Key Points
The decline in MP Materials (NYSE: MP) stock in June comes down to China, but perhaps not in the way you might think. The stock fell 13.4% in June, according to data from S&P Global Market Intelligence, with much of the decline occurring after China added MP Materials to its list of companies subject to export controls. Here’s the lowdown.
MP Materials and China
The company’s exposure to political risk around China is multifaceted. On the one hand, it has substantive upside potential from ongoing geopolitical tension with the country. After all, it’s the need to diversify the U.S. away from reliance on rare earth materials and magnets from China that’s largely behind the U.S. government’s support for the company.
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And that support is a key part of the stock’s investment case. As part of the partnership agreed last summer, the Department of Defense invested $400 million in the company, provided a $150 million loan, and assisted banks in arranging $1 billion in financing. On top of all of this, the DoD entered a 10-year pricing floor agreement for MP Materials products and “agreed to ensure that 100% of the magnets produced at the 10X Facility will be purchased by defense and commercial customers with shared upside.”
These actions secured the company’s future and financial position, allowing investment to proceed in its 10X facility being built in Northlake, Texas.
That strengthening of its financial position and ability to service customers encouraged Apple to sign a $500 million long-term supply agreement, therefore ensuring a key American business has access to domestically sourced and produced rare earth magnets.
Image source: Getty Images.
The downside risk from China
While MP Materials doesn’t directly buy or sell to China, the country’s export products blacklist does impact it significantly. The export ban doesn’t only apply to direct exports from China to MP Materials, it also applies to companies who then sell Chinese products to MP Materials.
In addition, if, say, a rare earth processing equipment company uses Chinese-made components and then sells the finished product to MP Materials, it may be banned from doing so by the Chinese government. Given China’s dominance in rare earth materials and magnet production and its pre-eminence in global manufacturing, it’s highly likely that the ban will impact MP Materials.
As such, being on the export blacklist has significant secondary ramifications for MP Materials, which is why investor enthusiasm for the stock cooled in June.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends MP Materials. The Motley Fool has a disclosure policy.
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