The semiconductor and tech manufacturing industries are on high alert since China fired off a response in the ongoing trade tensions between the U.S. and China. After facing a couple of years of chip and chip technology export bans -- specifically surrounding those needed to build advanced AI systems -- China placed export restrictions on niche semiconductor materials gallium and germanium. Companies will have to begin applying for licenses to buy these materials from China, which plays a dominant role in producing them.
The fear now is that export curbs could spread to rare earth metals, which China has an even more dominant role in supplying. It's happened before: China halted Japan's access to rare earths in 2010 during a spat over territorial disputes over small some small islands.
That has reinvigorated some optimism for U.S.-based MP Materials (MP -0.19%). Shares are down 15% over the last year as inflated prices in many mined products have moderated, but the stock rallied a bit following China's move on semiconductors. Could this be a winning investment in the battle for rare earth metals supply?
MP as an EV play
Rare earth metals are usually considered to be a group of 15 elements on the periodic table, ranging from lanthanum (La) to lutetium (Lu). They are often added to other base materials used in things like semiconductors, batteries, and magnets, which are used to power all sorts of electrical motion devices in areas like healthcare, industrial applications, and wind turbines. While rare earths often exist together in trace amounts among other more common elements, rare earths aren't exactly all that rare. So what makes them scarce?
As MP CEO and founder James Litinsky said at a recent investor conference, "What is really rare is having an economic enough concentration to process [rare earths] efficiently." In other words, it takes substantial monetary investment and hoop jumping to get into the rare earths mining game.
Because of the complex processes needed to separate and refine rare earths, as well as environmental issues, China mopped up market share of this niche of the mining industry over the last few decades. And besides accounting for the majority of rare earth supply, China also has a stranglehold on its refinement. Litinsky also pointed out that 90% of rare earth magnets are made in China.
With geopolitical tensions hot, and reliance on powerful magnets for things like electric vehicles (EVs) ballooning, this is the geographical void MP is filling. It and one other company (Lynas Rare Earths (LYSDY 0.22%)) are the only two public suppliers operating at significant scale not domiciled in China. MP is particularly focusing on neodymium and praseodymium (often combined under the symbol NdPr) from its Mountain Pass mine just outside of Las Vegas. The two elements are used in magnets, especially in the nascent EV industry.
More than just mining is needed
Litinsky noted that MP now represents "15% of global rare earth content," and has the potential to scale its operations higher. But in keeping with the previously mentioned statement that rare earths' scarcity comes from capital investment intensity, MP is doing more than just mining raw rare earth elements.
To meet the extraordinary growth expected over the next decade (perhaps an average of 20% to 30% growth in rare earth materials demand), MP commissioned rare earth refining at its mining site. And in an additional "third phase" of its expansion, it broke ground on a new "downstream" magnet alloys plant in Texas last year.
The project is being built in conjunction with a supply agreement with General Motors (GM 0.48%) as it tries to ramp up its premium EV sales. Besides providing the refined metals needed in EV motors, MP will also be able to recycle existing rare earths already on the market -- a significant capability, as some tech companies like Apple (AAPL -0.35%) have noted their desire to reduce dependence on new supplies of rare earths and source from recyclers instead due to environmental concerns.
Risks for MP, despite a tidal wave of demand
Like any emerging growth business, MP faces challenges. Tesla (TSLA -1.11%) made waves when it said it's cut rare earths down by about 25% in its Model 3s. An upcoming EV model (likely a more affordable entry-level car) may not utilize rare earth magnets at all. Existing EV models probably won't ditch more expensive rare earth magnets in high-end powerful motors, but cheaper EVs are needed to continue to propel global adoption. If engineers can figure out how to make non-rare-earth magnets more efficient, MP could lose out on some sales.
Additionally, like any mined product, rare earth market prices can vary wildly from one year to the next -- which has a very direct effect on sales, and ultimately profitability. That has been a key driver in MP's recent earnings reports, as rare earth market prices are down some 50% from 2022 levels.
Data by YCharts.
Nevertheless, rare earth demand is expected to outstrip supply in the coming decade, and geopolitical scuffles between the U.S. and China might only exacerbate the problem. That is what has kept MP on my watchlist since I started "digging" into the company last year. Rare earth prices are down in 2023, but could be poised for a rally as tech manufacturing around the globe is set to heat up in 2024. MP stock currently trades for 45 times analysts' expected earnings per share for 2023, but just under 21 times expected 2024 earnings. It's also very well funded, with cash and short-term investments of nearly $1.2 billion, offset by debt of $679 million.
MP is on my watchlist. If mined material prices start to bottom out and rebound later this year, MP could shoot up my list of stocks to buy.
