This deep dive is on Rare Earth Elements (REE) with a focus on MP Materials ($MP) a company that recently went public via SPAC. This is fascinating topic to me and I have barely scratched the surface in this subject with this post. I recommend you read many of the references below.
I hold $MP (I currently have some shares I bought at $34). I will add to my position if it drops below $24.3 (if market or the stock corrects) or goes above $40 OR
If the next quarter of earnings from MP shows faster growth than they projected (greater than 75% YoY growth in Q4 2020). Earnings date is Feb 23rd 2021.
Volume on the stock has been building in the new year with supports at $28, $24, $19 and $16 price ranges.
For FY 2021 MP expects $171M in revenue and $82M in adjusted EBITDA. The company was valued at at $1.4B when they went public via SPAC in July 2020 and are valued at over 3X that amount (Jan 2021).
What are rare earth elements (REE)?
The rare-earth elements (REEs) are 15 elements that range in atomic number from 57 (lanthanum) to 71 (lutetium); they are commonly referred to as the “lanthanides.”
Although REEs are not rare in terms of average crustal abundance, concentrated deposits of REEs are limited in number.
Rare earths are used in the renewable energy technologies such as wind turbines, batteries, catalysts, and electric cars.
Why are REE suddenly in the news?
Rare earth availability is undergoing a temporary decline due mainly to quotas being imposed by the Chinese government on export and action taken against illegal mining operations.
The reduction in availability coupled with increasing demand has led to increased prices for rare earths. Although the prices have come down recently, this situation is likely to be volatile until material becomes available from new sources or formerly closed mines are reopened.
Keep this in mind as you read this piece. Like many commodities such as oil, there is tight, restricted supply and increasing demand.
Although the number of identified deposits in the world is close to a thousand, there are only a handful of actual operating mines.
Prominent currently operating mines are a) Bayan Obo in China, b) Mountain Pass in the US and recently opened c) Mount Weld in Australia.
Are all REE the same?
Rare earths are further divided into
a) light rare earth elements (LREE) and
b) heavy rare earth elements (HREE) with the divide falling between the unpaired and paired electrons in the 4f shell.
LREE includes from lanthanum to europium and includes scandium. The HREEs include from gadolinium to lutetium and includes yttrium.
Present technologies for electric vehicles and wind turbines rely heavily on dysprosium (Dy) and neodymium (Nd) for rare-earth magnets.
It is anticipated that recycling and recovery will assist to satisfy the demand for rare earth element, but its contribution is currently low (i.e., less than 1%) and will pose significant challenge in terms of collection, processing and their recovery due low concentration of REE in products.
According to the Unites States Geological Survey (USGS), world resources are enough to meet foreseeable demand but world production falls short of meeting current demand.
Which rare earths matter? How are they obtained?
Rare earth containing minerals (or ores) are usually dominated by either HREEs or LREEs.
Minerals containing predominantly yttrium and the HREEs include gadolinite, xenotime, samarskite, euxenite, fergusonite, yttrotantalite, yttrotungstite, yttrialite.
Minerals containing predominantly LREEs include bastnasite, monazite, allanite, loparite, ancylite, parasite, lanthanite, chevinite, cerite, stillwellite, britholite, fluocerite and cerianite.
However, commercially operating mines around the world mainly extract bastnasite, monazite and xenotime ores.
So, you need to mine the ore and then “obtain” rare earth elements by extracting them via multiple processes.
For a typical open pit, mine, the approach is similar to other mining operations which involve
a) removal of overburden,
d) crushing and grinding,
e) separation or concentration
Why is this a big issue?
Between 2010 and 2012 the Chinese government put strict export quotas on their rare earth minerals and semi processed rare earth products. That caused a huge spike in prices as you can see below.
The quotas reduced the output by nearly 60% compared to the 2008. These quotas created a gap between demand and supply and large increases in the prices of the rare earths.
At this point, the Chinese have around 55% of all known rare earth deposits and control 95% of world supply through integrated mining, refining and supply chains.
So why now in 2021? And what is the connection to Electric Vehicles?
Rare earth magnets (Nd, Pr, Sm and Dy) are particularly needed for alternative energies.
These will find widespread application in wind turbines, the auto industry (electric and hybrid cars) and defense industry (i.e., missile guidance systems).
Rare earth containing (Er) glasses are important for fiber optical amplifiers required in high-speed optical communication networks as well.
Since there has been a boom in Electric vehicles, the need for REE in EV (batteries) is significant.
The rare earth’s sector in the US got a significant boost as Senator Ted Cruz lodged a bill with the US Senate to support the US rare earths industry. MP Materials has spent significant money building a lobbying arm to support their cause.
At this time, about 80%+ of rare earths come from China.
China’s major rare earth mine is Baiyun Obo, located in Inner Mongolia. It is the world’s largest known REE deposit. Reserves are estimated at more than 40 million tons of REE minerals grading at 3-5.4% REE (70% of world’s known REE reserves).
High prices also caused manufacturers to do three things:
1) seek ways to reduce the amount of rare earth elements needed to produce each of their products;
2) seek alternative materials to use in place of rare earth elements;
3) develop alternative products that do not require rare earth elements
Those may still happen for EV batteries, but right now REE are the best option.
This seems like a mining problem. Where is the opportunity for growth?
The global rare earth elements market size was valued at US $2.80 billion in 2018 and is estimated to witness a CAGR of 10.4% from 2019 to 2025. It will be a $5.2 Billion market by 2025.
