Heading into Q1 earnings, things were not looking good for rare earths mining company MP Materials (MP -3.06%). (Things ended up not being all that great, either -- but more on that in a moment.)

Prices for praseodymium and neodymium were tumbling, and MP's earnings from selling these metals, invaluable for the production of rare earth magnets, were expected to fall as well. Analysts forecast a decline of nearly 50% in revenue (to $88.5 million) and worried profits might fall as much as 63% (to $0.18 per share). 

But then a miracle happened.

MP by the numbers

Instead of $88.5 million, MP Materials reported $95.7 million in Q1 sales -- an 8% revenue beat. Adjusted earnings came in at not $0.18 per share, but $0.27 -- 50% more than expected. Disaster, it seemed, had been averted. However, in after-hours trading, MP Materials' stock price barely budged. 

So why was that? Why weren't investors more excited by MP's results? In a nutshell, the reason is that while MP may have "beat" earnings on both the top and bottom lines last Thursday, it did so not by reporting great numbers, but only by reporting slightly less terrible numbers than feared.

Sales may not have fallen by 50% exactly, but they did still fall 42%. Earnings didn't decline 63%, but they did decline 56% (when calculated according to generally accepted accounting principles, or GAAP), or 45% (non-GAAP). And actual GAAP profits for the quarter, it turned out, were not the $0.27 per share headline figure, but only $0.20 per share. So, not good.

More bad news

Granted, not all of this was MP's fault. Year over year, the price per ton of rare earth metals that MP produced slid 32%. But some of it was MP's fault. The company didn't move as much metal as it might have, with production volumes slipping 1.5%. It also spent more producing the metal it did move, allowing its production costs to rise 24%. None of that was going to be good for either MP's sales number or its profits.

Rounding out the bad news, spending to accelerate the company's "Stage II" rare earths separation business, and construction costs to build a Stage III rare earth magnets factory -- developments that management was quick to highlight -- forced MP to burn $19 million in cash in Q1, after generating strong positive free cash flow in Q1 2022. That fact show up in its cash flow statement, in a separate 10-Q filing with the SEC. 

What comes next

And yet, despite all the bad news -- both that which was MP's fault and that which wasn't -- the company did remain solidly profitable on a GAAP basis in Q1 2023. I suppose that's a plus. It's a plus, however, outweighed in my mind by MP's cash burn over the trailing-12-month period. According to data from S&P Global Market Intelligence, the company has now burnt through $68 million in cash over the past year.

Granted, MP does have nearly $500 million more cash than debt on its balance sheet at this point, so it can probably afford to burn a bit of cash in the interests of eventually advancing up the supply chain toward higher value-added products, which should yield better profit margins. But even so, burning cash is not ideal.

What it means for investors

In the end, does all of the above make MP Materials stock a "buy"? I honestly don't know. Valued on GAAP earnings, the stock sells for a modest 16.6 times trailing earnings. That valuation will probably increase this year as earnings continue to deteriorate, but analysts forecast an improvement in profits next year, such that the stock falls to just 12.6 times 2024 forecast earnings.

What I do know for certain is that at present, MP Materials appears to be the only pure-play way for an investor to invest in rare earth metals in the U.S. And I'm fairly confident that the importance of rare earths will only increase as relations with China deteriorate, and the U.S. economy continues to transition toward green energy from solar and wind.

Paying a low-to-mid-teens valuation for that prospect still feels like a good bet -- but as a shareholder myself, I'd feel a whole lot more confident in my buy thesis if MP could just kindly get back to generating some positive free cash flow as soon as humanly possible. Fingers crossed.