energy systems. In 2020, China produced 85% of the world’s supply of rare earth minerals. The dominance of China in the rare earth mineral industry is a concern of national security. As a response, the Biden administration has signed an executive order to do a full supply chain review. The Department of Energy also announced a $30 million initiative to secure the U.S. domestic supply of rare earth minerals.
However, due to political pressures from his party, it seems that the Biden administration does not plan to drastically increase the number of domestic U.S. mines. Rather, the strategy of the administration seems to be in processing and refining the raw materials. This policy actually benefits an incumbent like MP Materials to the detriment of new entrants.
As one of the only U.S. producers of rare earth minerals, MP Materials wouldn’t face a lot of competition in the domestic market under this policy. This is because domestic mining permits would still be challenging to come by. This will end up limiting the overall supply of rare earth minerals, thus ensuring prices remain at elevated levels. In other words, the industry would avoid an oversupply situation, a scenario that happened with fracking and the oil and natural gas markets. Therefore, as one of the few domestic rare earth miners, MP Materials will end up as a key partner for the supply chains moving back to the U.S.
MP Materials had a Blockbuster Quarter
MP Materials recently reported fantastic results for the first quarter. The company’s revenue increased 189% year over year from $20.7 million to $60 million. The increase in revenue was primarily driven by the increased prices of rare earth minerals. The company’s sales volume was up 18% compared to last year, indicating more products sold.
One of the benefits available to MP is the leverage the company has on the prices of the underlying commodity. Even as the price of rare earth minerals rises, the cost of production remains relatively stable. Therefore, all of the extra revenues flow directly to the bottom line. This can be seen in the Q1 results, as the company’s adjusted EBITDA and net income increased by 537% year-over-year and 737% year-over-year respectively.
Investor Takeaway on MP Stock
I believe that the bull market in commodities, especially in rare earth metals, is just starting. The main catalyst for this surge in demand is electric vehicles. These metals are a key component in EV batteries. According to a report by Brand Essence Research, the global rare earth elements market size could reach $20.6 billion by 2025.
MP Materials is poised to capitalize on the upcoming electric vehicle trend. Tensions between the U.S. and China also make the company a very important one. I believe investors with a long-term time horizon should consider MP stock.
On the date of publication, Joseph Nograles held a LONG position in MP. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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