Rare earths player MP Materials returns, riding on the back of a SPAC
A great capital markets creation in Canada 30-odd years ago was the blind pool, originally called Junior Capital Pools (JCPs). The program morphed to Capital Pool Companies (CPCs) with some minor changes to the JCP program, but the program was effective and continues to be so to this day.
In the US, the capital markets did one better, creating Special Purpose Acquisition Companies (SPACs), whereby the blind pools could raise capital through an initial public offering for the purpose of acquiring an existing company. They have also been around for years, but the usage has recently seen a resurgence, with more than 50 SPACs in 2020 raising approximately US$ 21.5 billion (to the beginning of August).
The problem is, SPACs (like CPCs) are technically a “blind pool”, so as an investor, you don’t really know if you are buying a pig-in-a-poke, a mine or if you are getting the shaft! Yes, there was always the nudge-nudge, wink-wink project for use of proceeds, but there (technically) was no certainty.
One of the more interesting SPACs to emerge as a “real company” is a mining project. Or the reincarnation of “the rare earths mining project” in California, just across the Nevada border. Welcome back Mountain Pass mine (and your storied history)! Or rather MP Materials Corp. (NYSE: MP), which recently closed a business combination with Fortress Value Acquisition Corp. (NYSE: FVAC) to create a $675 million market capitalization rare earths producer. MP Materials began trading on the NYSE on November 18, 2020.
MP Materials used $345 million of FVAC’s cash-in-trust plus an additional $200 million PIPE from institutional investors to capitalize the company with net cash of $525 million (estimated by management) on close of the transaction. The stated objective of the merger was to fund MP Materials’ Mountain Pass mine Stage II optimization plan, whereby the company “expects to become a fully integrated provider of separated rare earth oxides, with a focus on Neodymium-Praseodymium, one of the most crucial inputs for magnetics, by 2022.”
What does that all mean? Those of you with long memories might remember flurry in the rare earths space about 10 years ago that ultimately saw prices for rare earths crushed by the predominant producer – China Incorporated, as Jack Lifton likes to call them.
But that was then and this is now and rare earths have never been more important. Mountain Pass is the only rare earths mining and processing site of scale in the Western Hemisphere and currently produces approximately 15% of global rare earth content according to MP Materials. The mine has been in production off and on since 1952, but was restarted in 2017. There is substantial mining and processing infrastructure in place at Mountain Pass with a comprehensive plan developed to even become a downstream magnet producer (Stage III, 2025-ish).
At one time the United States was a significant producer of rare earths. Now however, approximately 80% of the world’s rare earths are produced by China, despite the country being a significantly smaller source of the mining resources. There is tremendous US government support to reinvigorate the domestic industry – partly out of strategic concerns, but significantly towards a future world where electronics, magnets, electric vehicles etc. will become as ubiquitous as the kitchen sink. All of which require rare earths to function.
About the future of MP Materials? The company just announced on November 18, that the company has been awarded a Defense Production Act Title III technology investment agreement to establish domestic processing for separated light rare earth elements. Under the TIA, the US Department of Defense will contribute $9.6 million towards MP Materials’ Stage II optimization efforts.
So investors – did you get a mine or are you going to get the shaft? It certainly looks promising this time around, but hang on, it’s going to be a bumpy ride….
Frederick Kozak is a Professional Engineer with extensive oil and gas, and international business experience and has more than 25 years involved in capital markets ... <Read more about Frederick Kozak>