A few weeks ago, I posed this question to the community here before digging into MP Materials myself. It took longer than expected to compile my DD, but I finally finished.
My full report contains a more comprehensive background of the REE mining business and a broader, macroeconomic picture (as well as graphics and tables, which I can't share here unfortunately). But for the sake of brevity, I'm going to summarize and focus on (a) MP's supply chain expansion, (b) recent and potential profitability, and (c) valuation. And because I know DD can still be a pain to read, I've also included TLDRs for each section.
MP Materials supply chain development
TL;DR. China has a strangelehold on the majority of the REE supply chain. The US government (via MP Materials primarily) is working to change that by building out a fully-integrated supply chain right here in the US. This will allow companies to source key materials, such as permanent magnets, directly from a US-based manufacturer, instead of China. MP, which already has deals in place with the Department of Defense and GM, expects to start producing magnets in 2025.
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The most sought-after and valuable REEs are neodymium (Nd) and praseodymium (Pr; together, NdPr or PrNd) — two key components of permanent magnets. If you aren’t familiar, I recommend scanning this article for an easy explanation. (TL;DR: Really important things like refrigerators, smartphones, EVs, wind turbines, and even jets and missiles need permanent magnets. But China controls most of the world’s supply.)
MP Materials (and the US government) want to change that. At the moment, thanks to Mountain Pass, the US has a bountiful source of REEs — but that’s the extent of its supply chain.
Although this is an extreme oversimplification, the REE supply chain proceeds through four phases:
- Upstream mining. This phase produces REE concentrates, which is exactly what MP currently does.
- Downstream refining. This phase purifies and separates REEs, which neither MP nor any other mining operation outside of China have been able to do, historically. Instead, MP sells its concentrate to Shenghe, a China-based mining operator.
- Downstream metal and alloy making. This phase creates the materials necessary to produce end products like permanent magnets. Again,
- Downstream magnet manufacturing. Pretty much what it sounds like. These magnets can be sold directly to end-users, such as automakers.
However, MP is currently progressing through a three-stage process that will conclude with a vertically integrated operation, all the way from mining REEs to producing permanent magnets and selling them to manufacturers.
Stage I
Naturally, the initial stage commenced with the purchase of Mountain Pass in 2017. MP leveraged the existing facility — which Molycorp had already put a sizable amount of funds into — and implemented changes to improve efficiency, plant up-time, and mineral recovery. All said and done, MP’s adjustments helped achieve 3.5x more REO production volume than the mine managed under Molycorp.
Stage II
The company expects to achieve full run-rate production volume for Stage II in 2023. Once the separation facility is operating, MP will be able to separate its concentrate into four products:
- Neodymium-praseodymium (NdPr) oxide
- Samarium, europium, and gadolinium (SEG+)
- Oxalate, Lanthanum (La) carbonate
- Cerium (Ce) chloride
More recently, the Department of Defense [awarded](https://www.defense.gov/News/Releases/Release/Article/2941793/dod-awards-35-million-to-mp-materials-to-build-us-heavy-rare-earth-separation-c/#:~:text=The%20Department%20of%20Defense%20(DoD,Mountain%20Pass%2C%20California%20production%20site)) MP Materials a $35 million contract to develop an HREE processing facility at Mountain Pass, which will be the first of its kind in the US.
Stage III
The final stage of this operational revamp will establish MP as the only vertically-integrated rare-earth magnets producer in the Western Hemisphere. These facilities would enable MP to convert NdPr into permanent magnets, which are integral components of EV motors.
In December 2021, MP announced the development of its initial magnet manufacturing facility in Fort Worth, Texas — as well as a long-term supplier agreement with General Motors to source and manufacture the finished magnets necessary for more than a dozen GM electric vehicle models. The company expects to begin delivering alloys in late 2023 and magnets in 2025.
The facility is expected to produce 1,000 metric tons of finished NdFeB magnets (NdPr, iron, and boron) each year, which is enough material to power roughly 500,000 EV motors. And this would only account for roughly 10% of the company’s NdPr output, giving it much more runway to sell these magnets to other manufacturers.
How Profitable Is MP Materials?
As of FY2021, MP Materials is a profitable business, generating $135 million of net income at a healthy margin (41%). The company has grown faster than the company expected, especially considering it only became commercially operational in July 2019.
It was a good year for MP Materials — revenue grew by 147% after a 10% increase in sales volume of REOs. The company attributes the bump to process efficiencies and greater than 90% plant uptime. More importantly, retail prices of REO concentrate skyrocketed. For instance, five years ago, NdPr was worth about $40/kg; it crossed $80 in 2021.
How Profitable Can MP Materials Be?
