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Stock Insights

This Rare Earths Company is a Rare Opportunity

6/10/2021

3 Comments

 
This week we are tackling the subject of rare earths, their applications for electric vehicles and how TAMIM’s Global Mobility strategy aims to benefit. The rare earth elements are composed of a group of seventeen metals that are each just as hard to pronounce as the next. They are becoming increasingly vital to a carbon free economy with applications for both electric vehicles and electrical efficiencies. 
Wind turbines, rare earths
Author: Adam Wolf
​Right now, China is producing over 80% of the world’s rare earth supply. As a result of this, the US is pushing towards domestic production of these elements. Our holding, MP Materials, stands to benefit.

MP Materials (MP.NYSE)

MP Materials logo
​MP Materials owns and operates Mountain Pass, the only integrated rare earth mining and processing site in North America. The Mountain Pass mine is in Nevada, a top tier mining jurisdiction.  Mountain Pass is blessed with one of the world’s highest quality deposits of rare earths, allowing MP to be a global low-cost producer The Mountain Pass mine contains more than 800k tons of recoverable rare earth oxides with an average 8% ore grade, one of the highest quality (known) deposits in the world. Mountain Pass is designed as a zero-discharge facility, featuring a dry tailings process that allows recycling of ~95% of the water used in the milling and flotation circuit. The sustainable features of the mine are very favourable given the current ESG-driven environment when it comes to valuation.

The Rare Earth Elements:

Scandium, Yttrium, Lanthanum, Cerium, Praseodymium, Neodymium, Promethium, Samarium, Europium, Gadolinium, Terbium, Dysprosium, Holmium, Erbium, Thulium, Ytterbium, Lutetium
​
​MP currently produces ~15% of the global supply of rare earths, currently in the form of an intermediate product — rare earth concentrate — that requires further processing in Asia. It currently sells its output to China-based, and 8% shareholder, Shenghe Resources for further processing but this is subject to change once MP implements their upcoming expansion strategies at the Mountain Pass mine. The company plans to reinvest the free cash flow generated from operations into expanding MP’s US capabilities, including restoration of domestic refining capability at Mountain Pass by next year. MP Materials will relaunch its onsite processing facilities, setting the foundation for a renewed, self-sufficient US rare earth industry. MP Materials shares have more than trebled since listing on the New York Stock Exchange in November 2020. 
Rare Earth Elements

​Rare earth elements are far more abundant than their name suggests but extracting, processing and refining the metals poses a range of technical, political and environmental issues. Most of the rare earth deposits are found along with radioactive materials that contribute to ecosystem disruption and release hazardous byproducts into the atmosphere. As a result, it is often difficult to receive the necessary environmental approvals to develop a rare earths mine. Environmental regulations are often more stringent than inside China which is why the country dominates the rare earth industry, producing over 80% of global supply as mentioned.
Rare Earth Supply and demand
​Having a single country, particularly one like China, dominating the supply of such critical elements poses a number of issues for the US. This is especially the case given the current geopolitical environment and the supply chain issues that are not only threatening inflation but also causing shortages in electronics and other industrial goods.  President Biden signed an executive order requiring the US Government to review supply chains for critical minerals and other identified strategic materials, including rare earth elements, in an effort to ensure that the US is not reliant on other countries, i.e. China.
NdPr Oxide Output & Price EXV China
Electric Vehicles

With electric vehicles being one of the three pillars of our Global Mobility fund (along with autonomy and sharing/connectivity), we look for companies that will benefit from the imminent growth in electric vehicle production by participating in the ecosystem that is being built around the industry. While the US intends to shift away from China to source their rare earth supply, without domestic production this would have a significant effect on American consumers as domestic demand for batteries and electric vehicles ramps up. The pace of demand growth is expected to rise rapidly over the next few years as sales of electric vehicles are slated to reach 12.2m in 2025, according to data from IHS Markit.
NdFeB Magnet Utilisation in a Representative Electric Vehicle
Source: MP Materials company website
​Rare earths are going to be a vital component in humanity’s shift towards cleaner energy. Not only will they be integral for electric vehicles but they are also used for things like wind turbines. Neodymium and dysprosium are the key components of the magnets used in modern wind turbines
" The wind turbine market is anticipated to account for ~30% of the global growth in the use of rare earth magnets from 2015-2025. Using rare earth metals prevents the use of gearbox. Rare earth magnets make the turbines lighter, cheaper, more reliable, easier to maintain and capable of generating electricity at lower wind speeds."
 - UBS Research, 23 July 2018
​Stage II + III Strategy

