The narrative surrounding MP Materials (MP 7.96%) is wonderful right now. Following two transformative deals with the U.S. government and Apple, the rare-earth minerals company is receiving heavy investment and commitments to purchase materials and magnets (with pricing floor commitments running for a decade).
At the same time, the company is expanding its existing magnet-producing facility in Texas while setting out to build a brand-new magnet production facility. So, is this a good time to buy the stock?
MP Materials solves a lot of problems
The positive news is not lost on investors, and the stock is up an incredible 356% this year as of the time of writing. In a nutshell, investors are buying into the idea that MP Materials can solve the problem of sourcing rare earth materials and magnets domestically, thereby reducing dependence on China -- the country that has a practical monopoly on global rare earth magnets.
Risks ahead
That's the good news, but before you hit the buy button, consider that this could prove the apex of optimism over the stock. Execution risk remains around the manufacturing plant expansion and new construction projects. The company remains loss-making and may require additional capital, which would dilute the interests of existing shareholders.
The involvement of the government in a public-private partnership introduces additional political risk, particularly since the U.S. government is likely to hold a significant amount of stock in MP Materials. In addition, it's incredibly difficult to predict where rare earth product prices will be over an extended period.
Image source: Getty Images.
Uncertainty ahead
The risks outlined above are significant, but it's also worth noting that there's an upside risk from other companies seeking to secure a domestic supply of rare earth materials and magnets. MP Materials certainly has a bright future, but investors might be overlooking several risks ahead, and the upside is too uncertain to predict accurately. On that basis, this is a stock most investors will want to avoid for now.
