Description

MP Materials (MP) is the only currently operational US producer of NdPr ore through their mine in Mountain Pass, CA. With climate change, we believe MP’s earnings power should increase to $4.56 in 2023 as demand for NdPr in permanent magnet motors in electric vehicles increases. We think the stock is worth at least $70 at 15x, offering 100% upside.

Electric Vehicle Revolution

Everyone without his head in the sand knows we are going through a climate revolution which includes the shift to electric vehicles given emission standard changes (kicked off in Europe) and much better performance. Clearly, charging station infrastructure and range need to increase for widescale adoption but with battery improvements and infrastructure spending, we are on the way to improving both.

A few headlines really support broad adoption – Biden announces new target for electric vehicles to make up half of new vehicle sales by 2030; GM aspires to be full-electric by 2035 making $27bln investment to accelerate plans. Volkswagen takes aim at Tesla to own European gigafactories…etc.

What is NdPr?

NdPr magnets were developed in the 1980s to offer a permanent magnetic field (i.e. magnets not affected by the Earth’s pole) for use in motors. Since NdPr magnets have a very high magnetic strength, they are used in just about all electric vehicle motors where the weight to power ratio is so important (i.e. less weight and more power is important since weight is such a large factor in extending EV battery life). The alternative to NdPr magnets, alternative induction would cost about 15x t get the same increased battery efficiency of an NdPr magnet. All this is to say that NdPr magnets are most valuable for the EV revolution and demand will grow substantially since the average EV uses about 2.5-3kg of NdPr while the average ICE car uses 0.5-1kg.

Tesla, GM, Ford, Rivian, Toyota, Hyundai, VW and most other auto OEMs use NdPr magnets in their EV motors, about 90% of total EVs with the residual 10% mainly being extremely small cars with limited range (i.e. very small batteries in cars that weigh very little and don’t requite as good battery/weight efficiency) – what you can buy on Alibaba that looks like a golf cart.

Aside from EVs, NdPr magnets will continue to be used in consumer electronics, wind power and many other markets, detailed below.

As per the chart above from MP’s investor presentation, EVs currently comprise 9% of NdPr demand but as per the chart below, should EVs reach estimates of 40-50% of global SAAR by 2030, demand will massively outstrip supply. Since NdPr trades around $140/kg, the actual dollar content in an EV is very low at $200-300 which supports price increases as demand rises.

There are other mines in the US, Australia and Western Europe but they are far higher on the cost curve and the only way for them to go through permitting and begin mining is for NdPr prices to continue to rise so supply can meet demand.

As per the supply demand charts above, whether you believe demand will be 98 kt or 103 kt, the supply/demand gap by 2025/2030 is pretty wide. You can also see from the charts above, about 80% of the world’s NdPr production is controlled by China. MP is the only domestic producer who can produce NdPr and other rare earths in the quantities needed to allow us to eventually end our reliance on China for NdPr.

Earnings Power/Business Transition

In its current Stage 1 of production, MP ships its rare earth oxides to China to be refined and turned into magnets. What this essentially means is that MP has a 7% concentration in the ore bodies where it mines the rock, puts it into flotation mills, adds the reagents that separate out the concentrates, skims these off the top and then ships it all to China. At production of about 10k metric tons of REO per quarter, MP received about $6,000 per metric ton or $6/kg in early 2021 ($7,693  and 12k tons by Q3 2021). Production costs are around $1,450-1,475 per metric ton.

Earnings power should increase substantially as MP transitions to Stage 2 of production in 2022/2023. In Stage 2, MP will take this 48k in annual REO metric tons, put it into an onsite roaster to strip out the Cerium (which goes back into the ground in lined impalements to make the process environmentally friendly), pull out the Lanthanum (which is sold for a nominal $1/kg) along with the heavies which would result in 7,200 metric tons of NdPr (15% conversion from the original 48k metric tons).

As it relates to earnings power, in Stage 1, MP sells the REO for the aforementioned $6-7.7/kg (or about $46/kg of NdPr based on our 15% conversion) vs. NdPr prices around $90-130 (Q1-Q3 2021). As MP transitions to Stage 2, it’ll sell the NdPr direct at market prices while realizing only a cost increase in the high teens per kg from about $10/kg today to $30/kg, i.e. a $75/kg revenue increase with a $20/kg cost increase.

Estimating financials for Stage 2 (2023 normalized), MP will produce 7,200 tons of NdPr or $1.15bln in revenue at the current $160/kg NdPr price. At $30/kg in costs, opex around $40m (some increased costs but not meaningful), $36m in estimated interest expense, tax expenses and $20m in maintenance capex, MP can do $4.56 in cash EPS. Given the significant operating leverage in the business, for every $50 increase in the price of NdPr, MP can generate an incremental $2 in cash EPS.

Again, as demand outstrips supply and the auto OEMs clamor for NdPr, a $50 increase in price really only increases the build of material cost of the car by $100-200, leaving room for significant ASP appreciation.

Transition to Stage 3 – MP further hopes to transition to a third stage where they will become a manufacturer of NdPr magnets in 2023/2024. In December 2021, they announced that they will build a magnet facility in Ft Worth in partnership with GM, beginning to ramp in 2023 with ultimate capacity for magnets for 500k cars, annually. https://www.businesswire.com/news/home/20211209005637/en/

Most of the IP in NdPr magnets lies with the three Japanese producers, TDK, Hitachi and Shen-Etsu, we assume they will pay a royalty to one of these companies. Assuming a 40% gross margin on a magnet with half the costs being NdPr and the other half being the rest of the components of the magnet, MP could receive a margin per magnet a bit higher than the price of NdPr (i.e. $100 magnet, with $60 in COGS or $30 NdPr and $30 other components would yield about $40 in gross profit). Assuming they get half that in a JV and have additional selling costs, at the very least, Stage 3 would boost earnings power by 30-40%. Again, this is very rough math, not incorporated into our earnings power but it offers additional upside as a free option.

Misvaluation – Recent Short Report

Link to the Bonitas short report from this week. https://www.bonitasresearch.com/

Essentially, the report says that MP is (1) selling all their rare earth oxide (REO) to Shenghe Resource, a related party that owns a stake in MP at an inflated price to boost MP stock and allow insiders to exit. Also, (2) they cite a German study from 2019 that says it’s not economically feasible to mine NdPr at the Mountain Pass mine.

(1) Since China is currently really the only place with the refining capability to extract NdPr, post Molycorp bankruptcy, the JLL/former Fortress team (James Litinsky and others) entered into an agreement with Shenghe to refine the REO and they took a stake in the company. While any company doing business with the Chinese in size is likely to be victim of an activist short-seller report, the impetus to move to Stage 2 for MP is really so they can refine their own REO and this is an interim solution with a Chinese partner, not a related party.

(2) The German study was done in 2019 when NdPr prices were 1/5 of where they are now. At that price, the mine didn’t generate a significant economic profit and if you think prices are going back there, you shouldn’t buy this stock just like you wouldn’t buy energy stocks if oil goes to $20 or gold to $200…etc.

It’s just stupid and salacious but I don’t need to educate this group on the demerits of so many activist short reports (obviously there are credible ones like Kerisdale, Jehophits…etc) but this one is not.

Catalyst

They should continue to beat earnings as NdPr prices rise and they transition to higher earnings power in Stages 2 and 3