A Look At The MP Materials/Fortress Value Acquisition Inc. Merger (NYSE:FVAC)

This article first appeared in Trend Investing on July 17, 2020; therefore all data is as of this date.

This week MP Materials announced:

“MP Materials, a leading producer of rare earth materials, to be listed on NYSE through merger with Fortress Value Acquisition Corp. (NYSE: FVAC).”

This is another special-purpose acquisition company [SPAC] merger which will allow MP Materials to both quickly raise capital and list on the NYSE. Investors can buy FVAC now and become MP Materials (MP) shareholders after the transaction completes in Q4 2020; when the FVAC company name will change to MP Materials, ticker ‘MP’.

Note: FVAC initially listed at US$10.00, and included a 1/3 warrant exercisable at $11.50. The transaction deck states that “5,933,333 warrants” may convert into “890,000 shares”.

Fortress Value Acquisition Corp. (FVAC) stock price chart (Price = USD 10.70)

Source: Seeking Alpha

Details of the FVAC/MP Materials Corp. transaction

  • “MP Materials supplies materials essential to electric vehicles, wind turbines, defense systems and many other advanced technologies, produced at its world-class, “green” mine and processing facility in Mountain Pass, CA.
  • MP Materials poised to become the Western champion of rare earth magnetics, onshoring a critical sector that will power a sustainable future.
  • Combined company to have an estimated post-transaction equity value of approximately $1.5 billion with over $500 million in net cash to fund growth strategy……
  • Current MP Materials shareholders, JHL Capital Group and QVT Financial, will roll 100% of their existing equity holdings into equity of the combined company.
  • Board of Directors to include former Chairman of the Joint Chiefs of Staff General Richard Myers, former Omnicom Group CFO Randy Weisenburger, and shareholder representatives.
  • Upon completion of the transaction, the combined company will be named MP Materials Corp. and will remain NYSE-listed under the new ticker symbol “MP”……
  • Cash proceeds raised will consist of FVAC’s $345 million of cash in trust and an additional $200 million investment, led by institutional investors including Slate Path Capital, Chamath Palihapitiya and Omega Family Office, at $10.00 per share in the common stock of FVAC immediately prior to closing of the merger.
  • The business combination is expected to close in the fourth quarter of 2020, subject to regulatory and stockholder approvals, and other customary closing conditions.”

Source

About MP Materials

MP Materials Corp. is majority owned by Chicago hedge fund JHL Capital Group and New York’s QVT Financial LP, while China’s Shenghe Resources Holding Co. Ltd. [SHA: 600392] holds a 9.9% stake.

MP Materials owns the Mountain Pass open pit rare earths mine and separation facilities, located in Mountain Pass, California, USA. The mine once supplied most of the world’s rare-earth elements.

MP Materials extracts 50,000 tons of rare earth concentrate each year but still relies on China to process the materials. However MP Materials plan to have their own Heavy Rare Earth separation facility and have been awarded partial US Defense funding for such a facility at their Mountain Pass Mine in California. The above linked report states: “MP will have to solicit the Pentagon again for construction-related funds.” Mountain Pass plans to have an output of 5,000 metric tons of neodymium and praseodymium (NdPr), starting in 2022.

Note: MP Materials will now have the needed funds thanks to the FVAC merger.

Background

MP Materials states:

Mountain Pass’s bastnaesite ore is one of the world’s highest quality rare earth deposits with a greater than 8% average grade. The mine started production in 1952, and was a dominant source of rare earth minerals in the world into the 1990s until prior owners exited the industry. More recently, Chinese rare earth production has grown to account for more than 80% of the global supply, and rare earth mining and processing stopped in the United States.

Current ownership and management acquired the Mountain Pass assets in 2017, restarted operations from cold-idle status and embarked on a plan to recommission the facility and position MP Materials for growth and profitability.

With the first stage of our plan completed, MP Materials has re-emerged as a best-in-class, globally competitive rare earths producer. Today, we produce approximately 15% of the global supply of rare earths, currently in the form of an intermediate product—rare earth concentrate—that requires further processing in Asia. Following completion of the second stage of our recommissioning, expected by 2022, MP Materials will relaunch its onsite processing facilities, setting the foundation for a renewed, self-sufficient U.S. rare earth industry.

About the Mountain Pass rare earths mine and separation facilities

The Mountain Pass Mine is the only rare earth mining and processing site of scale in North America, making it a highly strategic asset. Mountain Pass currently produces 15% of the global rare earths supply (China produces 70%+ of global rare earths supply). MP Materials sends its rare earths to China for processing, however the new MP Materials will change this and once the merger completes they intend to use the net ~US$500m cash proceeds to produce valuable rare earth end materials such as Neodymium-Praseodymium (NdPr).

MP Materials states the raised ~US$500m is to be used to:

“retrofit and fully recommission its existing on-site refining facilities and will further enable the Company to pursue additional downstream growth opportunities in the magnetics industry”.

