As demand for electric vehicles (EVs) and semiconductors soars, many investors are focused on lithium mining stocks to help meet the needs of the tech industry. But lithium isn't the only elemental material needed for large batteries, chip components, and the like. Rare earth materials -- like lanthanum, cerium, and samarium -- are also in demand for EVs and electric grid batteries, medical devices, and other tech manufacturing. Some estimates point toward sales of these elemental materials doubling from 2022 through 2026.
That's where MP Materials (MP -0.76%) comes in. A rare special purpose acquisition company (SPAC) stock from 2020 that's actually holding its own during the current bear market, MP is a top producer of rare earth materials that could have some advantages over its peers. Is this a megagrowth stock in the making?
A dirty process made cleaner and brought to the U.S.
Las Vegas-based MP Materials is the only rare earth materials mine in North America. This puts MP in a unique position. The market for these chemical elements has historically been dominated by operations in China, where low environmental impact standards have given them an edge over mining companies in the U.S. and Canada. However, MP's "Mountain Pass" mine meets the higher standards of North America in spite of the dirty process involved in extracting these elements.
MP is thus all alone in producing rare earths in the U.S. at this time. With various political agendas aimed at keeping supply lines of these chemical elements here at home as the use of EVs and other tech devices rise, MP could find itself in pole position as a key supplier for years to come for elements like lanthanum, cerium, neodymium, and samarium. These chemicals are being used in the manufacture of EV batteries and motors, wind turbines, device displays, and other high-growth technology hardware.
This unique position shows up in the financial numbers. Through the first half of 2022, MP's sales were $310 million, a 133% increase over the same period last year. Adjusted net income was up 214% year over year to $178 million as MP's operation became more efficient with scale. An incredibly lucrative operating profit margin of 68% probably can't stay this elevated forever (and probably not that triple-digit percentage revenue growth rate, either), but it nonetheless illustrates the demand for the scant resources MP is producing.
As of the end of June, this mining outfit had a stellar balance sheet with $1.18 billion in cash and investments offset by convertible debt (which is due in 2026) of $677 million. It will need that cash as it expands its operations, especially as it ramps up the next phase of its project.
High growth but high price tag
As can be expected with such a high-growth company, MP Materials fetches a high valuation. Shares currently trade for 70 times enterprise value to trailing-12-month free cash flow -- or 25 times trailing-12-month earnings per share. For a mining and materials producer (a volatile and cyclical industry), paying an elevated price can lead to problems.
For one thing, 90% of MP's sales come from one customer: Shenghe Resources. This customer is based in Singapore, but most of MP's products sold to Shenghe wind up in the Chinese market. Political tension between the U.S. and China (like tariffs or bans on future sales) could pose a risk for MP over time.
The company did enter into a long-term contract supplying General Motors (GM -0.04%) with rare earth elements that will be used in the automaker's growing EV lineup. The ramp-up of this agreement will begin in late 2023. However, this project entails constructing a new rare earth, metal, alloy, and magnet manufacturing facility in Texas, which commenced earlier this year. Mining and refining is a capital-intensive business, and expansion like this can get expensive and possibly weigh on profit margins at some point.
And then there are the U.S. Federal Reserve's interest rate hikes aimed at taming inflation. If the Fed has its way, base prices (like for mining materials used in manufacturing) will come down to cool off the economy. That's another risk for MP stock.
In spite of these possible headwinds, there's a lot to like about MP Materials at this juncture. The runaway optimism that sent the stock soaring in 2021 has worn off, and the valuation is more reasonable right now -- balancing the company's clear pathway to continued growth with present risk factors. If you're into mining stocks, especially those with important tech headwinds filling their sails, MP might just be worth nibbling on a little right now. I'd urge prudence, though, since this industry can be highly volatile and translate to some wild swings in stock price over time. If you do invest a little, do so for the long-term potential only.
