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Sales Double, Profits Up 22 Times, at America's Biggest Rare-Earth Metals Company

By Rich Smith - Mar 21, 2021 at 7:53PM

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But is MP Materials' stock a bargain at 33.3 times 2023 earnings?

Five years ago, heavy spending, a heavier debt load, and plummeting prices for rare-earth metals spelled doomsday for rare-earth miner Molycorp. Today, however, Molycorp is back with a vengeance -- and new name: MP Materials (MP -0.48%).

In its Q4 and full-year earnings report, MP Materials declared that its sales are up 100% over the past year, and its profits rose 22 times.

MP's Mountain Pass mining site.

Image source: MP Materials.

What is MP Materials?

If MP Materials isn't a familiar name to you, that's not surprising.

Named after its primary mining and processing facilities in Mountain Pass, Nevada, MP Materials was bought out of bankruptcy in 2017 and taken public via a special-purpose acquisition company (SPAC) reverse merger late last year. Today, it's "the largest rare earth materials producer in the Western Hemisphere," says MP -- the only operational miner in the continental United States -- and it's focused on the extraction of the neodymium-praseodymium rare earths that are used to create magnets for electric motors used in electric vehicles (EVs), wind turbines, drones, and similar high-tech robotic devices.  

If that sounds to you like the kind of business that could perform well in today's 21st century high-tech economy -- well, you're right about that. In yesterday's earnings report, MP Materials said that its Q4 2020 sales literally doubled in comparison to Q4 2019, up 100% to $42.2 million. Profits on those sales soared 2,225% to $24.1 million.  

That's right: MP's net profit margin in Q4 was 57%.

Now, things weren't quite as good as that makes them sound. The vast majority of the "profit" MP Materials earned last quarter came from a $17.8 million carried-forward tax loss, which added to positive profits on the bottom line. That historical loss tells you just how bad of a business this company was before it got revived. But even if its net profit isn't quite as impressive as it appears at first light, MP still booked a $7.7 million operating profit in Q4, which works out to an 18.2% operating profit margin, and that's none too shabby for a miner.

What it means for investors

So...does this mean you should run right out and buy some shares of MP Materials? Not so fast, Tex. We've still got other caveats to consider -- such as the fact that, strong as Q4 2020 was, the rest of 2020 was pretty tough going.

Despite selling $134.3 million worth of rare earths in 2020, MP Materials booked an operating loss for the year -- $34.7 million -- and a net loss for the year as well -- $21.8 million, or $0.27 per diluted share. MP also isn't yet ready to deliver "separated rare earth oxides" just yet, saying this will begin in 2022. (In 2020, the company was still selling only "contained rare earth oxide," or REO -- not the pure form.)

The good news is that the price of MP's rare-earth metals, even impure, jumped 70% in Q4, thanks to "higher demand for REO driving increased market prices" and helped by "improved productivity" resulting in "higher percentages of REO in concentrate" produced by the company. As purity improves over time, and demand for Neodymium-Praseodymium rises to feed the nation's hunger for windmills and EVs, it's logical to assume that pricing will improve as well. And no matter how high prices go, MP says it "continues to foresee 100% sell-through of its production."

Assuming all goes well and the company hits the targets analysts have set for it, 2021 could be the year MP earns its first full-year profit ($0.44 per share). By 2023, that number could triple to $1.33 per share, according to estimates collected by S&P Global Market Intelligence.

But is MP Materials' stock worth 33.3 times the profit the company might earn two years from now, as its current share price implies? That's a question value stock investors will have to answer for themselves.

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