Discovering a Moat: MP Materials
A monopoly brewing for the supply of rare earth elements.
To Investors,
Since the Paris Agreement was introduced in 2016, we’ve seen countries around the world ramp up their interest in electrification and transitioning energy production methods to reduce the negative impact we’ve had on the climate. Every automobile manufacturer is planning to introduce more electric vehicles to their lineups.
At the same time, since 2016 there’s been an estimated $106 billion cumulatively spent globally on robotic/intelligent process automation.
However, the global energy transition and the global acceleration of industrial robotics can be lumped into one concept: efficiency and optimising performance. This means electric vehicles must and will become the majority of vehicles on our roads, and industrial production will be driven by robots.
With that in mind, where are the opportunities to participate in the energy transition and the accelerated adoption of robots?
Because it's uncertain where the winners will be, the best bet would be to invest in a raw materials producer that will supply the entire market (i.e., raw materials that are essential to the development of renewables, electric vehicles, and industrial robots). One such raw material is rare earth elements.
Rare earth elements include Lanthanum (used in EV batteries, used to add efficiency to petroleum cracking, and enables specialised treatments for lenses and vision systems); Cerium (used to reduce car emissions through its use in catalytic converters and enables energy efficiency by powering LED lighting); Samarium, Europium, Gadolinium, Terbium, and Dysprosium (all used in electric motors, medical devices, and lasers); and Neodymium and Praseodymium (these elements power the critical component for electrification, which are the strongest types of permanent magnets, which enable the conversion of electrical energy into motion via permanent-magnet motors. These motors power EVs, wind turbines, and industrial robots).
Currently the largest producers within the rare earth materials value chain (from mining to processing critical components such as permanent magnets) are companies based in China. This means that the global supply chain for rare earth elements lacks diversity and resilience.
Enter MP Materials
The only significant producer of rare earths in the United States, MP Materials, is building a vertically integrated supply source for permanent magnets through a 3-stage approach.
Stage 1 and 2 were about perfecting the upstream and midstream parts of the value chain, from mining and crushing, milling and flotation; to roasting, leaching and impurity removal, separation and extraction, and product finishing. MP Materials has completed these first 2 stages.
Stage 3 is about building and perfecting the downstream capability to manufacture, among other products, neodymium-iron-boron (“NdFeB”) permanent magnets, the final critical component for electrification in the rare earths value chain.
This downstream operation will take place in a new manufacturing facility built and operated as a joint venture with General Motors (GM). The new facility being built in Fort Worth Texas, as currently designed, will produce approximately 1 000 Mt of finished rare earth magnets per year, sufficient to power approximately 500 000 electric vehicle (EV) motors annually. MP Materials (MP) also expects to supply rare earth alloy flakes to other magnet producers to help develop a diverse and resilient U.S. magnet supply chain.
Under this joint venture, MP Materials entered into a long-term supply agreement with General Motors to supply U.S.-sourced and manufactured rare earth materials, alloy, and finished magnets for the electric motors in more than a dozen EV models to be produced by GM.
Once MP can complete and perfect this third stage of operation, the company will be the first and only fully integrated source of supply for rare earth magnets in the Western Hemisphere.
Strategy Outlook (As per the MP Materials 2022 annual report):
The global effort to curb carbon emissions and address climate change often focuses on the impact of the transportation system, and MP Materials believes that its products will play a significant role in advancing those efforts. To date, all U.S. states have mandated or offer incentives to support deployment of EVs or alternative fuel vehicles and supporting infrastructure, either through state legislation or private utility incentives within the state, with similar mandates and incentives in other countries globally.
Additionally, on August 16, 2022, the U.S government enacted the Inflation Reduction Act of 2022 which, among other things, provides several tax incentives to promote clean energy, including tax credits on the purchase of EVs.
The NdPr [Neodymium Praseodymium] product that the Company produces at Mountain Pass is essential to the permanent magnet motor technology deployed in the significant majority of current EVs.
A confluence of geopolitical and economic factors is causing downstream customers, such as automotive original equipment manufacturers (OEMs), to be increasingly focused on supply risk, highlighting the need to develop domestic (US) production of rare earths and related products. To meet the growth in demand for EVs, the Company believes automotive OEMs will redesign their supply chains to ensure a ready and stable supply of rare earth products as they transition their engine, transmission, and motor manufacturing facilities to build EV components.
Another factor that is not getting enough attention is the fact that robots will play a significant role in our lives.
Global population growth is currently around 1% a year (down from around 2.1% in 1970), and the global fertility rate is currently around 2.4 (down from around 5 in 1960), just above the replacement rate of 2.1. With populations not expected to grow much over the projected future, to maintain or ramp up global productivity we will need to replace the lost labour from humans with robots.
Already, $35 billion is expected to be spent on robot/intelligent process automation and artificial intelligence automation worldwide in 2023. That is a compound annual growth rate of 24% since 2019. On the robot side, we’ve already seen the applications of robotics in Tesla's production factories, Amazon’s warehouses, Walmart’s distribution centres, and the highly anticipated Tesla Optimus humanoid robot.
The kicker is that these robots also require NdFeB magnets to power them, which introduces further commercial opportunities for MP Materials.
Margin of Safety
Every auto manufacturer is introducing a line of electric vehicles, with Bentley, Honda, Jaguar, Mercedes, Rolls Royce, Volvo, and General Motors planning to go fully electric by between 2030 and 2040.
According to Boston Consulting:
Competition
In 2022 producers in China produced 210 000 Mt of rare earth oxides, 70% of the global production volume for rare earths. In the same year MP Materials produced 42 500 Mt, approximately 14% of the global volume, larger than the production volumes of the next two largest producing countries (Australia and Myanmar) combined. This statistic makes MP the largest producer of rare earths outside of China.
90% of the world’s permanent magnets are manufactured in China, currently no production of permanent magnets takes place in the US. The completion and successful operation of the Fort Worth facility (which will already have a customer in General Motors - the largest automobile manufacturer in the United States) will mark the first such capability in the U.S.
Being a general ally for most of the world, the Fort Worth facility in the US, and by extension MP Materials, will have the opportunity to grab a significantly large market share of the rare earths value chain, rivalled only by state backed Chinese companies.
Management
The Mountain Pass facility was bought out of bankruptcy in 2017, and at the time, the site was non-operational.
Almost immediately after the acquisition, operations were restarted at the facility, and in 2020, 38 500 Mt of rare earths concentrate were produced, a record production volume for the facility at the time. In 2022, the facility produced 42 500 mt.
Since going public in 2020 via a SPAC listing, we’ve had insight into the challenging work that the new management of the Mountain Pass facility has put in to improve the operations of the Mountain Pass facility and the business.
Key figures:
A confluence of geopolitical and economic factors related to the energy transition and robotics adoption have come together to introduce an opportunity to build a Western hemisphere monopoly for rare earths supply. At a $4 billion enterprise value for MP Materials, there remains a ton of unrealised value for the company, as we’re only at the beginning of this forthcoming global manufacturing boom.
Respectfully,
-Mansa
Sources:
https://www.stanfordmagnets.com/magnets-used-for-robot-manufacturing.html
https://www.stanfordmagnets.com/what-is-a-permanent-magnet.html
https://bunting-dubois.com/industries/industrial-commercial/
https://www.statista.com/statistics/270277/mining-of-rare-earths-by-country/
https://www.statista.com/statistics/249375/us-market-share-of-selected-automobile-manufacturers/
https://www.stanfordmagnets.com/magnets-used-for-robot-manufacturing.html
https://www.rareelementresources.com/rare-earth-elements