The first time we discussed MP Materials was in early 2021 when the stock was 35% lower than where it is today.
And over the last year and a half, MP Materials has not only performed well, but they've been setting themselves us nicely for long-term success.
While you may have never heard of this company, they're essential in helping the world modernize and electrify everything from cars to planes.
That's because this company helps supply the raw materials needed to build the batteries for many of these essential projects.
We'll get more into the details on them below but the summary of it is that MP Materials is about to enter an entirely new stage of growth and we're raising our price target and increasing our investment in them while their valuation is still reasonable.
So with that context, let's get into the details below 👇
MP Overview:
Before we dive into our outlook for MP, let us first provide some context on who MP is. From there, we can then dive into what has us so excited going forward.
If you've been following us for a while and therefore already know about MP, feel free to skip to the section labeled, "MP Macro Case".
But at a high level, MP is the largest American rare-earth materials mining company that provides many companies with lower cost and sustainable access to highly coveted "rare-earth materials" that help power the modern economy.
With MP specifically, you can think of them as a different way to play the trend of a move from traditional oil combustion-based engines towards electrification and the EV supply chain.
What we mean by this is often people today are investing in the consumer-facing end of this trend (i.e. Tesla, GM, etc.) but take a few steps back on the supply chain and this is a rare chance to invest in the raw materials of this space. That's because MP provides Tesla and other companies "electrifying" the world with the materials needed to build their businesses!
The thesis here is that if clean energy increases in demand, MP will be the one to supply it. So rather than picking the company who will either win the EV space, wind turbine, etc., this is a way to just participate in a general increase in demand across the sector!
Therefore as the saying goes, when there is a gold rush it's better to be selling the shovels than the one finding the gold. And this couldn't be more true for MP Materials as they're the ones providing the materials (e.g. selling the shovels) and you don't need to bet on which company is going to be the bigger winner (e.g. find the gold).
MP Macro Case:
So what that context out of the way, we've loved MP Materials for years because of the macro and the micro. If you missed your economics classes, basically what we're trying to say is that there are some external & internal factors helping push MP forward.
On the external front, we're seeing more and more companies trying to source rare earth materials, which bodes well for the demand of MP's products. When we specifically look at MP's core product, NdPr, we see that this product is one of the core components of the magnets used in most EV motors and a growing number of wind turbines.
On top of that, today over 60% of rare earth mining is done in China for US products. However, this is expected to shift massively onshore given our reluctance to rely on China for our national security.
Therefore, the US has already started to create incentive programs to have domestic companies use these materials from companies like MP!
That's why these two macro factors are huge. The combination of increasing demand for their products & the need to buy them via American companies puts them in a position to do very well as they advance.
MP Micro Case:
However, just because the external setup is great, doesn't mean MP can't drop the ball. But in their case, the complete opposite is happening. So what has us so convinced?
Well, it's largely due to their 3-stage plan. Rather than bore you with the intricate details of each step, we'll summarize them:
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Stage 1: In Stage One, MP was focused on revamping and restarting mining in the US -- specifically in California. During this time they ramped up production on rare earths and set up responsible growth.
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Stage 2: In Stage Two, MP focused on not only mining those materials but also further separating them and pushing production further. While stage two is yet to be completed, it is expected to be fully done by end of the year 2023.
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Stage 3: While we may have breezed over the importance of stages 1 & 2, stage 3 is the real kicker. In stage 3, MP plans to start producing NdFeB which is another critical component for EVs and wind turbines. While we mentioned NdPr above, NdFeB serves another value add and gives them a real revenue boost over the foreseeable future.
While completion of stage 3 likely won't happen for another few years, we see the steps to get there being laid down now.
And once they get there, they have a contract with General Motors (GM) set up that should supply almost 500k EV motors annually.
Yes, you read that right. 500,000
And while that's awesome within itself, this is more or less just the starting point to start securing more contracts.
Combine that with the fact that the cost of the product is also going up (due to inflation) and demand specifically of their supply relative to China & other countries is also going up, and MP is sitting in a position to capture serious market share over the next decade.
MP Summary:
And while a few years ago this would be enough to justify our investment, in modern times capital efficiency is more important than ever -- aka making sure you're not burning cash to get to that end state.
So what will ultimately decide whether this will be a big winner over the next year is if stages 2 & 3 go according to plan in terms of budgeting.
Based on what we saw in stage 1, we have high conviction that they should be able to execute well in their successive stages.
With an obvious shift towards clean energy over the next decade, MP sits in a great position to capture market share in an ESG-focused way!
Price Target: $48 (26% upside)
Current Price: $38
Target Date: 6-12 Months
Rating: Overweight
Ticker: MP
Risk/Reward: High/High
Market Cap: $6.9B
Dividend Yield: 0%