As it currently stands, all of MP’s rare earth production requires further processing in Asia, something that the US is clearly anxious about. Following the acquisition of the Mountain Pass mine in 2017, the mine’s production is approximately 3.2x greater than the highest ever production in a twelve-month period by the former operator using the same capital equipment. That was the first stage of MP’s strategy.  The second stage of MP’s Mountain Pass strategy will see MP Materials relaunch its onsite processing facilities, setting the foundation for a renewed and self-sufficient US rare earth industry. This would mean that MP Materials no longer has to send their product for further processing in Asia, they will now be able to sell their concentrate to end users which will have a huge cost-benefit. MP is aiming to finish their second stage in 2022. Stage III would be downstream integration, to be completed via either building a captive integrated magnet supply chain or investing in this capability via an acquisition, partnership or joint venture. The integration of magnet production would establish MP as the first and only fully-integrated source of supply for rare earth magnets in the Western Hemisphere. In addition to offering end-market magnet customers a complete Western supply chain solution, MP believe downstream integration would also create a material incremental value creation opportunity.
Outlook & Thesis

We see MP Materials as a company with multiple tailwinds moving forward. The shift toward a self-sustained supply chain in the US will obviously have a favourable outcome for US rare earths miners and provide further support for future projects. The demand side for rare earths is looking strong with electric vehicle production ramping up as well as other applications in things like electronics and wind turbines. Looking over at the supply side, due to the radioactive material that is usually found with rare earths, these mines are hard to bring into production so our outlook for the price of these elements is very strong. The completion of MP’s Stage II plans will be a major catalyst for the company, it will make them the only US company that can provide a rare earth end product to consumers. This will not only be cost-effective but will give them sizable leverage when negotiating off take agreements with US consumers.

​MP are currently sitting on over US$1.1bn in cash, enabling them to execute their strategy at the Mountain Pass mine while also allowing them the opportunity to make further acquisitions or JV agreements, further increasing their production and presence in the future. In their last quarterly announcement, MP had an underlying EBITDA of 64%. Considering the cost benefits of their Stage II implementation and their increased bargaining power in terms of off take agreements, MP is sitting on a highly profitable mine. MP Materials is another company in TAMIM’s Global Mobility portfolio that will benefit from the shift towards decarbonisation through electric vehicles and clean energy applications. We see MP Materials dominating the rare earths industry in America and they will be the only US based company that has the ability to provide an end product to consumers without relying on Asia.

Disclaimer: MP Materials is currently held as a long position in TAMIM's Global Mobility portfolio. ​The TAMIM Global Mobility strategy seeks to  to capitalise on the ongoing $7 trillion autonomous and electric vehicle revolution.
3 Comments
Doug
7/10/2021 07:57:49 pm

Adam,
Thanks for an interesting article that tries to see the future through the murk of history. A minor point is that MP Materials does has its corporate HQ in Las Vegas, Nevada, but its Mountain Pass rare earth mine is actually located over the border in San Bernardino County, California.
https://www.nsenergybusiness.com/projects/mountain-pass-rare-earth-mine/
Your point that “...given the current geopolitical environment and the supply chain issues that are not only threatening inflation but also causing shortages in electronics and other industrial goods. President Biden signed an executive order requiring the US Government to review supply chains for critical minerals and other identified strategic materials, including rare earth elements, in an effort to ensure that the US is not reliant on other countries..” makes an old cynic like me wonder if countries such as the USA and Australia (where we manufacture nothing and even ship our rare earth ores off to Malaysia for processing) have really learnt anything from the globalisation experience.
Or will the mining history of Mountain Pass repeat itself, because nations forget Teddy Roosevelt’s advice to speak softly and carry a big stick if that strategy costs money to subsidise production of stick making materials? Or has climate change created a completely new and much greater market for rare earth metals?
Mountain Pass rare earth mine history
Molybdenum Corporation of America started rare earth mining operations at Mountain Pass in 1952. Unocal Corporation acquired Molybdenum Corporation of America in 1977 and continued rare earths production until 1998, although mining and milling operations continued until 2002.
Mining was suspended in 2002 due to weak prices for rare earth.
Chevron Corporation, acquired the mine from Unocal in 2005 and started processing stockpiled rare earth concentrates at the site in 2007.
Molycorp acquired the Mountain Pass rare earth mine from Chevron in September 2008 and restarted mining operations at the site in 2010.
Molycorp, invested approximately $1.5bn in the development of the Mountain Pass rare earth property, but went bankrupt in 2015, resulting in the suspension of mining operations.
MP Materials acquired the property in June 2017 and commenced mining in the fourth quarter of 2017. Production of rare earth concentrates at the re opened mine started in 2018.
Regards
Doug

Reply
Roger Armitage
8/10/2021 09:39:04 am

You didn't mention Lynas which has two US DOD contracts for heavy and light Rare Earth separation facilities on US soil

I expect Lynas and its US partners will share in the US end market and will have a first mover advantage over MP

Reply
Adam Wolf
8/10/2021 10:37:42 am

Hi Roger,

You raise an excellent point. According to their Feb 21 presentation, Lynas is expecting their RE facility in the US to be a "well progressed development" in 2023 with their Processing Platform in operation in 2025. This timeline was confirmed in more recent announcements. MP's plant should be operational next year.

The DoD contracts are an interesting wrinkle though!

Thanks for the comment,

Adam

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