Shares of rare earth miner MP Materials (MP -2.98%) fell just shy of 15% in morning trading on Dec. 29. Although the shares were able to claw back some of the decline, they still ended the day off by around 11% or so. The backstory here is complex, but it all ties back to the company's creation.
The year 2020 will be best remembered for the coronavirus pandemic. But the year also saw an increase in special purpose acquisition companies (SPACs or "blank check" companies). These are companies that start life with no business. They effectively sell shares to the public with the promise to use the cash raised to buy another company. This is the way in which MP Materials came into being. A blank check company bought a privately held business, and it became public.
Blank check companies are often complex entities. In this case, to simplify things greatly, there were public shareholders, warrant holders, and insiders. The public shareholders received stock in the newly created MP Materials that trades on the New York Stock Exchange. The warrant holders own securities that they may exchange for stock at a preset price ($11.50 per share) at some point in the future. And the insiders own shares that they are restricted from selling unless certain share-price levels are met within specific time frames.
Today's Securities and Exchange Commission (SEC) filing is partially to create roughly 11.5 million shares to account for the exercise of warrants. The company will receive about $132 million if all of the warrants are exercised, but that may or may not happen. The filing was also to register roughly 118 million shares that insiders may resell if they choose to when permitted. The company will not receive any proceeds from such sales. Investors seem to have taken a dim view of the news here, which makes sense. New shares (related to the warrants) and insiders selling after a lock-up period could put downward pressure on the stock price.
Having only traded for a month or so at this point, MP Materials stock has roughly doubled in value. The rare earth story is quite attractive to Wall Street today, given the important role these metallic elements play in high-tech products like electric cars. That said, the SEC filing today illustrates the complexity that exists with "blank check" companies. Long-term investors and those with a conservative bent would do well to keep MP Materials on the watch list for now -- at least until it has a longer track record as a public company. It's been a bit of a roller coaster so far, and that may not change for a little while.