January 31, 2023

Rare Earths market interest leads investors seeking value looking at Neo Performance Materials

Neo Performance Materials Inc. (TSX: NEO) definitely has attracted market attention as the company’s share price closed at C$13.78 on December 31, 2020, ending the year up from $12.38 on December 28, 2019, but not reflective of the fact that the share price was as low as $5.75 in early April, 2020. January 25, 2021 – over $17.00/share!

The interest in the company has been highlighted by the resurgent interest in the rare earths space –NEO is our solid #3 pick for 2021, a position not to be taken lightly, given the number of companies in rare earths at this time. Lead by renowned rare earths executive, Constantine Karayannopoulos, as President and CEO, Neo has many things going for it, including the fact that it is the only other rare earths processing facility in the world that is not in China (theirs is located in Estonia).

The company has 11 manufacturing facilities around the world and is a world leader in innovation and the production of permanent magnet powders, through its Magnequench business unit. Neo has also been touted as a takeover target for MP Materials, as several Neo assets were once part of Molycorp, but with Neo’s prospects, it is likely that the shareholder base would demand a massive premium to approve that transaction. And the price continues to get higher.

The company has a very strong shareholder base and notably the investment funds managed by Oaktree Capital Management, L.P continue to reduce their ownership of Neo. The company has continued the quarterly dividend of CAD$0.10 per share as customer demand is returning and slowly growing as we enter into the vaccination stage of the global pandemic.

Recall that the company announced on December 4, 2020 that a group of selling shareholders had entered into a secondary bought deal financing for the sale and purchase of 3.9 million shares at CAD$12.10 per share for gross proceeds of CAD$47.6 million. As this was a secondary offering from existing shareholders, the company will not receive any of the proceeds.

On January 25, 2021, the company announced another bought deal offering of secondary shares. A syndicate of underwriters have agreed to purchase from the selling shareholders 4.5 million common shares of the company at a price of $15.75 per common share for total gross proceeds to the selling shareholders of approximately $70.9 million. The company will not be receiving any of the proceeds of the offering. In addition, the underwriters have been granted an option to purchase up to 15% of the base offering, exercisable up to 30 days following closing. The common shares will be offered by way of a short form prospectus to be filed in all of the provinces of Canada other than Quebec. Private placement offerings in the United States will be made to qualified institutional buyers pursuant to Rule 144A of the United States Securities Act of 1933.

That’s a lot of gobbledygook jargon, but it’s important for a number of reasons. First, the company has interested investors across Canada and the United States. Secondly, they are also willing to pay $3.65/share (30%) more per share for a secondary offering that is also about 50% larger than the last secondary offering done on December 4, 2020. That’s less than 2 months ago.

Year-end 2020 financial results will not be out for a while yet, but investors have clearly done the arithmetic – at September 30, 2020, the company had cash, cash equivalents plus restricted cash of US$78.6 million and positive working capital of US$173 million (including $115 million of inventories). Add $47.6 million of new equity in December 2020, another $70.9 million in January 2021 (before fees) and clearly Neo is ready for the next phase in the rare earths industry. With a strong balance sheet (and perhaps a war chest of capital?).

Neo manufactures the building blocks of many modern technologies that enhance efficiency and sustainability. Presumably, the US government change will not overtly affect the previous stated mandate to create a national critical metals reserve, but stay tuned. Neo’s advanced industrial materials, magnetic powders and magnets, specialty chemicals, metals and alloys are critical to the performance of many everyday products and emerging technologies and the company is a dominant global player.

Operating global advanced materials manufacturing facilities in countries including Canada, China, Estonia, Germany, South Korea, the US and Thailand, with two dedicated research and development centres in Singapore and the United Kingdom, Neo is very well positioned to continue as a global leader in the rare earths.

It is important to remember that Neo has developed dual supply chains inside and outside China for rare earths separation and rare earths advanced materials. While the world strives to build a “new” rare earths supply chain not dependent on the Chinese, this will take time and is fraught with uncertainty and very significant capital requirements. The fact that Neo also owns the only rare earths separation facility in Europe means in the unlikely event of a global upset, it is one of only two companies which remain positioned to supply the rare earths products to a growing industry.

Blowing through the half billion-dollar (Canadian) market capitalization this year and on the way to a billion dollar market capitalization, Neo is leading the way in an industry that is continuing to evolve and grow. The company is innovative, and management has the expertise and knowledge and the potential to continue to innovate and lead the pack.

Disclaimer: The author of this post may or may not be a shareholder of any of the companies mentioned in this column. None of the companies discussed in the above feature have paid for this content. The writer of this article/post/column/opinion is not an investment advisor, and is neither licensed to nor is making any buy or sell recommendations. For more information about this or any other company, please review their public documents to conduct your own due diligence. To access the InvestorIntel.com disclaimer and other important legal notices, click here.

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