Why MP Materials Skyrocketed This Week

Key Points

• The Department of Justice announced a $400 billion investment in MP to fund a huge rare earths processing plant expansion.

• In conjunction, the DoD agreed to a long-term purchase agreement with a minimum price and volume commitments.

• The deal is momentous for MP and significantly de-risked its growth outlook, albeit in exchange for a 15% dilution, accounting for the government's new stake.

• 10 stocks we like better than MP Materials ›

Shares of MP Materials (NYSE: MP) rocketed 46.7% this week, according to data from S&P Global Market Intelligence.

MP Materials is one of only a few U.S.-based miners with rare earths reserves, and the only one with a fully integrated operational mine, processing facility, and magnet-manufacturing facility in Mountain Pass, CA just outside Las Vegas. As such, the company's importance has come to the fore amid the U.S.-China trade war, since China is the world's dominant processor of rare earths materials. During recent trade negotiations, China slowed shipments of rare earth materials to the U.S. as a bargaining chip.

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On Thursday, the Department of Defense announced a massive investment in and long-term commitment to MP Materials. The announcement gave investors not only a high degree of certainty about MP's future profit growth but also a validation of the company's strategic importance.

As a result, the stock skyrocketed nearly 54% yesterday.

The DoD becomes MP's largest shareholder

As part of the announcement, the Department of Defense will purchase a $400 million convertible note, as well as warrants to purchase MP Materials common stock, with a total as-converted stake amounting to about 15% of the company.

The investment will fund a second rare earth processing facility, which MP named the "10X facility," implying a 10x increase in output. To ensure that this facility remains profitable and is a good deal for MP, the DoD has also entered into a 10-year agreement to buy rare earths from MP with a price floor of $110 per kilogram while also ensuring that 100% of the output is purchased by either the government or commercial customers.

These provisions indicate that if this massive new "10X" facility isn't able to sell all its rare earths to commercial entities or if China starts to "flood the market" to drive down rare earths prices, as it has done with other commodities, the government will still pick up remaining inventory at a fair price.

Image source: Getty Images.

Is this deal a sign of others to come?

There has always been some degree of government involvement in strategic industries; however, since high-stakes trade negotiations continue between the Administration and just about every U.S. trading partner, one may expect similar deals going forward with other companies.

MP may be the most directly involved the government gets in any private company. However, the large tax and spending bill, subsidies, and future industry-specific incentives all have the capability to greatly affect certain "strategically important" companies and their stocks.

When looking at one's portfolio, one may want to include some strategically important U.S.-based companies, whether they be in rare earths, other commodities, defense contractors, semiconductor manufacturers, or others.

As we've seen, one announced deal has the potential to greatly move such stocks in a short amount of time -- and the current President certainly likes to make "deals."

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool recommends MP Materials. The Motley Fool has a disclosure policy.