Pity a commodities stock in a cyclical market even when the commodity in question is one of the hottest natural resources on the planet.
Ever since the green revolution got underway, and especially since the Biden administration got its green energy-friendly Inflation Reduction Act passed last year, with billions of dollars of subsidies for technologies such as electric cars and rechargeable batteries and wind turbines, investors have looked for ways to profit off the trend toward greater American investment in renewable energy. And one of the most obvious candidates to benefit from this trend (one would think) was MP Materials (MP 2.21%), the biggest American miner of rare earth elements used to make permanent magnets used in electric vehicles and wind turbines.
But here's the thing: MP Materials reported its third- quarter 2023 earnings earlier this month, but instead of making bank, the company had to report a loss.
NYSE: MP
Key Data Points
A loss by any other name is still a loss
MP's numbers last quarter looked pretty miserable. On the one hand, MP sold and shipped 9,177 metric tons of unrefined rare earth oxides (REO, which is to say, rare earth metals) in the quarter, which was 14% less than it shipped in the prior year's Q3.
That wasn't the bad news, though. Despite high interest rates weighing on both sales of electric cars and installations of wind turbine projects, management noted that demand for REO was actually pretty steady year over year. In fact, the only reason shipments shrank at all was because MP has itself begun using some of the REO it produces -- taking it and refining it into pure rare earth metals. (More on that in a moment.)
The really bad news was that REO prices continue to slide. The price per ton that MP was able to collect, in fact, fell by more than half. Thus, smaller shipments plus lower prices sent quarterly revenue down 58% year over year to $52.5 million and flipped MP from a $0.33 per-share quarterly profit to a $0.02 per-share loss.
(Admittedly, when calculated as a non-GAAP number, MP still "beat estimates" by reporting a $0.04 per-share non-GAAP profit. But another word for non-GAAP, in this instance, is a GAAP loss.)
Right place, wrong time
But wait! This bad news gets worse!
Q3 2023 wasn't just a lousy quarter for selling rare earth oxides. It was also the first quarter that MP succeeded in executing Stage II of its three-part plan to bring back the production of rare earth magnets to U.S. shores (as opposed to exporting rare earth oxides to China, so they can refine the oxides there, turn them into magnets, and then... sell them back to the U.S.).
As MP advised, having now established its own refining capability, the company "produced separated NdPr" on U.S. soil, repatriating a critical national security capability in Q3. (NdPr is pure, separated neodymium praseodymium. So you can see why they use the less tongue-twisty chemical abbreviation.)
What's next for MP Materials
MP intends to continue expanding Stage II production of pure NdPr. What's more, despite falling prices, the company is forging ahead with a new "Upstream 60K" strategy to grow REO output by 50% over the next four years.
That might seem counterintuitive. Ordinarily, commodity companies respond to falling commodity prices by cutting production to bring supply and demand into better balance on the theory that this will boost prices and improve profits. In MP's case, however, the more REO the company mines, the more pure NdPr it can produce, and eventually, the more rare earth magnets it can manufacture for its industrial customers. Just roughly calculating from the 1,499-ton fall in REO sales from Q3 2022 to Q3 2023, it appears that MP needs approximately 30 tons of REO to produce one ton of NdPr. So if MP wants to produce more than the 50 tons of NdPr it separated last quarter, it will need to mine a lot of REO.
Long story short, it appears that MP Materials is playing the long game here. Undeterred by crashing REO prices in the short term, it's ramping up REO production in pursuit of its goal to become a major supplier of rare earth magnets to the American market -- freeing U.S. companies from reliance on China as their magnet supplier.
This is good news for the U.S. from a national security perspective. As for whether it will be good news for investors in MP and result in the 20-times increase in profit (between now and 2027) that analysts polled by S&P Global Market Intelligence predict... this remains to be seen.
