CO2 levels in the atmosphere hit an all-time high (since humans started taking measurements, at least) of 420 parts per million in April, as The Wall Street Journal reported on Thursday -- and that's probably bad news for global warming. But here's something else that happened on Thursday: Rare earth metals mining company MP Materials (MP 4.09%) absolutely crushed its Q1 earnings estimates.
Rare earths, such as the neodymium and praseodymium that MP mines, are essential for the manufacture of rare earth magnets that drive the electric motors powering most electric vehicles (EVs) today -- and that, advocates hope, will help solve the climate crisis tomorrow. It makes sense then that with EV sales surging around the world, sales at MP Materials would be surging as well. Even knowing that, however, the numbers MP just put up for the fiscal first quarter of 2022 are kind of mind-blowing.
Artist's conception of MP Materials' new Stage III rare earth magnets factory. Image source: MP Materials.
Double digits ... and triple digits, too
For Q1, MP reported "adjusted" earnings per share (EPS) of $0.50 and sales of $166.3 million -- numbers 22% and 21% more than Wall Street had predicted, respectively. Those double-digit beats made Q1 a clear win for MP, but let's put those numbers in context to show just how truly impressive this quarter was:
- Revenues at MP Materials surged 177% year over year.
- Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) jumped 301%.
- EPS quintupled -- up exactly 400% when calculated according to generally accepted accounting principles (GAAP).
- And total net income ran up 431% (a bit more than EPS because MP issued a few new shares).
Now, it's worth pointing out that much of these gains -- but not all of them -- is explained by the fact that MP benefited from a 135% jump in the price of rare earth oxides year over year. This owes partly to "higher demand for rare earths driving increased market prices," and possibly also due to supply chain constraints (because more than half of global rare earths come from China, which has suffered supply chain snarls as it fights to contain a Covid outbreak). Decreased demand, or increased supply of rare earths could cause prices to fall back in the future, slowing future profits growth at MP.
Also, MP's earnings are growing off a very small base -- MP earned less than a dime a share a year ago -- which is helping the company produce all these triple-digit gains. Still, much of MP's work is in what the company calls "Stage I" of development, with work on evolving to Stage II separation of rare earth oxides in progress, and Stage III -- construction of a special facility to manufacture rare earth magnets -- only just beginning.
It should also be borne in mind that all this development work is a cash drain. By my calculation, MP Materials' free cash flow is about $53 million over the past 12 months -- only about 25% of reported net income. Future investments in Stages II and III could further constrain FCF growth.
All this being said, on balance I believe that as MP Materials evolves from a rare earth miner to a rare earth magnets manufacturer, its GAAP profits and cash profits have a good chance of continuing to grow strongly.