Cerium, neodymium, lanthanum, praseodymium, yttrium, and dysprosium are the most commonly used rare earth elements. The market is driven by the increasing demand for these products in the manufacturing of magnets & catalysts for the automotive industry.
Cerium is widely used as a catalyst in catalytic converters of motor vehicles while neodymium & praseodymium are used in the production of batteries for electric vehicles.
As per the International Energy Agency, the global stock of electric cars was over 5 million in 2018 with more than a 63% increase from 2017. According to JP Morgan there will be 8-10 Million EVs by 2025.
Rising demand for electric vehicles to reduce CO2 emissions is expected to propel the use of permanent magnets in the production of batteries. Neodymium and praseodymium based rare earth permanent magnets are majorly used in the manufacturing of batteries.
Who is MP Materials?
MP Materials was founded in 2017 and they went public via SPAC (announced July 2020) at a valuation of $1.5 Billion (currently valued at nearly $5 Billion).
Mountain Pass in CA had a mining operation that was forced to shut in 2002 in part because it was squeezed out by China’s low prices. In 2015, its owner went bankrupt. MP Materials acquired the mine, and slowly restarted operations.
MP Materials currently has to send much of its rare earth concentrates (ores) to China for processing because it doesn’t have the capacity to do so itself. The company hopes to process and refine its own rare earths by 2022, so as to keep the entire supply chain on US soil.
Why MP Materials?
MP Materials owns and operates Mountain Pass, the only rare earth mining and processing site in North America.
MP Materials extracts 50,000 tons of rare earth concentrate each year but still relies on China to process the materials. However, MP Materials plans to have its own Heavy Rare Earth separation facility and has been awarded partial US Defense funding for such a facility at their Mountain Pass Mine in California. This is a big moat. They dont give these out to every company.
MP Materials say they will kick-start their own processing operation by the end of 2020 and produce about 5,000 tonnes of two popular types of rare earths annually: Neodymium (Nd) and Praseodymium (Pr).
What is the moat for MP materials?
MP is the only existing domestic (US) extractor of REEs. Their Mountain Pass mine is indeed the sole American rare earths source currently in operation.
MP has been operating it since 2017, and produces a rare earth concentrate product that amounts to in excess of 36,000 tons of rare earth oxide equivalent per year (approximately 15% of world rare earth market demand).
The company currently has some 200 employees working at the Mountain Pass mine.
They are the 2nd largest producer outside China and profitable.
Who is the competition?
In China there are several competitors, but outside China, Texas Mineral Resources and Lynas (Australia) are the only other competitors.
$TMRC (Texas Mineral Resources Corp).
TMRC’s flagship Round Top Project is in Hudspeth County, Texas. The project is dominated by rhyolite ore enriched in rare earth elements (REEs), especially heavy rare earths (HREEs), as well as several other critical elements including lithium. It is reported that the Project “offers a 130-year supply of the critical minerals.”
TMRC has a development agreement with USA Rare Earth LLC (“USA Rare Earth”) whereby the partner will earn up to 70% interest in the Round Top project once its $10 million investment leads to a Bankable Feasibility Study. Thereafter, USA Rare Earth can earn an additional 10% interest with a $3 million cash payment to TMRC.
$LYSCF (Lynas) Australia
Lynas is NOT a US rare earths miner; however, it recently won partial funding from the US defense for a heavy rare earths processing plant in Texas USA. Further funding along with their project partner (Blue Line Corp.) looks very likely. Lynas plans to ship rare earths from its mine in Western Australia for final processing at the Texas facility.
What are the risks?
The biggest risk is China controls 80%+ of all production which dictates prices. They can (like they did before) reduce prices to such a low level that MP becomes unprofitable and can go bankrupt – similar to their predecessor.
The second risk is that this is a capital intensive business. Although MP is profitable now, and have enough cash (They got $545M from the proceeds of the SPAC) to get them to processing the ore, they depend on China for a few more years to manage the processing. They may even depend on them for longer after that.
The third risk is MP has a Chinese investor who owns over 10% of the company. Shenghe Resources Holdings owns about 10%, which makes them vulnerable to certain defense contracts.
How do the financials look?
The projections are strong, and growth forecasts are excellent – if they execute and if prices for REE remain stable. China has incentive to keep prices stable, I believe, but we are in uncharted territory.
If you think OPEC the oil cartel is bad, this is worse since one country controls prices.
They estimate to have $415M in revenue by 2023, and if that is the case, they will have a significant part of a large market and are expected to grow at 50%+ CAGR.
The growth quickens in 2022 (70%+) and slows again in 2023 (18%).
What is the 1 year price target?
The valuation is rich now (it was reasonable in July 2020) at 48X LTM (2020, Last Twelve Months) revenue and 29X NTM (2021, Next Twelve Months) revenue.
This is a narrative driven investment, not by the financial metrics.
You have to believe the US & the rest of the world (sans China) has deep interest in seeing MP succeed for a part of their supply chain.
You have to believe that MP will eventually get to processing ore in the US as opposed to sending it to China for processing.
You have to believe that the environmental lobby won’t find a shut down this mining operation.
If you believe all those things, you can see this being not a multiple of revenue but a core part of many EV and innovation portfolios. It could get there as a “picks and shovels” play on EV ETFs.
I am not sure what a good price target is, but this stock has been building momentum and has good institutional buying (see below).
I can see the stock going up 100% in 2021 thanks to current traction, but I can also see a deep pullback before it gains momentum.
Should this be a core part of the portfolio for more than just patriotic reasons?
Yes, the growth is tremendous and the moats are significant.