As demand for electric vehicles (EVs) and semiconductors increases, many investors are focusing on lithium ore stocks to meet the needs of the technology industry. But lithium isn’t the only element needed for large batteries, chip components, and the like. Rare earth elements — such as lanthanum, cerium, and samarium — are also in demand for batteries for EVs and electric grids, medical devices, and other technology products. Some estimates indicate that sales of these substances will double from 2022 to 2026.
It is there MP materials (Mp 3.73%) A rare special purpose acquisition company (SPAC) With 2020 stock holding its own during the current bear market, MP is a top producer of rare earth materials that may have some advantages over its peers. Is this a megagrowth stock in progress?
A dirty process was made more clean and brought to the US
The Las Vegas MP materials are the only rare earth materials mine in North America. This puts MP in a unique position. The market for these chemicals has historically been dominated by operations in China, while their low environmental impact levels have given them an edge over mining companies in the US and Canada. However, MP’s “Mountain Pass” mine meets North America’s highest standards despite the dirty process involved in extracting these elements.
MP is therefore alone in producing rare earths in the US at this time. As the use of EVs and other technological devices increases, and various political agendas aimed at keeping supply lines of these chemical elements domestic, MP may find itself as a key supplier for elements such as lanthanum, cerium, neodymium for many years to come. , and Samaria. These chemicals are used to make EV batteries and motors, wind turbines, device displays and other high-tech hardware.
This special place is shown in the financial numbers. In the year MP sales for the first half of 2022 were $310 million, a 133 percent increase compared to the same period last year. Adjusted net income rose 214 percent year-over-year to $178 million as MP operations became more efficient at scale. An incredibly profitable 68% profit margin can’t keep this up forever (and probably not a triple-digit percentage revenue growth rate), but it shows the need for the meager resources that MP is producing.
In the year At the end of June, this mining outfit had a stellar balance sheet with $1.18 billion in cash and $677 million in investments in revolving debt (due in 2026). He will need that money as he expands his business, especially when he completes the next phase of the project.
High growth but high price
As expected with such a high-growth company, MP’s materials bring high value. Shares currently trade for 70 times enterprise value to trailing 12-month free cash flow — or 25 times trailing 12-month earnings per share. Paying higher prices for mineral and material producers (flexible and cyclical industry) can lead to problems.
For one thing, 90% of MP sales are from one customer’s referral resources. This customer is based in Singapore, but most of MP’s products are sold to Shenge in the Chinese market. Political tensions between the U.S. and China (such as tariffs or restrictions on future sales) could pose risks to parliament over time.
The company has made a long-term supply contract General Motors (G.M 1.95%) along with rare earth elements used in the automaker’s growing EV lineup. Amendments to this agreement will begin in late 2023. However, this project includes the construction of a new rare earth, iron, alloy and magnet manufacturing plant in Texas earlier this year. Mining and refining is a capital-intensive business, and such expansion can be expensive and possibly weigh on profit margins at some point.
Then there are interest rate hikes by the US Federal Reserve, which aim to control inflation. If the Fed has its way, core prices (such as minerals used in manufacturing) will fall to slow the economy. That’s another risk for MP stock.
Despite these potential headwinds, there’s a lot to like about MP materials this season. In the year The runaway optimism that drove the stock higher in 2021 is over, and the speculation is now more reasonable — balancing the company’s clear path to continued growth with the current risks. If you’re into mining, especially those with important technological windfalls that fill their sails, it might be worth investing a bit more MP now. But I advise caution as this industry is very volatile and can translate into some wild swings over time. If you invest a little, only do it for long-term affordability.
Nicolas Rosolillo and his clients have no position in the said shares. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
