Editor's note: This article has been updated to include the company's response to the report.
Shares of MP Materials (MP 0.12%), which is looking to be an integrated North American producer of rare earths metals, fell as much as 19% on Feb. 3. The only news out of the company was the date of its upcoming fourth-quarter 2021 earnings release. That was a non-event, so it was probably the short-seller report that also came out today that was the cause of investor concerns.
Bonitas Research, which is openly short MP Materials, released a document today outlining its concerns about MP Materials' business. These types of research reports often cause investors to sell the target company, fearing that the information contained in the report is accurate. That's not an unreasonable response, but it is important to note that Bonitas has a vested interest in seeing the stock move lower. In other words, reports like this should be taken with a grain of salt.
MP Materials responded to the report on Twitter and said Bonitas should be added to the "long list of detractors that fail to understand our business, deceptively manipulate competing sets of data, and bet against" MP Materials.
Bonitas has some doozies in the report. For example, it claims MP Materials has been artificially inflating profits, is involved in questionable related-party transactions, and that the purpose of much of this effort was to artificially inflate the stock price. That last one is notable because MP Materials came public via a blank check company in late 2020. These are complex deals that often involve insiders who are locked into their shares until certain time periods expire, or share price targets are met. Bonitas believes $400 million worth of insider stock was sold based on stock price gains related to its allegations. There's more to the report, as well, including the suggestion that MP Materials' rare earth metals may not be economically viable to mine. All in, Bonitas is taking a very negative stance here.
It is hard to quantify the risks when a short-seller starts questioning a company's business. Sometimes there's truth to be had, other times there isn't. For conservative types the Bonitas Research report could be a reason to jump ship, at least until there's more information. More aggressive investors who own the stock because of its rare Earth metals connection might want to wait to hear what the company has to say before making a final call. Either way, there is a drama unfolding here and it could get even more tense before there's a resolution.
The company noted it would be providing more information when it reports results on Feb. 24.