MP Materials: Quite The Verdant Oasis (NYSE:MP)

Investment Thesis

MP Materials Corp. (NYSE:MP) operates in the diversified metals and mining industry. This firm has demonstrated remarkable financial success, and its financials are very attractive. The company’s share prices have been volatile due to the market’s volatility.

Currently, the world is focusing on energy transition to curb climate change. According to Fitch Ratings, this energy transition will boost the long-term demand for metals, something I believe will be a major catalyst for MP’s long-term success. In anticipation of this opportunity, the company is scaling up its production, and as of Q3 2022, it commissioned Stage II at Mountain Pass.

Given the company’s current financial status, which I expect to improve owing to the potential strong demand for metals and its attempt to ramp up its production capacity to leverage that opportunity, I am optimistic about MP Materials Corp.’s long-term success.

Global Energy Transition: A Major Tailwind To MP Long-Term Success

Fitch Ratings forecasts that metals used in the production of electric vehicles (“EVs”) and renewable power generation facilities would see a dramatic increase in demand due to the energy transition. To meet the demand, miners must invest a lot of money and increase production over the next two decades.

EVs and renewable energy use more metal than alternatives that use fossil fuels. This will increase demand for metals as the world moves toward a carbon-free economy. According to IEA, by 2050, the demand for minerals will be six times higher than it is now. Although the energy shift is predicted to increase demand, the pipeline of new projects is not yet synchronized with this increase. This could lead to supply shortfalls after 2025.

Given the above estimates, I am convinced that MP’s bottom line will improve as demand grows. Since new production capacity has not yet been synchronized with the rising demand, MP appears to be ahead of the industry by beginning to ramp up its production capacity, which will allow them to tap into that future opportunity when I believe pricing to be exceptionally high owing to supply shortages in 2025. Also, I think they’ll be able to increase their market share owing to the competitive edge they’ll gain from their enhanced productivity.

Financial Performance

Overall, MP Materials Corp.’s financial health is highly appealing. The company has impressive top and bottom-line numbers. I believe that its low costs and high product demand are responsible for its stellar performance. It has a YoY revenue growth of 93.94%, an EBITDA growth of 150.71%, and an EBIT growth of 183% compared to industry medians of 17.45%, 10.57%, and 13.13%, respectively. These numbers demonstrate MP’s exceptional financial performance on its own and illustrate that it towers over its competitors.

This company is a goldmine of a company in terms of profitability. Its strong sales growth and minimal costs have yielded extremely healthy profit margins.

Both in absolute and relative terms, this company is a real wager. Its profit margins are incredibly high, viewed independently, and very lucrative compared to the industry median. This company is running a solo race in terms of profitability and is a compelling reason to buy into it. A large part of the company’s success in obtaining such attractive margins can be attributed to its ability to keep costs low while experiencing rapid sales growth.

A Solid Balance Sheet

MP’s robust balance sheet is one of the company’s many notable features. A debt of $685.33M is equal to 0.15X the market capitalization of the company. The low debt-to-equity ratio demonstrates the company’s deleveraged status. I believe the existing debt is sufficient to finance their CAPEX when they are increasing their production capacity. The debt matures in January 2026, which is a long way off, but even if it matured quickly, it wouldn’t be a problem given its strong financial position. The company’s annual financial leverage ratio stands at 0.685, below 1, an indicator that this company is a less risky venture.

In addition to the good leverage ratio, the company’s liquidity is very pleasing. MP Materials Corp. has a current ratio of 18.15X and a cash of $1.26B. The current cash is enough to cover the company’s outstanding debt, summed up with its TTM total operating expenses of $83.8M 1.6X. In my view, this company’s balance sheet is very healthy, and this bolds well for the company’s long-term success.

Valuation

Most relative valuation indicators are higher than industry medians, indicating that this company is overvalued.

While it is elementary to conclude that this company is overvalued using this data, my take is that its financial performance justifies its valuation. I even find the company undervalued because its valuation metrics exceed the industry median by smaller margins than the margins it exceeded in the industry’s financial performance. In my view, the company’s fair value is about $30 per share. Finbox’s discounted cash flow (“DCF”) model supports my claim that the stock price is low for the company’s value. The model estimates a fair value of $34.02 per share for the firm, giving it a potential upside of 36.2%

Risks: NdPr Supply And Price Volatility

NdPr has many applications outside its use as an addition in non-ferrous metal alloys, including as a standalone product for permanent magnet materials. MP broke ground on its first factory to produce rare earth metals, alloys, and magnets near Fort Worth, Texas, in February 2022. This investment relies heavily on NdPr, and supply or price volatility uncertainties can affect them significantly. In April 2022, MP and General Motors Company signed a long-term, binding deal for MP to supply GM with rare earth minerals, alloys, and finished magnets produced in the United States for use in GM’s electric motors.

There is a danger to this attractive investment because of the constraints in the NdPr supply chain and its price volatility. China presently produces 85% of the world’s NdPr output, making these metals strategically important. Gaining safe access to raw materials and magnets is more crucial than ever as the COVID-19 outbreak, and the ongoing conflict between Russia and Ukraine put pressure on global supply chains.

Having bottomed out in June of 2020, neodymium and praseodymium prices rose by a factor of four before reaching their all-time high in February last year. To start April, prices dropped by almost 18.5% before recovering by 6%. Whether or not prices have corrected sufficiently from their surge in 2020–2022, and whether or not there will be further volatility and potential weakness as markets rebalance, is unclear at this time. This uncertainty is a potential threat to investors in the company.

Conclusion

Financially, MP Materials Corp. is head and shoulders above its competitors. The company has a healthy financial foundation, which bodes well for its future growth as the globe undergoes an energy revolution that may increase demand for metals. Finbox’s DCF model output suggests the company can grow at a rate of roughly 36% over the next few years, leading me to conclude that the stock price is now low. In light of MP Materials Corp.’s solid financial position and bright outlook, MP stock is verdant oasis; thus, I rate it a buy.