MP Materials — 10x Investment Idea

Why you should be long MP Materials to “restore the full rare earth supply chain to the United States of America”?

MP Mine in Mountain Pass, CA [Credit: MP Materials Investors Presentation]

*** I’m currently long MP Materials (NYSE: FVAC) ***

1. Reason: Rare-Earth Materials support over $7 trillion of finished goods

Cerium (Ce), Dysprosium (Dy), Erbium (Er), Europium (Eu), Gadolinium (Gd), Holmium (Ho), Lanthanum (La), Lutetium (Lu), Neodymium (Nd), praseodymium (Pr), Promethium (Pm), Samarium (Sm), Scandium (Sc), Terbium (Tb), Thulium (Tm), Ytterbium (Yb), and Yttrium (Y)

If you have not noticed, these are the 17 rare-earth elements that are known and listed in the period table. Why should you care about these elements?

Rare-Earth Elements [Credit: Geology.com]

Because most of the electronic devices need those materials to function: Think about automobiles, phones, computers. These special materials are critical to more than $7 trillion of finished goods as James Kennedy, the president of ThREE Consulting, which is specialized in rare earths and thorium, stated:

“This is one of the smallest commodity markets in the world but the rare-earths that are produced (this tiny little fraction of materials) are critical to $7 trillion finished goods: automobiles, aircrafts, phones, computers.” — James Kennedy

On Wednesday, July 14th, MP Materials, owner and operator of Mountain Pass, the only rare earth mining and processing site of scale in North America, announced a definitive agreement to merge with Fortress Value Acquisition Corp. (NYSE: FVAC), a special purpose acquisition company sponsored by an affiliate of Fortress Investment Group LLC. Upon completion of the transaction, the combined company will be named MP Materials Corp. and will remain NYSE‐listed under the new ticker symbol “MP”. It will create the only pure-play rare earths investment opportunity in the United States.

The combined company will have an estimated post‐transaction equity value of approximately $1.5 billion with over $500 million in net cash to fund its growth strategy.

Notably, the transaction includes a $200 million fully committed common stock PIPE at $10.00 per share anchored by Slate Path Capital, Chamath Palihapitiya, and Omega Family Office. Probably, the most interesting figure is here Chamath Palihapitiya who is investing his own money into this venture and anchoring the pipe.

Transaction Summary [Credit: MP Materials Investors Presentation]

In addition, Fortress Value Acquisition Sponsor has also agreed to vest their shares at a premium signaling that they are confident about their investment:

  • 50% at $12.00/share
  • 25% at $14.00/share
  • 25% at$16.00/share

Drew McKnight, CEO of FVAC, explained the investment thesis behind MP Materials as follows:

“We believe MP Materials is a compelling opportunity to invest in an irreplaceable, world‐class asset at a point in time when demand from electric vehicles, wind turbines, and other technologies is hitting an inflection point, and while the need to find a reliable and resilient source for rare earths is crucial for the U.S. and global supply chain. The electrification of global transportation and infrastructure will be a dominant investment theme over the next several decades, leading to demand for rare earths rapidly outpacing current levels of production and supply. Mountain Pass is the only scaled North American source of supply for these materials, and Jim and his team have already restored Mountain Pass as a global leader in the rare earth market. Together, we will leverage that foundation into a transformational opportunity at a critical time for our nation.” — Drew McKnight, CEO of FVAC

Mountain Pass, CA, is rich in Neodymium and Praseodymium among other rare earths deposits. Commonly referred to as NdPr, these rare earths are fundamental to powering traction motion. MP Materials want not only to mine and refine rare earths such as Neodymium (Nd) and Praseodymium (Pr) in California but also to create industrial-ready products in the form of NdPr-magnets that are essential to rotate electric motors. Such permanent magnets are used in EV, drones, robots, and consumer electronics. They are the key building blocks of the electrification movement.

