MP Materials Valuation - A discounted cash flow (DCF) approach

Table of Contents

Introduction
MP Materials Valuation Primer
The Valuation Framework
The Inputs for MP Materials Valuation
Major Inputs for MP Materials Valuation
What is the Discounted Cash Flow DCF Valuation of MP Materials
Conclusion

Introduction

In this article, we actively explore MP Materials' (NYSE:MP) valuation using the dynamic discounted cash flow (DCF) approach, reflecting the company's impressive growth in the rare earth sector since its 2020 public debut. We focus on the strategic milestone of commencing NdPr production, crucial for permanent magnet manufacturing, amidst a market ripe with opportunities, especially due to China's export ban on rare earth technologies. Drawing from Professor Aswath Damodaran's insights using Tesla's sample valuation model, our analysis offers a detailed look at MP Materials' financial prospects, combining robust revenue forecasts, market share estimates, and growth projections.

MP Materials Valuation Primer

This is the first article in the valulation series at Financial Gurkha. In this article, we are valuing MP Materials, a leading company in the rare-earth mining and processing sector in charge of operating the only rare-earth materials extracting and processing facility in the North American continent, the Mountain Pass mine in California, southwest of Nevada. In the Stage III of the company's develpement, MP Materials has begun "trial production of NdPr metals".

The impetus for this MP Materials valuation is the recent news relating China's export ban of rare-earth and permanent magnets related technology, and MP Material's recent success in manufacturing, albeit in test phase, NdPr Permanent Magnets. With giants like GM Motors already already in the line to secure MP Materials products, we believe the company is going to ride high waves.

MP Materials has an impressive revenue growth Year over Year. The TTM 2023 revenue backslide is due to decrease in the price of ROE oxides by more than 50% in the year 2023.

The news in 2023 for MP Materials, ranging from manufacuring of Permanent Magnets to China's Export Ban on rare-earth related-technologies, suggests that MP Materials will continue to grow in their core business. We assume MP Material will capture 30% market share in the long run given the backdrop of aggressive electrification of the automobile industry and massive investments in renewable energy.

The Valuation Framework

We want to thank Professor Aswath Damodaran, the "Dean of Valuation" at NYU Stern who has graciously been publishing GEMS on valuation, corporate finance and financial markets in general in his Musing on Markets blog. We highly recommend everyone to read his blog. He is one of the best and we owe a great deal to his work.

We have used Dr. Damodaran's valuation template, borrowing the Tesla Motors valuation template to make modification to bring the MP Materials Valuation to fruition.

Note to Readers Regarding Investments and Market Risks: This is not an investment advice. Our portfolio has MP Materials Stock. We believe there is a great potential for MP Materials and in the objective of using applying objective data and subjective estimate figures to properly assess our estimated value for this company, we conducted the valuation. Stock investments are subject to market risks and thus we strongly recommend our readers and to everybody that reaches this article to consult with a Financial Advisor to make investment decisions.

The Inputs for MP Materials Valuation

The MP Materials Valuation spreadsheet is attached here. Feel free to access the framework (We borrowed it from Prof. Aswath Damodaran) and made required changes.

Major Inputs for MP Materials Valuation

Terminal Year Revenue Projection : Terminal Revenue Projections are based on International Energy Agency's reports and Global Market Insight's demand projections for 2040.
Market Share estimated at 30% over the long run. American companies have the tendancy to acquire sizable market due to factors of provision of capital, technology, and innovation.
Probability of failure set at 20% set in scenario of money losing enterprise with a high debt load.
Rate of growth into perpetuity set at 8% with the assumption that rare-earth minerals and American-sourced permanent magnets are likely to be in high demand for a long period of time.

What is the Discounted Cash Flow DCF Valuation of MP Materials

According to our DCF Valuation Model, the MP Materials valuation stands at $81.17 per share. Currently, MP Materials trades at $20.16, implying a massive discount and a great potential for future returns. The valuation's terminal cash flow projections extends to 2040.

**Download the MP Materials Valuation Spreadsheet here

Note to Readers: This is a subjective valuation. Stock performance is subject to market risks

Conclusion

The article is intentionally kept short to encourage readers to refer the excel framework, MP Materials, in our view, provides a great investment opportunity in the onshoring movement that is currently happening the United States of America. MP Materials is a rising star in the rare earth sector, showcasing significant growth potential and resilience in a competitive market. The company's strategic advancements, particularly in NdPr production, coupled with favorable market conditions following China's technology export ban, positions it as a key player poised for substantial growth.