Five years ago, heavy spending, heavier debts and falling prices for rare earth metals represented doomsday for rare earth miner Molycorp. Today, however, Molycorp is back with a vengeance – and a new name: MP materials (NYSE: MP).
In its earnings report for the fourth quarter and the full year, MP Materials stated that its sales increased 100% over last year, and its profits increased 22 times.
What are MP materials?
If MP Materials is not a household name for you, this is not surprising.
Named after its main mining and processing facilities in Mountain Pass, Nevada, MP Materials was bought out of bankruptcy in 2017 and made public through a reverse merger of a special purpose acquisition company (SPAC) at the end of the year. last year. Today, it is “the largest producer of rare earth materials in the Western Hemisphere”, says MP – the only mining company operating in the continental United States – and is focused on the extraction of rare earths from neodymium-praseodymium that are used to create magnets for electric motors used in electric vehicles (EVs), wind turbines, drones and similar high-tech robots.
If that sounds to you like the kind of business that could perform well in today’s 21st century high-tech economy – well, you’re right about that. In yesterday’s earnings report, MP Materials said its fourth quarter 2020 sales literally doubled compared to the fourth quarter of 2019, a 100% increase to $ 42.2 million. Profits from 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 quite as good as it makes them sound. The vast majority of the “profit” that MP Materials earned in the last quarter came from tax losses of $ 17.8 million, which added to positive bottom line profits. This historic loss shows how bad a business was before it was reborn. But even though its net profit is not as impressive as it appears at first glance, MP still posted an operating profit of $ 7.7 million in the fourth quarter, resulting in an operating profit margin of 18.2%, and this is not bad for a mining company.
What does this mean for investors
So … does that mean you should run out and buy some shares of MP Materials? Not so fast, Tex. We still have other caveats to consider – such as the fact that, strong as the fourth quarter of 2020 was, the rest of 2020 was very difficult.
Despite selling $ 134.3 million in rare earths in 2020, MP Materials recorded 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 “separate rare earth oxides”, saying it will start in 2022. (In 2020, the company was still selling only “contained rare earth oxide”, or REO – not the pure form. )
The good news is that the price of PM’s rare earth metals, even impure, jumped 70% in the fourth quarter, thanks to “greater demand for REO leading to higher market prices” and helped by “improved productivity” resulting in ” higher percentages of concentrated REO “produced by the company. As the purity improves with time and the demand for Neodymium-Praseodymium increases to feed the country’s hunger for windmills and EVs, it is logical to assume that the price will also increase. And no matter how high the prices are, the MP says that “it continues to forecast 100% of the sale of its production”.
Assuming that everything goes smoothly and that the company reaches the goals that analysts have set, 2021 may be the year that the MP makes its first annual profit ($ 0.44 per share). In 2023, that number could triple to $ 1.33 per share, according to estimates collected by S&P Global Market Intelligence.
But MP Materials’ shares are worth 33.3 times the profit the company can earn in two years, as indicated by the current share price? This is a question that stock investors will have to answer for themselves.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even our own – helps all of us to think critically about investing and making decisions that help us become smarter, happier and wealthier.