July was a momentous month for the rare-earth and magnets company MP Materials (MP 2.25%). The stock rose a whopping 84.9% in July, according to data provided by S&P Global Market Intelligence. Moreover, as I write, the stock is up an incredible 338% on a year-to-date basis.
Why MP Material stock surged in July
The move in July comes down to a series of events starting with the transformative partnership signed with the United States Department of Defense.
It's an unusual partnership, and it fundamentally changes the investment proposition for the company:
- MP Materials will construct a domestic magnet manufacturing facility (its second), known as the "10X Facility."
- The DOD purchased $400 million in the company's preferred convertible stock and has a warrant to acquire additional common stock. If exercised, the warrant could lead to the DOD owning 15% of the shares in the company at the time of the deal.
- The DOD is loaning MP Materials $150 million to expand its capability at Mountain Pass, and JPMorgan Chase and Goldman Sachs have agreed to provide $1 billion in financing toward the construction of 10X.
- The DOD will ensure that "100% of the magnets produced at the 10X Facility will be purchased by defense and commercial customers with shared upside," and will enter a 10-year agreement, guaranteeing a price floor of $110 per kg for neodymium and praseodymium (NdPr) products.
As the bullet points imply, the deal helps secure MP Materials' future, ensures cash flow, brings financing, and propels the company into the forefront of providing the future supply of critical rare-earth materials to the U.S.
Enter Apple
A few days later, in mid-July, MP Materials announced a long-term rare-earth magnet supply agreement with Apple. The technology company's commitment to buying $500 million in rare-earth magnets produced in the company's Texas facility will result in a significant expansion in that facility.
The next day, MP Materials announced a $500 million stock offering, which was promptly raised to $650 million the following day due to strong demand, with the proceeds to be allocated to expanding its facilities, including 10X.
Image source: Getty Images.
What's next for MP Materials?
The company has benefited from its position as the only operator of a major operational rare-earth mine, Mountain Pass in California, and the operator of a rare-earth magnet production (a market globally dominated by China) facility in Texas.
It clearly has a big future, but what's less obvious is how the company will deal with the execution risk around building out facilities, or even what kind of administration will be in place in the future in the U.S. Any public-private partnership, by definition, carries political risk, and investors need to consider that before investing in this exciting company.
