MP Materials as it is the Largest rare earth metals company in the Western Hemisphere. That’s a statement that they must have repeated 10 times in their 10K and just about everywhere you read about them. So, clearly, very focused on trying to get market’s attention to that. Too promotional for my taste, but below is what I have to say objectively.
Business
The company is the only producer of scale for rare earth metals in North America. Owns and operates the Mountain Pass mine (Nevada). Acquired mountain pass mine in 2017 >> at that time it was in cold idle status. Mountain pass was active since 1952 by Molybdenum Corp which got acquired by Unocal Corp in 1977. 1998, Unocal stopped production at the mine. Unocal itself was acquired by Chevron in 2005. In 2008, Molycorp Minerals LLC acquired the mine from Chevron, resumed operations, was then placed into cold Idle status in 2015.
Has an offtake agreement with Shenghe, a Chinese company, by its rare earth concentrate production. 90% of revenues are accounted for by Shenghe but in turn sells the material to Chinese refiners. Completed the stage 2 programme in Q3 2023 >> downstream refining process including NdPr production to sell to global customers. At the same time, it entered into a tolling agreement with VREX Holdco, which owns the Vietnam Rare Earth Company. VREX was 100% owned by Shenghe and MP acquired a 49% stake from it for $9.7 million. Stage 3 is about producing magnets using it refined rare earth production and the facility will be based in Fort Worth TX.
Global industry REO production off 209,000 metric tonnes. MP’s production for the last three years have been about 40,000 metric tonnes annually.
Some issues/questions about this process / structure:
- the company touts its stage 1 and stage 2 programme everywhere. However, the production from stage 2 is less than 5% of total production.
- While the vertical integration? The company states that it wants to capture the full value chain of rare earth production >> why does it make sense for the company to get into magnet production?
- Wants to get into further vertical integration into finished products >> intends to do so by build/buy/JV >> additional capital allocation risks.
- If refining on its own makes sense, then why the tolling agreement? If it is about US independence, Huawei the tolling agreement with a Chinese partner?
- If mines in cold idle status can be restarted in such a short amount of time, how many other such mines are there in the Western Hemisphere?
- How much refining capacity exists outside of China like this which can be used as tolling partners?
- Spends a lot of time in the initial 3 pages of the 10K in impression that it will be the only one stop shop/integrated player in Western Hemisphere. Question is: why does it make sense for MP materials to do? What kind of return on equity is the pure magnet production associated with?
Management
As seen in the table below, none of the people have any mining experience or any manufacturing / industrial experience. Why is this the right kind of team to build a business with such ambition? How about a conflict of interest between MP materials and JHL?
Compensation, costs, corporate governance
Claims to be one of the lowest cost producers of rare earth materials. However, has extremely high SG&A costs in relation to revenues and other costs >> SGA& is almost as large as COGS! Says that SG&A includes salaries etc of executives. At $79 mln, this is too high a level of SG&A for a mining company with $250 mln in revenues. High ESO costs as well which amount to about $25-30 mln with about 1% of shares being issued as ESO >> in my opinion, this is too high for a mining company.
Very high compensation levels to executives as seen below. Incredibly, the GC earns compensation of $2.5 which isn’t too far away from its COO and CFO!
Source: Company’s proxy filings
Way too many adjustments to be adjustment to the adjusted metrics reported:
- excludes expenses that they classify as start up costs >> is the costs associated with initial expenses etc of facilities being set up >> why weren't these allowed to be capitalised?
- Excludes initial transaction expenses pertaining to acquisitions, investments etc >> in a year when acquisition amounted to $9.7 million, how do we end up with 11.4 million in transaction related costs? Again, why won't this allowed to be capitalised if this word pertaining to CapEx?
In summary, I have a lot of questions on the business and whether it is a sensible operation. In my opinion, it doesn’t seem to have the right kind of strategy, people, or relationships. Is capitalizing on the hype about REEs and the incoming administration’s focus on it. I have no view on the stock price » for all I care, it could double tomorrow, but this isn’t a business I will want to own.
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