MP Materials (MP 0.94%) is a unique company with a crucial role to play in America's defense policy and its geostrategic positioning. Currently, it's the only company operating a rare-earth mine and processing facility in the U.S., and it has recently become a partner of the Department of Defense and Apple. Does that make it a stock likely to turn investors into millionaires over time?
MP Materials stock is on a roll
There's no other way to put it. The stock is up a whopping 305% year to date as of the time of writing, and took off after the recent DOD deal was announced on July 10, with another leg up in the share price occurring after the Apple agreement was announced on July 15.
The good news just kept coming for MP Materials as a $500 million stock offering on July 16 saw strong demand, leading to an upsize offering of $650 million worth of stock priced at $55. For reference, the stock price at the time of writing is $63.22. Sentiment is very optimistic over MP Materials, but can it last?
Why rare-earth materials matter
To understand that question, you have to look at the deals and put them into the context of the U.S.'s need to secure a reliable domestic provision of rare earths and rare-earth magnets -- essential materials used in mobile phones, computers, wind turbines, electric vehicles, drones, missiles, and many other applications. Brazil, India, Russia, China, and Vietnam dominate the market share of global reserves.
Not only does China dominate reserves, but it also dominates rare-earth element production, holding a 70% global share, and refined production, with an 87% share. The reliance on China's rare-earth magnets (the most common use for rare earth elements) is such that export to the U.S. surged by 660% in June compared to May after a trade deal with China resulted in a resumption of imports to the U.S.
This is an uncomfortable position for the U.S., and it's also somewhat problematic, at least over the near term, for MP Materials because according to its latest 10-K filing with the Securities and Exchange Commission (SEC), "Currently, the Company sells the vast majority of its rare-earth concentrate to Shenghe Resources (Singapore) International Trading Pte. Ltd.," a subsidiary of a Chinese company, Shenghe Resources.
Image source: Getty Images.
It's no coincidence that the U.S. signed a mineral deal with Ukraine and President Donald Trump has mooted the possibility of acquiring Greenland, a country with substantive rare-earth reserves.
It's also the reason behind the game-changing deal with MP Materials, which creates a highly unusual public-private partnership through the DOD.
Game-changing MP Materials deals
The DOD is investing $400 million in preferred convertible MP Materials stock (which could result in it owning 15% of the company) and providing a $150 million loan. At the same time, the department has agreed to ensure that all the rare-earth magnets produced at a to-be-built facility ("10X Facility") will be purchased by "defense and commercial customers with shared upside." Additionally, the DOD has established a price floor commitment of $110 per kilogram of NdPr (Neodymium-Praseodymium) that MP Materials sells or stockpiles.
As such, the department has acted to secure the future earnings and cash flow. With known revenue streams and price floors, it has made it easier to raise capital for its magnet manufacturing facility. JPMorgan Chase and Goldman Sachs have steeped in with a $1 billion loan in addiiton to the $650 million equity raise. The deal also influenced an agreement with Apple for the tech giant to invest $500 million ($200 million prepaid) for rare-earth magnet supply from an MP Materials facility in Texas.
Image source: Getty Images.
Is MP Materials a millionaire maker?
The securing of MP Materials' mining and magnet manufacturing facility is a significant plus and likely to lead to more interest and deals from American companies looking to secure rare-earth magnet provisions.
At the same time, it's incredibly challenging to predict the future prices of rare-earth materials and magnets, particularly if you are seeking upside from the DOD price floor. Similarly, building a major facility entails execution risk, which could lead to additional equity raises that dilute existing shareholders. Moreover, there's always political risk to consider when the public sector takes a share in a private company.
These factors could limit the upside, and while MP Materials has significant upside potential, there are too many complicating factors to confidently conclude that this is a stock that will make millionaires of ordinary investors.
