MP Materials (MP -6.00%) is caught up in a storm, but it has managed to soar on the volatile winds. While nothing material has changed about the business over the past 30-odd days, the world has started to shift in a big way. Here's why MP Materials' stock has rallied roughly 90% in less than a month and why you might still want to consider the stock for your portfolio.
What does MP Materials do?
Modern technology is built on very specific compounds. Some of the most important today are known as rare earth metals, which are used in magnets and other items. Without items made from rare earth metals, a whole host of industries can't make the products consumers buy. For example, a dearth of supply has left the automotive sector worried that vehicle production will be impacted. Cars are a huge retail category for rare earth metals.
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MP Materials is a U.S.-based producer of rare earth metals, describing itself as "America's only fully integrated rare earth producer with capabilities spanning the entire supply chain -- from mining and processing to advanced metallization and magnet manufacturing." This sets up the entire story because China supplies the world with most of the rare earths metals that get used, so a U.S.-based supplier is highly desired.
A safe place to buy rare earths metals
China and the United States are currently in a contentious trade dispute centered around tariffs. Both sides are attempting to use their leverage as they look for the best outcome, or at least the best outcome for their country. China's greatest leverage is likely centered around the supply of rare earth metals, and that has companies looking for alternative suppliers. MP Materials is, pretty clearly, a good option, given that it is based in the U.S. However, the big news of late is about the company's partners.
In early July, the U.S. government entered into a complex 10-year agreement with MP Materials to support the company's business. According to the press release, the agreement includes "convertible preferred equity, warrants, loans, and price floor and offtake commitments." If the convertibles and warrants were exercised, Uncle Sam would own around 15% of the company's stock.
At this point, MP Materials has a foundation for growth that's backed by a very powerful and important entity. But that's not the whole story, either. Just a few days after the U.S. government deal, a deal with technology giant Apple (AAPL -1.37%) was announced. This agreement was less complex, involving Apple inking a long-term purchase agreement for recycled rare earth metals from MP Materials. But it helps to further solidify the future for the company's production as it grows.
Also happening in the last month was a $650 million equity offering, upsized from $500 million, capitalizing on the excitement around the stock. So not only does it have two important partners, but it also managed to raise a lot of money to help it deliver on all of the promises it has made. Put simply, the good news piled up quickly in July for MP Materials and investors pushed the stock way up.
Big opportunities ahead?
It would be easy to suggest that MP Materials was in the right place at the right time and got lucky. But the truth is, the company has been working toward being a U.S. provider of rare earth metals for years. While there is an element of luck here, MP Materials deftly positioned itself to take advantage of just the situation that has occurred. It is notable that the big stock move in July started at roughly the same time the U.S. government partnership was announced.
But don't think that this is a short-term thing. The opportunity is long term, noting that the U.S. government agreement is for a decade and could, eventually, lead to the government taking a significant stake in the business. While MP Materials' stock price has risen quickly, the opportunity here could still be worth buying into given the strategic and long-term importance of what MP Materials sells.
