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Notes
MP Back to Best Ideas Long, Easy Pair vs Mature Metals
- Stage II + IRA Substantial Tailwinds, Demand For REE Continues To Soar On Electrification
- EV adoption continues, with consumers very interested in EVs and auto OEMs rolling out new platforms at a blistering pace. Production capacity & new vehicle platform developments lock in years of likely volume growth for the EV metals complex. Our survey points ~95% of respondents interested in electric vehicles, with the introduction of pick-ups and SUVs driving acceptance. Tesla’s claimed development of a down market drive unit that does not use permanent rare earth magnets highlights the pending supply shortages of the material, not some technological breakthrough. Like many Tesla promises, this one lacks context, ignores what the other 97% of the auto industry is doing, and may never enter production. The IRA provides substantial tailwinds to MP, with a 10% COGS rebate for production costs and a likely 30% rebate for magnetics facility capital investments.
- EV Metals Bottomed? NdPr Prices Inflecting At Level Approximating Real Chinese Producer Costs
- Prices for lithium carbonate and NdPr may have bottomed. For NdPr, the fragmented Chinese industry dominates REE supply, with producers seen as having older, less eco-friendly facilities. New REE mines take many years to develop; meaningful competitive entry outside of China is unlikely in the near-term. MP has the highest-grade bastnäsite deposit known, scale as the #2 globally with 15% of world supply, and newer assets that allow cost competitiveness. Demand is set to grow rapidly over the next few years as new EVs launch, pushing even high-cost producers into a profitable position. We see more prospective REE users aware of the potential ESG pitfalls of using metal of unknown provenance, with companies from Beats to GM flagging sources for consumers.
- MP Potential Double, With Exposure To A Long EV Upcycle; Steel’s Moment In Market Sun Ending
- MP has company specific catalysts next year that make it particularly attractive beyond the ‘electrification’ tailwinds. As MP starts downstream processing and initial magnetics production at Ft. Worth (Stage II and initial Stage III) sales and EBITDA should more than double from 2021 levels at equivalent NdPr prices. IRA rebates, DoD/Western Government support for breaking the Chinese REE monopoly, and customer ‘ESG’ buy-in are not inconsequential competitive advantages vs. incumbent suppliers. We see MP as likely top performer among Materials equities into 2024, trading at discount to peers despite its product’s centrality to a rapidly growing market investors have richly valued. We see it as an attractive long vs. mature metals alternatives, like Steel producers STLD & NUE, where a domestic production narrative has led to significant capacity increases.
Key Macro Factors
- Macro environment remains unfriendly for materials
- The Fed appears to be tightening into a 1H23 recession; cyclicals tend to follow the target rate
- GDP negative Q/Q SAAR, Inflation still above 2% at YE
- Defensive cyclicals have been a priority on the long side; we think EV metals qualify as they are likely to be somewhat macro-independent given the industry-specific supply/demand dynamics
- Auto already cyclically depressed, but challenges abound
- China has been the cyclical outlier, with inventory trends and reopening “messy” for metals and EV demand
- EV names haven’t responded as clearly to macro
- MP is likely to perform more like ALB during the long EV upcycle; TSLA has benefited from stimulus, but also de-linked during its period of outsized demand growth
- NUE, STLD perform poorly in Quad 4 (not shockingly)
- These are more cyclically “normal” metals & mining names
- As inflation rolls over, correlation a “factor exposure”
- Steel names are among the most straightforward correlations to CPI, which is likely to slow markedly; we are literally long CARR, LII and short CF, NUE, STLD on best ideas.
- Betting on inflation to re-accelerate here seems low probability.
Rare Earths Market
- Radioactive contaminants, ore grade consistency matters
- Byproducts drive up the cost for most REO mining operations, with Mountain Pass less burdened with Thorium and other challenging materials
- Rising production keeps high cost producer “umbrella”
- High prices are needed to attract new production capacity to a metals industry; the initial leap up from 2016-2022 has partly been underutilized facilities and brownfield expansions; entirely new production takes many years, as MP’s own well-funded, highly-focused effort at Stage II makes clear
- Current production not close, super-cycle underway
- Anyone who thinks EV sales penetration will reach 30% or 40% by 2030 isn’t paying attention; while not as undersupplied as lithium, NdPr has more of a supply security and sustainability challenge, which favors MP specifically
MP Has Many Non-Macro Reasons to Work
- Efficient Electrification (STILL) Requires RE Permanent Magnets
- Car makers can use induction motors or weaker non-REE magnets, but the reason is typically to avoid the Chinese stranglehold on REEs and the costs/frictions that creates. Tesla is raising this issue – working around REEs in the first place – because demand growth is likely to strain REE magnet supply chains and availability.
- Interest In Battery Electric Vehicles Highest In Our Survey
- Pick-ups and SUVs have greatly broadened the appeal. Consumers like performance characteristics.
- Consumers Love A Good Subsidy
- The IRA reintroduced a variety of EV tax credits, although the scope of those credits generally narrowed. IRA subsidies favor domestic and/or trade-aligned suppliers and assembly. While not an explicit requirement for domestic magnets, it wouldn’t shock us if that were included at some later as ex-China production ramps up.
