MP Materials Corp.

Moat: 2.5/5

Understandability: 3/5

Balance Sheet Health: 4/5

MP Materials Corp. is a rare earth materials producer, primarily focused on mining and processing rare earth oxides (REOs), with a strategic emphasis on the Mountain Pass mine in California, making them a crucial player in the rare earth supply chain, particularly within the western hemisphere.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

MP’s Moat: A Mixed Bag MP Materials’ moat is a complex and evolving story, not easily summarized by a simple rating. It has elements of a narrow moat but also significant vulnerabilities and risks. Therefore, the rating has to be adjusted to 2.5 out of 5.

  • Limited Moat: They operate in a market with high barriers to entry given the scarcity of rare earth resources and the high upfront investments required to set up a mining and processing operation like Mountain Pass. Also the fact that they have secured exclusive agreements with certain partners helps with the moat. This provides a certain edge over newcomers.
  • No Pricing Power: While being a critical part of supply, MP is not a price setter. The pricing of their products is determined by prevailing market prices, particularly the price of REOs in China, which is a market with large state influence and a higher degree of control over supply. While the western world is trying to create more localized manufacturing, MP’s ability to extract pricing power from customers will remain low.
  • Customer Stickiness: MP has a level of stickiness with its offtake agreements, but this isn’t a ‘real’ moat.
  • No Control over the Downstream Process: MP doesn’t manufacture the magnets, electronics, or other components using the REOs they produce. This makes it reliant on others for the ultimate conversion of REOs into high value-added products, limiting their overall control of the value chain.
  • Government Support: The company receives government support, especially after the passage of the Inflation Reduction Act, which gives preferential tax rates to companies in the US working with critical minerals. This increases the chances of the company to be a successful and sustainable operation.
  • Production Capacity: MP has created a significant presence in rare earth production, they are one of the biggest producers outside of china, it’s hard for newcomers to create the same capacity as them, specially given the long timelines in getting projects up and running in the mining sector and the high upfront investments needed.

Rating Justification: The presence of barriers to entry, exclusive agreements and scale in production is offset by a lack of pricing power and control of the downstream process. As well as this, government support is not necessarily sustainable on the long term.

Risks to the Moat and Business Resilience While the company has some strength, there are risks that could erode their moat:

  1. Chinese Competition and Market Concentration: Most of the REOs processing and much of the production is concentrated in China, they have a lot of influence on the prices. That power is unlikely to go away. Despite efforts by other governments to foster local manufacturing, it’s likely the Chinese will continue having significant power and control over the market for many years to come.
  2. Geopolitical Risk: Trade wars, import restrictions and potential future international conflicts could greatly affect supply chains that MP is involved with, given the critical nature of rare-earth minerals and the concentration of production in certain regions.
  3. Price Volatility: Pricing for REOs is volatile as prices are often affected by global demand, trade, tariffs, geopolitics, or even the price of the oil. These price fluctuations could affect MP’s revenues. Since their operations are extremely fixed costs heavy, a drop in prices could negatively impact the company.
  4. Technological Disruption: While not something we see, there is a possibility of substitute materials that may be developed in the future that could disrupt the demand for rare earth materials.
  5. Reliance on Few Customers: MP primarily sells its products to a limited number of clients. If any of these customer decide to reduce or terminate their contract, it can significantly impact the revenues.
  6. Operational Risks: Mining operations are subject to risks, delays, and operational problems, for example; accidents, environmental incidents, geological issues and so on.
  7. Permitting and Regulatory Risks: The company’s operation relies on regulatory approvals, land use permissions and environmental permits. As it takes a long time to get these types of licenses, that is a big risk. If they are unable to secure these licenses it will be hard to build new mines and continue expansion.
  8. Tax incentives and governmental grants: While they are getting government subsidies and tax benefits it’s also worth mentioning that such programs may expire in the future.

Business Overview

  • Revenue Streams: MP Materials operates primarily in the rare earth segment, extracting and processing minerals from the Mountain Pass mine. The revenues are predominantly from sales of rare earth oxides (REOs), their main product. The business is mainly split into two segments: REO production and NdPr (Neodymium and Praseodymium) production, NdPr is used in the production of high-performance permanent magnets.
    • Sales are tied to long-term offtake agreements with partners and various consumers.
    • Most of MP’s revenues are denominated in USD.
  • Industry Trends: The rare-earth market is experiencing increased demand fueled by growing use in electric vehicles, wind turbines, and other green technologies, where their properties are necessary. Government support for establishing more localized rare earth supply chains has increased after geopolitical tensions and issues related to supply chain concerns.
  • Margins: The company has high-operating costs as they require specialized facilities to mine and process rare earth materials as well as labor costs, but the profit margins remain satisfactory, and their margins have increased over the years.
    • They are continuing efforts to lower their costs, specially on the processing operations as they plan to transition to selling more separated REOs.

  • Competitive Landscape: The rare earth market is oligopolistic with China dominating a big percentage of production. Although there are few competitors in the market, MP has gained a leading position as it’s one of the few producers outside of China, having a secure and stable supply chain. Competitors are small in size compared to them and many are just beginning to scale their production facilities, making it difficult to replicate MP’s success.

  • What Makes MP Different? Unlike most other producers of rare earth materials, MP has an established mine and production facilities in the western hemisphere, making them an attractive option for companies looking for local production. In addition, they do have contracts already in place to reduce dependence on Chinese supplies. Their focus on producing REOs using advanced technology gives them an operational and cost efficiency advantage.

Financial Analysis

  • Revenue Growth: Over the last few years, revenues have increased considerably, but the rate of growth has slowed down. From 2022 to 2023 revenues have declined, but it’s expected for revenue growth to turn positive and be above 10% for 2024.
  • Profitability: While operating income and net income have varied, due to the impact of prices and costs, the company is expected to become much more profitable in 2024 and onwards.
  • Free Cash Flow: Historically free cash flow has been erratic. The company did have negative FCF in previous years, but is turning to positive FCF recently. Expected to generate consistent positive free cash flows for next 3 to 5 years.
  • Leverage and Liquidity: The company has a high amount of debt relative to their equity, but it’s been coming down over the past year. Their cash and short-term investments is more than enough for the short-term, they have enough cash runway to continue the operations while they wait for the cash flows to become more stable.

Overall, their financials have a lot of room for improvement. But it’s worth highlighting the positive trend in FCF as well as the increase in margins and profits.

Recent Concerns & Issues MP Materials has faced challenges from falling rare earth prices and high costs, which has affected profitability during 2023. The management has taken measures to improve efficiency and reduce costs in their operations as well as focusing on long-term contracts for their REO products. The company has also been pushing production of more separated REOs which have higher prices and margins than the mixed ones they are currently selling. Additionally, the company has been working on securing long-term offtake agreements which will provide revenue visibility.

Understandability: The company is relatively complex, since it involves a wide range of mining and processing activities as well as the complexity of the rare earth supply chain and the global market. Therefore, it receives a 3 out of 5 rating for understandability.

Balance Sheet Health: The company has a reasonably good balance sheet, they have large amounts of debt, but their cash reserves can cover it all for a significant time as well as a good growth profile. Therefore they receive a 4 out of 5 rating.