Introduction#
In this article, we actively explore MP Materials' (NYSE:MP) valuation using the dynamic discounted cash flow (DCF) DCF valuationDiscounted cash flow. You estimate the cash a business will generate every year into the future, then reduce each of those future amounts to what it is worth today — because a dollar in 2035 is worth less than a dollar now. Add them up and you get an estimate of what the whole company is worth, independent of what the market currently says. It is the most rigorous valuation method and also the most sensitive to its own assumptions: change the growth rate or the discount rate slightly and the answer moves a lot. 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 valuation 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 Stage III of the company's development, MP Materials has begun trial production of NdPr NdPrNeodymium-praseodymium, a pair of rare earth elements. Alloyed together they make the strongest permanent magnets available commercially — the components inside electric vehicle motors, wind turbine generators, hard drives and defence systems. China has historically controlled the vast majority of processing capacity, which is why Western production is treated as a strategic issue rather than only a commercial one. metals.
The impetus for this MP Materials valuation is the recent news relating to 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 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 a decrease in the price of REE oxides by more than 50% in the year 2023.
The news in 2023 for MP Materials, ranging from manufacturing 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 insights 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 modifications to bring the MP Materials Valuation to fruition.
Note to Readers Regarding Investments and Market Risks: This is not investment advice. Our portfolio has MP Materials Stock. We believe there is great potential for MP Materials and in the objective of using 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 everyone 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#
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Terminal Year Revenue Projection Terminal yearThe final year of an explicit forecast, after which you assume the business settles into steady, predictable growth forever. Because that assumed-forever period often accounts for most of a DCF valuation, the terminal year assumptions usually matter more than every individual year that precedes them.**: Terminal Revenue Projections are based on International Energy Agency's reports and Global Market Insight's demand projections for 2040.
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Market Share: Estimated at 30% over the long run. American companies have the tendency to acquire sizable market share due to factors of provision of capital, technology, and innovation.
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Probability of failure: Set at 20% in the scenario of a money-losing enterprise with a high debt load.
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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 great potential for future returns. The valuation's terminal cash flow projections extend to 2040.
Download the MP Materials Valuation Spreadsheet
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 to the Excel framework.
MP Materials, in our view, provides a great investment opportunity in the onshoring movement that is currently happening in 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.
Note to Readers Regarding Investments and Market Risks: This is not investment advice. Our portfolio has MP Materials Stock. We believe there is great potential for MP Materials and in the objective of using 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 everyone that reaches this article to consult with a Financial Advisor to make investment decisions.