LYC vs MP, page-19

MP MaterialsStage II production achieved and outlooksolid, but reduce PO on lower NdPr prices Reiterate Rating: BUY | PO: 33.00 USD | Price: 23.09 USD First separated rare earth sales near, reiterate Buy ratingMP Materials (MP) Q2'23 results were ahead of BofA and consensus estimates (see our first-take). We update our model for Q2’23 results, revised Stage II sales guidance for H2’23, and lower Neodymium-Praseodymium (NdPr) price forecasts (more on this below). We reduce our 2023E/24E/25E adjusted EBITDA from $277m/ $621m/ $646m to $94m/ $368m/ $455m. We lower our Price Objective (PO) for MP from $38 to $33 per share, based on 15x (vs.10x prior) 2024E EV/EBITDA. Our multiple reflects the historical premium to peer, Lynas, and upside from growth in magnets. We like MP for scarcity (only rare earth producer in the Western Hemisphere), low costs, growth upside (from its Stage III magnet production), and a strong balance sheet. Reiterate Buy rating.Stage II production milestone achieved; sales to lagThe key highlight from Q2 results, is the "official" start of separated rare earth (RE) production (that should alleviate a key investor concern). MP expects to begin shipments of NdPr oxide by late-Q3’23. However, the initial 'sales cycle' is guided to be temporarily elongated (as MP streamlines the supply chain to end customers), with Stage II revenue to be recognized only in Q1'24. Also, for Q3'23, MP flagged a 'low teen %' decline in realized pricing vs. Q2’23, following a 33% reduction seen in Q2'23 vs. Q1’23. Yet, these setbacks are likely to be "looked-through" by the market, given the transitory nature.Lowering NdPr forecasts, yet set to rebound post YTD blipYear to date (YTD), the price of NdPr oxide has declined by 36% to $66 per kilogram (/kg). On the demand front, MP sees solid 20%-30% growth from EV/e-mobility (25% of total) but sees weakness in traditional sectors (75% of demand). Regarding supply, the reopening of the Myanmar-China border has led to the release of pent-up Myanmar mining inventory. Both factors appear temporary. With current pricing close to China’s operating cost, we see potential for a strong rebound in pricing. Nevertheless, we lower our near-to-medium term forecasts given the YTD reality (price correction). We forecast, NdPr to average $70/kg, $110/kg, and $120/kg in H2’23, 2024E and 2025E, respectively.14 August 2023EquityKey Changes( US$)Lawson Winder, CFA >> Research AnalystMerrill Lynch (Canada)+1 416 369 7592 [email protected] KasinathanResearch AnalystBofAS+1 646 855 2769 [email protected] Puri >> Research Analyst Merrill Lynch (Canada) [email protected] DataPricePrice ObjectiveDate Established Investment Opinion 52-Week RangeMrkt Val (mn) / Shares Out (mn)Average Daily Value (mn) BofA Ticker / Exchange Bloomberg / ReutersROE (2023E)Net Dbt to Eqty (Dec-2022A) ESGMeterTMP reviousCurren t Price Obj. 38.00 33.002023E Rev (m) 455.0 247.9 618.5 742.10.33 1.24 1.56 2024E Rev (m) 894.2 2025E Rev (m) 933.32023E EPS 1.062024E EPS 2.252025E EPS 2.35 Estimates (Dec) (US$) 2021A 2022A 2023E 2024E 2025EEPS 0.89 1.87 0.33 1.24 1.5633.00 USD 14-Aug-2023 C-1-9 20.21 USD - 38.34 USD 4,102 USD / 177.670.74 USD MP / NYS MP US / MP.N 4.8% -38.4% Medium23.09 USD GAAP EPS 0.71 1.49 0.17 1.14 1.48 EPS Change (YoY) 229.6% 110.1% -82.4% 275.8% 25.8% Consensus EPS (Bloomberg) 0.37 1.05 1.84 DPS 00000 Valuation (Dec) P/E 25.9x 12.3x 70.0x 18.6x 14.8x GAAP P/E 32.5x 15.5x 135.8x 20.3x 15.6x Dividend Yield 0% 0% 0% 0% 0% EV / EBITDA* 16.7x 9.7x 38.9x 9.9x 8.0x Free Cash Flow Yield* -0.5% 0.4% -5.8% 4.4% 8.4% * For full definitions of iQmethod SM measures, see page 8. >> Employed by a non-US affiliate of BofAS and is not registered/qualified as a research analyst under the FINRA rules.Refer to "Other Important Disclosures" for information on certain BofA Securities entities that take responsibility for the information herein in particular jurisdictions.BofA Securities does and seeks to do business with issuers covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.Refer to important disclosures on page 10 to 13. Analyst Certification on page 6. Price Objective Basis/Risk on page 6. 12592847Timestamp: 14 August 2023 12:07AM EDTESGMeter is not indicative of a company's future stock price performance and is not an investment recommendation or rating. ESGMeter is independent of BofA Global Research’s equity investment rating, volatility risk rating, income rating, and price objective for that company. For full details, refer to “BofA ESGMeter Methodology”.