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Investing.com -- Jefferies has downgraded MP Materials to Hold, saying that a recent policy shift in China takes away the scarcity premium that has supported the US-listed rare earths producer’s valuation.
China’s move to issue short-term export licences for rare earth magnets reduces the risk of near-term supply disruption and is likely to have a global policy response focused on expanding production capacity rather than constraining exports.
China move makes it less likely that rare earth prices will spike sharply, weakening the case for re-rating MP shares in the absence of new demand catalysts.
“Even on generous assumptions -- a fly-up scenario, rapid expansion, elevated ROICs longer-term, and a lower equity risk premium -- we view the risk/reward as neutral, at best,” the analysts wrote.
MP Materials operates the Mountain Pass mine in California and has ambitions to become a fully integrated producer of neodymium-praseodymium (NdPr) magnets used in electric vehicles, wind turbines, robotics and defence systems.
MP could significantly expand earnings if it builds out downstream magnet production. Analysts estimate that scaling internal consumption of rare earth oxide could raise mid-cycle earnings to $650 million, and potentially $1.5 billion under a more ambitious build-out.
But the capital required, up to $4 billion, and the risks around returns make the expansion case less compelling at current share levels.
The analysts estimate the current valuation implies the market is already pricing in returns of 25 to 30 per cent on future magnet investments and applying a lower discount rate to MP’s projected cash flows.
The broker also cautioned against relying on another sharp price rally, or “fear trade,” driven by policy risk or a demand spike from sectors such as robotics.
While a tight market could trigger price gains, Jefferies said such spikes would likely prove temporary, with higher prices inviting new entrants and suppressing demand.