Five years ago, heavy spending, a heavier debt burden and the falling prices for rare earth metals spelled the day of judgment for the rare earth miner Molycorp. Today, however, Molycorp is back with revenge – and new name: MP material (NYSE: LP).
In its fourth quarter and full-year earnings report, MP Materials stated that its sales had increased 100% over the past year and that its profits had increased 22 times.
What is MP Materials?
If MP Materials is not a familiar name to you, this is not surprising.
Named after its primary mining and processing facilities in Mountain Pass, Nevada, MP Materials was bought out of bankruptcy in 2017 and announced via a reverse merger of a special purpose acquisition (SPAC) company late last year. Today, it is ‘the largest producer of rare earth materials in the Western Hemisphere’, says MP – the only operational miner in the continental United States – and it focuses on the exploitation of the rare earths of neodymium praseodymium used to create magnets for electric motors used in electric vehicles, wind turbines, drones and similar high-tech robotic devices.
If this sounds like the kind of business that can perform well in today’s 21st century high-tech economy – well, you were right about that. In yesterday’s earnings report, MP Materials said that its sales in the Q4 2020 literally doubled compared to the fourth quarter of 2019, by 100% higher to $ 42.2 million. Profit on these sales increased by 2,225% to $ 24.1 million.
That’s right: MP’s net profit margin in the fourth quarter was 57%.
Now things were not rather as good as it makes them sound. The vast majority of the ‘profit’ earned by MP Materials last quarter was due to a $ 17.8 million transfer carried over, which added a positive profit to the bottom end. This historic loss tells you how bad the business was before it revived. But even though the net profit is not as impressive as it seems at first glance, MP still posted an operating profit of $ 7.7 million in the fourth quarter, which is an operating profit margin of 18.2%, and it’s not too bad for a miner.
What it means for investors
So … does that mean you should run out of shares right away and buy shares in MP Materials? Not so fast, Tex. We have other warnings to consider, such as the fact that the rest of 2020, very strong as in the fourth quarter of 2020, was quite difficult.
Despite selling $ 134.3 million in rare earths in 2020, MP Materials posted an operating loss for the year – $ 34.7 million – and a net loss for the year as well – $ 21.8 million, or $ 0.27 per diluted share. MP is also not yet ready to deliver ‘divorced rare earth oxides’ and says it will start in 2022. (In 2020, the company still only ‘contains rare earth oxide’, or REO – not the pure form).)
The good news is that the price of MP’s rare earth metals, even impure ones, rose by 70% in the fourth quarter, thanks to greater demand for REOs which caused increased market prices to rise and ‘helped by’ improved productivity ‘leading to ‘higher percentages of concentrate produced by the company. As purity improves over time and the demand for Neodymium-Praseodymium rises to feed the country’s hunger for windmills and EVs, it is logical to assume that the price will also improve. No matter how high the prices go, MP says he “continues to provide production with 100% through sales.”
Assuming all goes well and the company reaches the targets analysts have set for it, 2021 could be the year MP earns his first full-year earnings ($ 0.44 per share). By 2023, that number could triple to $ 1.33 per share, according to estimates by S&P Global Market Intelligence.
But is MP Materials’ share 33.3 times more than the profit the company can earn over two years, as the current share price means? This is a question that investors themselves must answer.
This article represents the opinion of the author, who may not be in agreement with the ‘official’ recommendation position of a Motley Fool premium advisory service. We are furry! When we question an investment thesis – even one of our own – it helps us all to think critically about investing and to make decisions that help us become smarter, happier and richer.