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Why Shares of America's Biggest Rare-Earth Metals Company Crashed Today

By Rich Smith - Mar 24, 2021 at 5:03PM

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MP Materials announced a sale of shares and debt. Investors weren't pleased.

What happened

Shares of MP Materials (MP -0.48%), the company known as Molycorp prior to its recent SPAC IPO and currently "the largest rare earth materials producer in the Western Hemisphere," fell Wednesday, closing 9.4% lower.

In twin press releases, the rare-earth metals miner announced that some of its shareholders intend to sell as many as 6.9 million shares of common stock for $35 per share on Friday. Simultaneously, MP Materials itself will sell up to $690 million worth of "0.25% Green Convertible Senior Notes due 2026" (i.e., debt).    

Simple red arrow declining stock chart on a white checked background

Image source: Getty Images.

So what

Because the stock sale will be conducted by shareholders selling their existing shares, no new shares will be created, and there will be no stock dilution from that offering. However, for the same reason, this means that MP Materials will receive none of the expected $241.5 million proceeds of the sale.

Not to worry, though. The proceeds of the notes offering will go to MP Materials, and with these proceeds being more than twice as great as what the share sale will generate, this is a much bigger deal. It will put a lot more money in the company's hands to spend on both "general corporate purposes" and also "eligible green projects" (such as, one presumes, accelerating production of Neodymium-Praseodymium rare earths for use in producing the kinds of magnets that drive the electric motors of electric vehicles and wind turbines).

Now what

Here's why MP Materials shares closed down today: Yes, the company is getting a lot of cash that it can use for investment in building its business, and yes, it's getting a downright terrific interest rate on this debt.

On the other hand, if converted into stock at "approximately $44.28 per share" as envisioned in the press release, these convertible notes have the potential to convert into as many as 15.6 million shares of new MP Materials stock, which would cause current investors to suffer stock dilution of about 8.4%.

Unless and until that happens, though, I still see MP Materials getting access to a large pile of cash at a very attractive rate. On balance, I have to think this is a good thing for the company.

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