TL;DR. Much more profitable than today, and they're already pretty profitable. Why? Demand for permanent magnets is expected to surge for the next decade (e.g., wind turbines, electric vehicles, military spending), creating a market deficit of NdPr, which would theoretically lead to increased prices. (That would be good for MP.)
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Fortunately, we have unique insight into MP’s anticipated cash flow and potential profitability through a market report within the company’s 10-K (performed by a third-party consulting company). This report shares an economic feasibility study, including future revenue and cash flow based on mine output, projected commodity prices, etc.
Long story short, the report predicts a significant supply deficit of NdPr for the majority of this decade. As such, the price for this valuable oxide is expected to skyrocket ($110/kg by 2025) — which would be good news for MP.
Upon reaching anticipated production rates for REO and other planned downstream products at Mountain Pass, we expect to produce approximately 20,000 metric tons of separated REO per year, excluding cerium concentrate, consisting of approximately 6,075 metric tons of NdPr oxide per year*. Prior to reaching expected production rates for REO and other planned downstream products at Mountain Pass, we intend to enter into short- and long-term sales contracts with new customers.*
Using a simple calculation, assuming NdPr spikes to $110 per kg, that’s over $600 million of annual revenue from just NdPr oxide.
MP Materials Stock Valuation
TL;DR. MP Management shared some run-rate Adjusted EBITDA expectations for Stage I (current) and Stage II. Based on some assumptions (which are in no way, shape, or form guaranteed to happen), MP is reasonably priced pre-Stage II (valuation estimate: $37.87), while it could trade between $55 and $75 upon completion of Stage II.
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So, how much is MP Materials stock worth, especially once you factor in completion of these stages? Management didn’t offer formal earnings guidance, but they did provide a couple of insightful tidbits that we can use to estimate the value of MP Materials’ shares. Here’s the first snippet from the 4Q earnings call:
So, what will that investment get you, our shareholders, when we are fully operating our separations capability, including heavies and our initial magnet facility is at run rate or the benchmark? And I say this with all of our caveats around forward-looking statements, where we do assume current spot pricing for the full year of 2022, we would expect to be currently at a run rate of $450 million to $500 million of annualized adjusted EBITDA from sales of concentrate, i.e., our current business.
Of course, we always have to be cautious with “Adjusted” EBITDA, but most of MP’s adjustments are the usual add-backs (e.g., stock-based comp, some non-recurring transaction costs).
The second tidbit sheds light on the potential scale of MP’s business once Stage II is complete.
After our investments in Stage II, including heavies and the achievement of full run rate in our initial magnetics facility, our model indicates expected total adjusted EBITDA for MP with nearly double through approximately $900 million to $1 billion at current spot prices.
Now, we have to make some assumptions using the company’s latest operating results, particularly its margins.
- Assume MP lands in the middle of their run-rate projections.
- Adjusted EBITDA margin of 66% based on FY21, which allows us to back into implied revenue.
- Net income margin of 41% based on FY21, which allows us to estimate EPS based on shares outstanding at the end of 2021.
- If NdPr prices remain high — and signs seem to indicate they will — REE mining can remain a very profitable business. Still, 41% is pretty high, so I’ve also included an adjusted Stage II valuation that lowers MP’s projected profit margin to 30%.
| $ in millions | Stage I | Stage II | Adj. Stage II |
|---|---|---|---|
| Revenue (Implied) | $719.3 | $1,439.5 | $1,439.5 |
| Run Rate Adj. EBITDA | $475.0 | $950.0 | $950.0 |
| Net Income (Implied) | $292.8 | $585.6 | $431.8 |
| EPS (12/31 shares) | $1.65 | $3.29 | $2.43 |
Which brings us to implied share prices based on
- MP's current PE ratio of 49.6
- The average PE ratio of holdings within the S&P 500 Metals & Mining Index of 23.0
- The PE ratio of the S&P 500
| Share Price (Implied @ Current PE) | $81.65 | $163.30 | $120.43 |
|---|---|---|---|
| Share Price (Implied @ Avg. XME holding PE) | $37.87 | $75.74 | $55.86 |
| Share Price (Implied @ S&P 500 PE) | $34.58 | $69.16 | $51.00 |
In all likelihood, MP’s current price-to-earnings ratio already factors in some of their anticipated bottom-line growth post-Stage II. So, it’s hard to imagine investors paying such a premium (50x earnings) once the company reaches that point operationally.
On the other hand, the average PE ratio of the holdings within the S&P 500 Metals & Mining Index seems more realistic at 23. This would imply that MP is reasonably priced pre-Stage II ($37.87), while it could trade between $55 and $75 upon completion of Stage II.
The usual disclaimer: this valuation approach is imperfect and not guaranteed to ever be reflected in the company’s share price. Fluctuations in the company’s margins relative to FY21 would drastically impact implied share prices.
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