An aerial view of the Mountain Pass rare earths mine and separation facilities in California USA

Source: MP Materials

MP Materials next steps and strategy

MP’s current strategy consists of a three-stage plan to re-establish this critical industrial input within the United States:

  • Stage I (complete): Commissioning of the mining, milling, and flotation processes to produce a high-quality rare earth concentrate, an intermediate product that is currently sold into Asia. MP’s median monthly production is >2.6x that of its predecessor in a largely fixed cost business; Adj. EBITDA and FCF positive at this stage.
  • Stage II (complete by 2022): Retrofit of the existing processing facility workflow to make separated rare earth oxides more reliably, at significantly lower cost and with an expected smaller environmental footprint. The project is permitted, “shovel-ready,” and is expected to accelerate near-term earnings power to $252 million of expected 2023 Adj. EBITDA at estimated forward pricing.
  • Stage III (2025+): Leverage singular source of commercial-scale Western rare earth supply to expand downstream to magnets, easing concerns about China as a supply chain “single point of failure” as global EV penetration accelerates; flexibility to buy, build, or JV with substantial incremental EBITDA opportunity.

MP Materials facilities at Mountain Pass

Source

MP Materials key management

As shown below Chairman & CEO James Litinsky will play a key role. His degrees in economics and law, as well as his merchant banking and investment experience, will be valuable.

Michael Rosentha will continue on as Mountain Pass Chief Operating Officer, a role he has had since 2017.

Source: MP materials Company presentation

Valuation discussion

The post-transaction equity value of MP Materials will be approximately $1.5 billion with over $500 million in net cash, based on a $10.00 FVAC price.

Given FVAC is currently priced at US$10.70 that equates to a ~7% premium over what early FVAC investors paid (not to mention the 1/3 warrant from the FVAC listing).

MP Materials expects to deliver over $100 million in estimated revenue and nearly US$30 million in estimated adjusted EBITDA in 2020, rising to US$250 million forecast adjusted EBITDA in 2023 due to the planned rare earths oxides production from 2022 boosting revenues and margins.

Valuation is not easy but we can we can compare to Lynas Corporation [ASX:LYN] (OTCPK:LYSCF) that trades on a 2020 EV/EBITDA ratio of 23.7x. Based on MP Materials 2020 forecast EBITDA of US$30m and using a 23.7x multiple we get an enterprise value of US$711m. If we use Lynas’s 2022 EBITDA multiple of 7.14 and apply it to MP materials forecast 2023 EBITDA of ~US$250m we get an enterprise value of US$1.785b. So a range from US$711-1.785b seems fair.

Lynas Corp. has a market cap of close on US$1b, but relies on Malaysia for some processing facilities. MP Materials will be entirely in the USA.

Based on a pro-forma 150m shares at the current FVAC price of US$10.70 equals an equity value of US$1.605b, less the US$500m in cash, gives a current FVAC enterprise value of US$1.1b. We may need to increase this slightly due to warrants; however the current FVAC stock price of US$10.70 appears to be in the right ballpark, assuming the merger completes and MP Materials can achieve somewhere near their forecast EBITDA’s. This will depend on rare earths prices going forward.

Note: Please let me know if you feel I have made an error in the above calculations.

All up the rarity of a quality US rare earths mine, separation facility, and soon rare earths oxide processing facility all for about US$1.1b looks attractive for investors that are bullish on the key rare earths. Albeit the rare earths processing is not expected to start until about 2022.

MP Materials states: (based on FVAC at 10.00)

Transaction implies a pre-transaction Enterprise Value (cash-free / debt-free) of ~$1,000MM and a post-transaction Equity Value of approximately ~$1,473MM(3)(4). Represents a material discount to public peers and retains significant valuation upside for anchor investors. Existing MP shareholders expected to retain 62.4% of the pro forma equity(3)−No monetization or sell-down expected by existing shareholders. MP management expected to own over 12% of the pro forma company, and expects to remain long-term holders given their conviction in the prospects and valuation upside of the business.

Risks

  • The usual completion risks involved when using special-purpose acquisition companies.
  • Competition – China dominates rare earths production and has a history of subsidizing industries forcing commodity prices down. The Mountain Pass Mine has had a checkered history and had to close previously due to low prices, on one occasion forcing Molycorp. into bankruptcy.
  • Budget blowouts – The new rare earths processing facility needs to come in on time and budget.
  • Business risks – Management, debt, environmental (rare earths processing has had environmental problems in the past), currency etc.
  • The usual stock market risks (liquidity, dilution, sentiment etc).

Further reading

Charts

The EV boom is expected to boost demand for valuable NdPr used in magnets for electric motors

Source

China dominates global rare earths production

Source

Conclusion

Demand for rare earths is set to soar the next decade boosted especially by demand for valuable NdPr magnets used in electric motors (electric vehicles, wind turbines, consumer electronics, military & aerospace applications).

MP Materials’ Mountain Pass Mine is already a prized US mine, but once producing rare earth end products (especially NdPr) it will be even more highly prized and strategic. This is because the FVAC/MP Materials merger will allow MP Materials to go the next step in producing rare earths in the USA, rather than sending to China for processing. This helps MP Materials by selling a value-added product, thereby improving margins considerably.

The good news for investors is that they can now buy into the Company via the FVAC listing, compared to before when it was private and not accessible to most investors. The other good news is that we should hopefully soon get some positive news from the US Senate in regards to several Acts that aim to support a US rare earths supply chain.

Valuation looks reasonable and management will retain ~12% in the final MP Materials company after merger Q4 2020, all going to plan.

Risks revolve around execution and production risks, rare earths pricing and hence China competition.

I rate FVAC (soon to be MP materials Corp. (MP)) a good buy for long term investors positive on the rare earths sector.

As usual all comments are welcome.

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Disclosure: I am/we are long FVAC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information in this article is general in nature and should not be relied upon as personal financial advice.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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