Prediction: MP Materials' Aerospace Deal Is Just the First of Several

Last month, MP Materials (NYSE: MP) signed an agreement to supply gadolinium oxide (a key rare-earth material found in nuclear reactor shielding on submarines and infrared sensors and electronics) to an unnamed U.S. aerospace and defense manufacturer. Management expects the contract to be worth nine figures over multiple years, with MP developing the additional separation capacity at its Mountain Pass facility in California.

Now, the company hasn't disclosed the customer or the specific size of the contract, but management described the deal as significant. And while I'm not typically keen on ambiguity, the announcement of this deal does provide some interesting intel about demand.

You see, American aerospace and defense companies rely heavily on rare-earth materials for everything from aircraft and missiles to radar systems, satellites, and drones. The problem is that China controls much of the world's rare-earth processing and manufacturing capacity. That's a vulnerability the U.S. government has been trying to eliminate.

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MP Materials already operates a mine and processing facility in Mountain Pass, California, and it's expanding further in Texas, where it currently produces rare-earth metals and magnets in Fort Worth. The company is actually building a much larger magnet manufacturing campus in nearby Northlake.

MP is producing more rare-earth material

In Q2, MP Materials produced 840 metric tons of NdPr oxide, up 41% year over year. NdPr is neodymium-praseodymium, the material used to make the essential permanent magnets found in electric vehicles, drones, robotics, and wind turbines.

MP sold 1,006 metric tons of NdPr in the second quarter, a 127% increase from the same quarter last year. That helped push quarterly revenue up 89% to $108.5 million, while adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) improved by $41 million to $28.5 million.

Those numbers are important because MP's investment thesis increasingly depends on its ability to move beyond simply mining rare-earth ore and sell higher-value products further down the supply chain. And that's exactly what's starting to happen. MP's magnetics segment generated $16.5 million in Q2 revenue, and adjusted EBITDA from that business reached $7.5 million.

Customers are validating the strategy

The unnamed aerospace company isn't the first major customer to back MP's domestic supply chain strategy. Last year, the Department of Defense agreed to invest $400 million in MP Materials. Then Apple followed with a $500 million commitment to purchase American-made rare-earth magnets from MP. So now you've got the Pentagon, Apple, and an aerospace and defense company all moving in essentially the same direction.

This isn't the last one

MP has spent years building the infrastructure necessary to create a rare-earth supply chain outside China. Now the customers are beginning to line up before that build-out is even finished.

Apple wants magnets for consumer electronics. The Defense Department wants a secure domestic supply chain. And now an aerospace and defense customer has signed a long-term agreement for another critical rare-earth material.

That's why I don't believe this latest aerospace agreement will be the last. The bottom line is that the more companies decide that dependence on China represents an unacceptable supply chain risk, the more valuable MP Materials' domestic production becomes.

Jeff Siegel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and MP Materials. The Motley Fool has a disclosure policy.