2 Reasons to Buy MP Materials Stock, and 1 Reason to Sell

Critical minerals are crucial for modern technology. These materials are essential for everything from smartphones to clean energy systems to modern defense platforms. Research from The Motley Fool shows that China controls a significant share of the supply chain for mining and processing critical minerals, which could pose a national security threat due to supply disruptions or trade disputes.

Because of their importance, the U.S. is seeking to secure its supply of critical minerals and rare-earth elements, and MP Materials (NYSE: MP) is one company leading the way. Last year, the U.S. producer of rare-earth materials entered a historic deal with the government. For investors considering MP Materials, here are two reasons to buy the stock and one reason to sell.

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Reason No. 1 to buy: MP's Mountain Pass mine gives it a first-mover advantage

MP Materials owns and operates the Mountain Pass mine in California, which is one of the world's richest rare-earth deposits and the only active rare-earth mine in the United States. The mine is a high-grade deposit with a total rare-earth element concentration of approximately 7% to 9%.

The company also leverages a vertically integrated business model, from upstream mining and raw material refining to downstream metallization and alloying. MP's processing capabilities enable it to produce large volumes of rare-earth oxide concentrate, as well as separated neodymium-praseodymium (NdPr) oxide and metal, which are essential raw materials for high-powered permanent magnets used in electric vehicle motors, military guidance systems, and artificial intelligence data centers.

With its mining operations and integrated business model, MP Materials has a first-mover advantage in the domestic "mine-to-magnet" supply chain.

Reason No. 2 to buy: MP has a historic deal with the U.S. government

Last year, MP Materials entered into a landmark public-private partnership with the U.S. government. As part of the deal, the U.S. has become MP Materials' largest shareholder through a $400 million convertible preferred equity investment.

The deal includes a 10-year Price Protection Agreement (PPA) that establishes a guaranteed price floor of $110 per kilogram for the company's NdPr products produced at Mountain Pass. This price floor provides MP with predictable revenue while protecting it from predatory pricing strategies by state-subsidized foreign competitors who could flood the market with cheap material.

Investors saw the effect of this arrangement first-hand in MP Materials' first-quarter earnings report, when its price protection agreement income boosted earnings by $42.3 million. In the quarter, MP achieved a record NdPr production of 917 metric tons, while sales increased 49% to $90.6 million. As a result, MP's adjusted EBITDA improved to $36.6 million, up from its $2.7 billion loss last year.

Reason to sell: Scaling up its domestic processing capabilities will take significant time and capital

MP Materials has the infrastructure to mine and process critical minerals, but it must continue to expand to meet growing demand for domestically sourced materials. As part of this, the company will construct a "10X" rare-earth magnet manufacturing campus in Northlake, Texas. The 10X facility is designed to scale total production capacity to roughly 10,000 metric tons of finished NdFeB magnets annually, with commercial commissioning projected to commence in 2028.

MP Materials estimates that developing the 10X project will require roughly $1.25 billion. While the project is partially subsidized by government assistance, the company still has to borrow funds, and the capital intensity will likely strain cash flow during development. Any delays in the build-out could affect its projected growth. Not only that, but if trade relations with China materially improve, the need to develop domestically sourced critical minerals may be de-emphasized by regulators in the U.S.

Is MP Materials a buy?

In the months following MP Materials' deal with the U.S. government, the stock surged to $100 per share. However, enthusiasm for the stock has waned, and it is now 46% off its 52-week high. The stock is priced at around 54 times its projected 2027 earnings and could be vulnerable to any struggles in ramping up production or expanding margins.

Investors should be aware of the risks associated with owning MP Materials. That said, the company has a first-mover advantage in the domestic critical minerals space, and the agreement with the U.S. government provides it with a unique backstop that helps secure future revenue. If you're bullish on the build-out of the domestic mine-to-magnet supply chains, MP Materials is a top stock to own today.

Courtney Carlsen has positions in MP Materials. The Motley Fool has positions in and recommends MP Materials. The Motley Fool has a disclosure policy.