Well, that was certainly a pleasant surprise!
I have to admit, it was with some trepidation that I opened up my online stock portfolio Friday, after rare-earth mining stock MP Materials (MP +5.94%), which I own, reported its Q2 2023 financial results. After all, MP had just reported that, thanks to weak commodities prices, its revenue had fallen by 55% in comparison with Q2 2022 -- and its income for the quarter had collapsed 90%.
Yet instead of selling off, MP Materials stock jumped higher, ending the day up 5.6%. So why did that happen?
NYSE: MP
Key Data Points
MP Materials by the numbers
Well, start with expectations. The fact that pricing on rare earths had been falling for a while was news to exactly no one. MP Materials actually shipped more rare-earth ore this year than last, but the prices it's getting per ton are way down. As a result, Wall Street was already expecting MP Materials revenue to tumble from more than $143 million a year ago -- perhaps to as low as $61 million in Q2 2023. As it turned out, though, revenue stopped falling at $64 million -- a pleasant surprise.
Similarly with earnings, Wall Street had forecast that MP would earn only $0.06, adjusted for one-time items, or 85% worse than last year. But MP earned $0.09 per share -- still a big drop, but 50% more than what analysts had forecast.
Yet another pleasant surprise.
It's worth pointing out, though, that when calculated according to generally accepted accounting principles (GAAP), MP's profits were a bit less than the "adjusted" figure -- just $0.04 per share, down from $0.38 per share a year ago. Also, free cash flow (FCF) this year is running decidedly negative. Through the first six months of the year, MP says its capital investments have totaled $130.2 million, or nearly twice the amount of its operating cash flow of $65.4 million.
What investors want
Yet consider what MP Materials has been spending that capital on. As management proudly announced, it has shifted from "stage 1" in its Mountain Pass mining operation into the beginnings of "stage 2," and "has begun producing refined rare-earth products ... an important milestone for the company and in returning the full rare-earth supply chain to the United States."
Shipments of pure neodymium and praseodymium (NdPr) rare-earth elements -- as opposed to ore containing these elements, and needing further refining -- are expected to begin this quarter. Eventually, the company believes it will produce enough NdPr "to produce magnets powering the motors in 6 [million] to 10 million electric vehicles, or around half of total U.S. vehicle sales," MP said in a statement.
And that's not all. Looking ahead to the next stage in its development, MP noted that it has already begun installing "stage 3" metal and alloy manufacturing equipment in a new factory under construction in Texas. There, the company will take the rare earths it has refined in Nevada and use them to manufacture NdFeB -- that's neodymium-iron-boron -- rare-earth magnets, giving the U.S. the first fully functional rare-earth magnet factory it's had here in decades, and freeing U.S. users of rare-earth magnets from China as a sole source of supply.
In anticipation of this happy event, MP has already signed a rare-earth magnet supply contract with General Motors (GM +2.96%).
What it all means for investors
So what should investors expect from MP? Management didn't give any specific guidance in its earnings release -- and considering the volatility in commodity prices, perhaps that was the right call.
It's not preventing Wall Street's best and brightest from making guesses, however. According to data collated by S&P Global Market Intelligence, 2023 looks as if it will be a transition year for MP, in which profits keep trickling in ($0.15 per share is the forecast), while free cash flow flames out. By next year, however, with stage 2 up and running, MP Materials is expected to earn as much as $1.25 per share and return to producing free cash flow as well -- $124 million worth.
Then, as stage 3 comes online, growth should continue both in GAAP earnings and free cash flow. By the time 2025 rolls around, we could see MP Materials both firmly profitable and generating copious FCF -- $1.93 per share and $273 million, respectively. At today's prices, that works out to a valuation of 12.3 times 2025 earnings, and 15.2 times FCF. Not bad prices at all, if things all work out as planned.
Fingers crossed that they do.