- Real NdPr Prices Down, New “Floor” Likely Higher
- Stage III should allow MP to decouple somewhat from NdPr pricing in China, capturing downstream value…as well as whatever is happening on the heavy rare earth processing side.
- NdPr, Li Prices Have Held Up Despite Weak Auto Production
- Auto sales have been depressed on supply-chain constrained production – we aren’t seeing what NdPr demand would look like with production meeting demand. VW has “…an order backlog of almost 2 million vehicles in Europe alone.”
- Stage III In 2025 Isn’t Far Out, Progress Continues
- Any EV maker with these magnets could undermine competitors with the damage Chinese REE production does. It would make garment manufacturing issues look trivial – more like asbestos mining or blood diamonds. As consumers understand the damage mishandled waste products inflict on local environments and populations – it is bad and hard to remediate (e.g. Thorium exposure)
- Volume Has Been Heading Up, Key Metric
- Most importantly, MP disclosed no lost work-days due to injury in 3 years. Compare that to most metals and mining earnings calls, which sound more like a mortality and morbidity report. Cost efficient operations are the safest operations, in our experience. That is a class-leading statistic.
- ASPs Will Continue Lower Into 2Q23, Price Is Price
- Prices have moved down with the broader easing of supply chains; shortages are easing throughout the economy, with logistics costs coming down. There isn’t much a metal miner can do about market prices – costs, volumes, uptime and the like are controllable.
- Unit Costs Outstanding Given Inflationary Pressures
- The IRA benefit may shift as processing enters stage II. Margins are fairly high (costs low) so the IRA tailwind isn’t numerically enormous…but Stage II will change that. Incurring leaching and other processing expenses domestically give MP access to IRA credits for those costs, and allows it to capture the revenue and profits that currently accrue to Shanghe.
- Freight Could Have Been Worse, Mostly Tailwind
- Anyone remember that short-and-distort report on a lost container that failed to get unloaded? This should continue lower with broader shipping rates.
- EBITDA Margins Compress With Stage II, III
- The exceptionally high margins were a result of selling REOs to Shenghe from an exceptional deposit. Processing captures more value and profit, but at a likely lower incremental margin.
China = A Geopolitical Rival; MP ‘Must Win’
- MP Only Relevant Domestic Producer Of Rare Earths For Years
- Even the buildout of a new mine in Texas will take half a decade, capacity that is desperately needed to wean US industry from the Chinese stranglehold on rare earths. MP is the only game in the contiguous US at a time when relations with China are not strong enough for essential supply chains. That is unlikely to change in the near-term.
- Heavy Rare Earths In Addition To Light/Alloys/Magnets
- Defense applications for rare earths extend beyond NdPr, into sensors and components for which the US and NATO cannot rely on a potential adversary. One way or another, MP will be a successful miner with contracted volumes, in our view. That Lynas also has a US heavy rare earths contract shows just how critical (and subsidized) this new production will be. Expertise in producing these materials is of value to allied western countries, not just the US.
- Ukraine War Natural Gas Makes REE Risks Clearer WRT China
- The US and much of NATO will no longer be willing to rely on competing or rival ‘great powers’ for essential products. From chemical feedstocks to electronics to medical supplies, the US is likely beginning a long process of disentanglement from strategic vulnerabilities that give China leverage of US supply chains and production.
Why Stage II is So Important for MP in Next Few Quarters
- Give Or Take, It Double Sales & Net Income
- MP will transition from selling ~43,000 mt of mixed rare earth oxides to ~6,500 mt of NdPr Oxide. That is a significantly higher priced product, which would have been more like $90,000 per mt in 1Q23 than the $9,400 MP received.
- Frees MP From Mostly Having A Single Chinese Customer
- Shenghe is an investor and a bear case/suspicious talking point for those who are negative on MP. It is an obvious concentration risk. MP has picked up some additional tolling agreements but it is an important change for MP.
- Pick Up Advantages Of IRA Subsidies, Reduced Logistics Overhangs
- While shipping costs aren’t enormous, the local production and control of processing of the materials is a significant advantage. It also adds to the support IRA provides for domestic REE production.
MP Valuation
- MP comps suggest it should trade in the mid-$40s
- MP shares have historically traded higher prices with more EV uncertainty, so this seems reasonable to us
- MP has ~$1 billion in cash, trades at 10x 2025E
- Stage II processing + IRA tailwinds + improved auto production are powerful company-specific catalysts for a company supplying a rapidly growing end-market
Upshot: EV Metals an Adoption Winner, MP Down & In
- We’re adding MP Materials back as a Best Ideas Long, anticipating that REE demand growth, IRA support, and Stage II/III growth will drive outperformance into 2024. We see MP as a potential double over the next 12-18 months.
- We continue to see lithium and REEs as an easy ‘super-cycle’ long in Materials – we’ve had it on and off years. Our survey work…and more importantly now, EV launches… increasingly support that super-cycle view. Brand sensitivity on environmental issues and national security favor MP over Chinese producers at little additional cost.
- MP shares are down about 42% over the past year following lower NdPr product prices. We think that provides an opportunity for buyers of MP, with Stage II and stabilizing product prices combining with EV introductions and IRA tailwinds to drive a rough double in the price of MP shares.
