MP Materials: Securing America’s Future With Massive Short Squeeze Potential (NYSE:MP)

Introduction

After discussing a wide variety of dividend stocks, it’s time to take a little detour, as I want to revisit a company I started to cover last year.

With a market cap of $3 billion, the MP Materials Corp. (NYSE:MP) is one of the smallest stocks on my radar and one of the few that does not pay a dividend.

I started covering the stock on July 6, 2023. My most recent article was written on October 17, 2023. Back then, I went with the title “Energy Transition And Robots – Why MP Materials Has So Much Potential.”

Since then, the stock is down roughly 7%, lagging the S&P 500’s 18% return by a huge margin.

In fact, since its peak in early 2022, the relatively young company has been in a steady downtrend.

While I was bullish too early, I believe we are at a bottom.

• Economic growth in key areas like China is improving, which bodes well for rare earth demand.
• The company is in a fantastic spot to boost output and improve overall operations.
• 21% of the company’s available shares are sold short. If we see a fundamentally backed breakout, we could see an accelerated uptrend fueled by traders required to cover their shorts.

In this article, I’ll elaborate on all of this.

So, let’s get to it!

The World Needs It, MP Has It

The “MP” in MP Materials stands for Mountain Pass.

This mine is one of the world’s most important mines, as it provides a big part of global rare-earth production. It’s also the only mining and processing facility in the United States, which comes with tremendous national security importance.

To quote Wikipedia (emphasis added):

The Mountain Pass Rare Earth Mine and Processing Facility, owned by MP Materials, is an open-pit mine of rare-earth elements on the south flank of the Clark Mountain Range in California, 53 miles (85 km) southwest of Las Vegas, Nevada. In 2020 the mine supplied 15.8% of the world’s rare-earth production. It is the only rare-earth mining and processing facility in the United States.

This is what the mining complex looks like:

Essentially, the company’s investment strategy is focused on a three-stage plan to reinstate the complete rare earth supply chain within the United States.

As of 1Q24, the company dominates the Stage I business, focusing on rare earth concentrate, where it has a major market share in the low-teens.

The company is currently scaling up its Stage II operations, which are refining separated rare earth oxides and metals.

Furthermore, the company is now making substantial progress in its Stage III business, which involves North American production of NdPr metal and magnets.

According to the Australian government:

Rare earths are a collection of 16 chemical elements that are used in a variety of applications on which we depend. Two of the rare earths – neodymium and praseodymium (NdPr) – are the key raw materials in ultra-strong permanent magnets. They are essential to electronics, technology and automotive industries, as well as to realise energy efficiency and reduce greenhouse gases.

With General Motors Company (GM) as a major customer, MP Materials believes it is strategically positioned to cater to the growing demand for rare earth materials, especially in the automotive sector.

Based on this context, as we can see below using Arafura data, NdPr demand is expected to rise to 126 kilotons in 2032. Most of this demand is expected to come from the energy transition (EV mobility, wind turbines, and other vehicles).

In this case, NdPr supply is expected to be 57 kilotons below forecasted demand. That’s a 45% gap!

The outlook from MP Materials goes to 2040, which shows that the supply deficit could grow to more than 85 kilotons.

Although I’m fairly sure that the struggling EV transition could result in lower-than-expected NdPr demand, this gap is so large that it is poised to create both demand and pricing tailwinds for MP and its peers.

Going back to the company’s expansion plans, during the February 29 Baird Vehicle Technology & Mobility Conference, the company made clear that it has plans for significant expansion through the Upstream 60K initiative in its Stage I.

This initiative aims to increase rare earth oxide production by 50% over the next four years, leveraging the company’s favorable position on the cost curve.

During the same conference, the company made the case it operates at such a low point of the cost curve that it can remain profitable when rare earth oxide (“REO”) prices are subdued.

Even better, the company makes the case that its current pricing is significantly below the threshold required to incentivize new capacity from competitors, meaning it can make money at prices where others are not profitable.

On top of an efficient production expansion and low-cost operations, the company has a healthy balance sheet, with more cash than gross debt.

We ended the year with just under $1 billion of gross cash and over $300 million of net cash. As for CapEx, we spent $262 million on gross CapEx or $259 million, net of $2.8 million received from the Department of Defense. Net growth CapEx totaled $244 million with roughly $15 million of maintenance CapEx during the year. – MP 4Q23 Earnings Call

It also helps that it has a diversified customer base.

According to MP Materials, it serves a wide range of customers, including automotive OEMs, Tier 1 suppliers, magnet manufacturers, and defense contractors.