NdPr Magnets Market Share [Credit: MP Materials Investors Presentation]

One of the largest opportunities represents the transition to electrical vehicles. Currently, the total annual domestic automotive sales is around $545 billion, which contributes to around 3% of the GDP and represents over 10 million jobs in the auto supply chain.

Rare Earths Usage [Credit: MP Materials Investors Presentation]

While the most efficient chemistry for EVs is still unknown since it has been a quite nascent discovery when Sony introduced the first lithium-ion battery in the 90s, every single electric motor needs a magnet where NdPR is the standard. It looks like MP Materials could be a pick-and-shovel play for the electrical vehicle.

EV Motor Technology [Credit: MP Materials Investors Presentation]

Magnets are so important for the electrification that the famous innovator Nikola Tesla stated that it is the most important invention that he had and that the core technology is almost irreplaceable:

“I would not give my rotating field discovery for a thousand inventions, however valuable… A thousand years hence, the telephone and the motion picture camera may be obsolete, but the principle of the rotating magnetic field will remain a vital, living thing for all time to come.” — Nikola Tesla

MP Materials has almost no competition in the Western hemisphere. Other competitors have no access to substantial quantities of the critical materials and need many years and high CAPEX-expenditures in the millions to compete on a meaningful level. The rare-earth market possesses high barriers to entry for any competitor.

MP Material’s competition [Credit: MP Materials Investors Presentation]

5. Reason: The United States sees rare earths as a key to the critical national security supply chain

The United States has issued many executive orders to ensure that it has secure and reliable supplies of critical materials. During the COV-19 pandemic, many nations especially the United States have focused on supply chain resiliency is critical to national security. China has been the dominant force in the rare earth supply chain controlling up to 85% of it. The United States will probably issue many more call to actions to secure this strategic important good.

The U.S. Government sees rare earths as key to national security [Credit: MP Materials Investors Presentation]

6. Reason: The company has a solid high-growth financial outlook with a CAGR of 53.3% and high EBITDA margin of 60.8% by 2023

MP’s current strategy consists of a three-stage plan to re-establish this critical industrial input within the United States:

  1. Stage: Supply China with RE concentrate — This stage is complete generating over $100 million in revenues.
  2. Stage: Refine NdPr, La, Ce at Mountain Pass, CA, for global distribution — This stage is in process and should be completed by 2022.
  3. Stage: Create NdPr Magnets — This stage will be followed after stage 2.
MP Materials long-term plan [Credit: MP Materials Investors Presentation]

The company will focus on stage 2 by retrofitting the existing processing facility to make separated rare earth oxides more reliably and cost-effective. Sales are estimated to grow from $75 million in 2019 to $415 million in 2023. The company is estimated to achieve an impressive CAGR of 53.3%. By 2023, the company could increase its earnings power to $252 million of adjusted EBITDA.

In 2025, the company wants to leverage its singular source of commercial-scale Western rare earth supply to expand downstream to magnets. At that time, the global EV penetration is anticipated to accelerate significantly. This is not part of the current forecast and offers further earnings upside.

So why should you invest in MP Materials (NYSE: FVAC)?

1. Reason: Rare-Earth Materials support over $7 trillion of finished goods

2. Reason: MP Materials is a pure-play opportunity to restore the full rare earth supply chain to the United States of America

3. Reason: MP Materials’ NDPR magnets are a vital part of the EV revolution and are irreplaceable

4. Reason: MP Materials has almost no competition in the Western hemisphere. There are high barriers to entry for any competitors

5. Reason: The United States sees rare earths as a key to the critical national security supply chain

6. Reason: The company has a solid high-growth financial outlook with a CAGR of 53.3% and high EBITDA margin of 60.8% until 2023

If you buy know into MP Materials, you are investing in the validated concentrate business to China and the global oxides business that will be realized in stage 2 and you receive through the equity the nationality to participate in the highly profitable NdPr magnet business.

*** I’m currently long MP Materials (NYSE: FVAC) ***

MP Mine in Mountain Pass, CA [Credit: MP Materials Investors Presentation]