Digging Into the Rare Earths Trade

Late last week, MP Materials MP surged in price overnight from Wednesday into Thursday. On Thursday, the shares closed up 50.6% for the day, closing at $45.23 after having traded as high as $48.12. The stock had traded with an $18 handle as recently as late May. On Friday, the shares closed down small (-0.27%) after having peaked intraday at $50.98. The "why"was simple.

The U.S. government had announced well ahead of last Thursday's opening bell, plans to take a large stake in the firm, which is the operator of the only active rare earths mine in the U.S. (This mine is in California). Under the agreement, the Department of Defense would become the largest shareholder in MP Materials, while guaranteeing a floor price for key rare earth minerals, metals or magnets that would stand at nearly twice current Chinese market prices.

The firm, headquartered in Las Vegas, operates through two segments. The materials segment operates the Mountain Pass mine in California. This mine produces refined rare earth products, as well as rare earth concentrate and rare-earths related products.

This segment had primarily generated its revenue through sales of rare earth concentrate that were primarily sold for further distribution to a single, principal customer in China. That setup has now very likely changed. The segment has also made sales of neodymium-praseodymium oxide and metal to customers in Japan and South Korea as well as other Asian nations. The Magnetics segment operates the firm's Independence Facility, also in California, where it produces magnetic precursor products.

Does Anybody Else Play This Game?

In America? Not so much. I told readers last week that I have initiated a long position on Ramaco Resources METC as an MP Materials-adjacent play. I had missed out on the MP trade. METC, itself was up 30.94% on Thursday, followed by a very small haircut (-0.06%) on Friday. I now see the stock up nearly 12% around 11 a.m., after having traded considerably higher through the zero-dark hours. Other trade ideas might include USA Rare Earth (USAR), which is a supplier of rare earth magnets and Lynas Rare Earths LYSDY, which is an Australian miner. Both of these names have been volatile as well. Lynas is a "Stocks Under $10" candidate and USAR has often been.

Ramaco Resources is a Lexington, Kentucky-based operation that describes itself as a developer of metallurgic coal operating in West Virginia and Virginia, while also acting as a development producer of coal and rare earth minerals at its mine at Brook, Wyoming. The Wyoming facility is in its initial stages of production. The company's portfolio in Wyoming actually includes several different properties. Ramaco also controls mineral deposits near Sheridan. This is part of the company’s initiatives regarding the potential recovery of rare earth elements and critical minerals.

USA Rare Earth is headquartered in Stillwater, Oklahoma. It describes itself as a supplier of sintered neo magnets and other rare earth metals. The Company operates a magnet manufacturing plant in Stillwater. The firm intends to establish domestic rare earth and critical minerals extraction, and processing capabilities to both supply its own magnet manufacturing business and to market surplus materials to third parties.

Some Fundies

Using the most recent data available, over the past 12 months, METC has generated operating free cash flow of $113.5 million and free cash flow of $39.1 million. I am impressed. I did not expect to see positive numbers there. MP does not have that, but now they have the Department of Defense. USAR does not have that, either.

Looking at the balance sheets, USAR has no debt on the books, but its balance sheet is very, very small. In March MP had a cash position of $759.2 million, current debt of almost $71 million and long-term debt of almost $854 million. Then again, they have the DoD as their newest and largest shareholder. METC, in March, had a cash position of $43.5 million, almost no current debt, but long-term debt of more than $104 million.

Not perfect. That said, the company did have inventories of $56.1 million on the books, a current ratio of 1.32 and a quick ratio of 0.87. Given that those inventories are probably only rising in value, this name will very likely be able to meet its obligations as it goes through these growing pains. A little DoD love wouldn't hurt, but cannot be counted on. The fact that MP's operations are already up and producing, is why that company got the prom date.

The Chart​

Readers will see that METC broke spectacularly out of a Falling Wedge pattern of bullish reversal. ​The stock also just benefited from a "golden cross" where the 50-day simple moving average overtook a now rising 200-day simple moving average. Relative Strength has just entered potentially overbought territory, while the daily Moving Average Convergence Divergence has taken on an overtly bullish posture.

What I am thinking at this point, is that the shares may make a run at the $22.70 high from early 2024. At that point, should we even get there, then we would either have to worry about a giant Double Top Pattern of bearish reversal, which would be negative... or what will then look like a Cup pattern adding a handle. That, my friends, would be a buying opportunity. It all really depends on how much of a defense contractor this firm can become.

At the time of publication, Guilfoyle was long METC equity.