This makes sense, as all of these producers are dependent on reliable REO/NdPr supply.

Essentially, a diversified revenue stream not only mitigates concentration risk but also ensures resilience against fluctuations in specific end markets.

For example, while EV demand growth may be underwhelming, demand from defense should be strong, as advanced defense programs require a lot of rare earths.

Speaking of defense, not only did we see that MP got money from the Department of Defense (see the quote above), but we also saw that the DoD is increasingly focused on building a well-integrated supply chain to lower national security risks.

In addition to the F-35, Virginia and Columbia-class submarines, magnets produced from rare earth elements are used in systems such as Tomahawk missiles, a variety of radar systems, Predator unmanned aerial vehicles, and the Joint Direct Attack Munition series of smart bombs. The F-35, for instance, requires more than 900 pounds of rare earth elements. Each Arleigh Burke DDG-51 destroyer requires 5,200 pounds, and a Virginia-class submarine needs 9,200 pounds. – Department of Defense

With that in mind, MP has been in a steady downtrend since 2022 despite all of this good news.

The problem is that cyclical demand was weak.

Now, this seems to be changing, which is why I expect MP to benefit from both cyclical and secular tailwinds soon.

As we can see below, industrial metals have started to rise again.

According to Bloomberg, the Chinese economy is “set to expand 5.3% this year as the property sector stabilizes, and external demand improves.”

This improvement is supported by leading indicators showing promising upside:

The upward revisions come after a key gauge of factory activity – the Caixin manufacturing PMI – indicated a fifth straight month of expansion in March, with official government data also showing a rebound. Exports have also increased amid rising global demand for technology goods.

“Recent China macro data have been solid,” Goldman’s economists wrote in the note, adding that the manufacturing data “suggests the Chinese economy found a local bottom in late 2023 and is on the way up.” – Bloomberg

So, what does this mean for its valuation?

Valuation

With all of this in mind, I believe the valuation is highly favorable.

As we can see in the data below, even in this market environment, analysts expect the company to gradually increase annual EPS from $0.13 in 2024E to $1.51 in 2026E.

While the numbers are highly prone to adjustments, they make the MP valuation look very attractive.

For example, if I were to apply a 20x multiple, it could have a fair price target of $30 (20x$1.50).

This multiple is based on a premium over peers.

Rio Tinto Group (RIO), the established iron ore-focused giant, has a normalized P/E ratio of 12.7x. Albemarle Corporation (ALB), the North American lithium producer, has a normalized P/E ratio of 17.2x.

I believe that MP should not trade below 20-25x earnings, which is why I stick to the $60 price target I mentioned in both previous articles, as I expect EPS growth expectations to improve substantially in the quarters ahead.

Furthermore, given that the stock has a short float of more than 20%, I believe we could see an accelerated breakout if the stock moves above $20.

Needless to say, this is a high-risk, high-reward trading idea that should not be compared to the long-term (dividend) investments we usually discuss.

So, please be aware of the volatile nature of this stock before you decide if MP is right for your portfolio.

Takeaway

Despite recent setbacks, MP Materials stands at the forefront of a crucial industry, supplying rare earth materials essential for modern technologies.

With a strategic focus on expanding its operations and serving diverse markets, including automotive and defense, the company is poised to capitalize on increasing demand.

As global economic indicators signal a rebound, MP’s undervalued position presents an opportunity for investors seeking high-growth prospects.

However, caution is warranted due to the stock’s volatile nature and speculative elements.

Pros & Cons

Pros:

• Dominance in Rare Earth Supply: MP Materials holds a significant market share in rare earth concentrate, positioning itself as a key player in global supply.
• Diverse Customer Base: Serving a wide range of industries, including automotive and defense, MP is able to lower revenue volatility.
• Expansion Plans: With initiatives like the Upstream 60K program, MP is aggressively expanding its production capacity.
• Low-Cost Production: Thanks to very efficient operations, MP is profitable when (some) peers are losing money.
• National Security Importance: As the sole rare earth mining and processing facility in the US, MP contributes to national security by reducing dependency on foreign sources.

Cons:

• Volatility: MP’s stock has shown significant volatility, making it a high-risk investment prone to major market fluctuations.
• Cyclical Demand: The company’s performance is closely tied to cyclical demand trends, which can affect short-term profitability.
• Speculative Nature: MP’s stock is subject to speculation, with a short float of over 20%, indicating the potential for volatile price movements.
• Dependency on External Factors: MP’s success is dependent on factors like global economic conditions and regulatory changes, adding uncertainty to investment outcomes.