When people talk about raw materials at the moment, it is usually about oil and gas. The exploding energy prices are a hot topic of discussion for politicians, business and end consumers alike. In this tense situation, metals such as scandium, yttrium and lanthanum are almost forgotten. Wrongly so, because the substances known as "rare earths" can be found in numerous everyday products such as smartphones, lasers, LEDs or even in the batteries of electric vehicles.
The "building blocks of the future" are also, or rather especially, interesting for investors. Because where there is growth, there are usually price gains lurking. This is best illustrated by the example of the US group MP Materials. Over the past two years, the share price has risen by around 180%. This impressive performance was accompanied by an equally good operating performance. For example, the group, which operates the only active rare earth production facility in North America, sold a record 42,158 tons of metals last year, generating record sales of USD 332 million, an increase of 147% over the previous year. Adjusted Ebitda even shot up by 414% to USD 219 million, resulting in a net profit of USD 135 million. By comparison, in 2020 the bottom line was still a loss of just under USD 22 million.
The trend curve continues to point upwards in the current fiscal year. The Las Vegas-based company reported a 96% increase in revenue in the second quarter. However, the mining group did not even have to mine any more to achieve this; MP produced 10,300 tons, roughly the same as in the same period of the previous year. Rising prices had a decisive influence on this growth. Due to rising demand, the price per ton increased by more than 90% to USD 13,918. This resulted in a net income of USD 73.3 million or 38 cents per share, compared to USD 27.2 million or 15 cents per share in the same quarter of the previous year. The company once again exceeded expectations in terms of sales as well as earnings.
"We benefited from higher prices and tightly controlled costs while adding new talent to the team," CEO James Litinsky commented on the interim report. However, price increases will not continue indefinitely. On the contrary, the board even expects lower prices in the current third quarter. But the growth story of MP Materials is far from over. The increasing electrification of the global infrastructure continues to play into the company's hands. According to its own figures, MP currently supplies around 15% of the world's rare earths. The long-term focus is on neodymium-praseodymium (NdPr), a crucial material for powering electric vehicles, wind turbines, drones and robots. The e-car sector, in particular, is generating fantasy. Adamas Intelligence estimates that demand for NdPr will increase 34-fold by 2035, when only e-cars will be allowed on the market.
Given these bright prospects, MP is also getting into magnet production itself. The plant under construction in Texas is expected to produce enough magnets per year to power around 500,000 electric vehicle engines. The company already has a supply agreement with General Motors, which will begin in late 2023. "Our first Stage III magnet plant in Texas is quickly taking shape," CEO Litinsky enthuses. But back to the present: as far as the current fiscal year is concerned, analysts currently expect, on average, an increase in earnings per share to USD 1.53, as well as sales of USD 545 million. On the earnings side, this corresponds to an increase of 115%, and on the revenue side of slightly more than two-thirds. The majority of experts also agree on the price trend of the MP share. The average 12-month target is currently USD 60, which equates to an upside potential of 37%.
However, a look at the chart of the MP share reveals that a direct investment requires a very tough nerve. This year alone, the historical volatility is an above-average 69.3%. These high fluctuations can be converted into targeted returns with a barrier reverse convertible, giving conservative investors access to the interesting rare earth specialist from the USA. In addition, Leonteq has launched two new softcallable BRCs. With these products, above-average returns are possible even in a sideways trend or with moderately declining prices. With a maximum term of 15 months and a risk buffer of a comfortable 51%, an interest rate of 15.00% p.a. is possible with the CHF version. The USD-denominated counterpart even offers a coupon of 18.00% p.a. - with otherwise identical features. The first soft call observation day takes place after six months and then quarterly from that point on.
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