Believe it or not, free trade with China is good news for MP Materials.
Shares of MP Materials (MP 7.74%), the biggest miner of U.S. rare earth metals, and also involved in rare earth refining and magnet manufacture, surged to close up 7.7% Monday.
Why? Well, over in London, trade representatives from China and the U.S. are meeting to discuss lowering tariffs tensions in general, and in particular, to discuss easing export restrictions on rare earths from China, to be imported into the U.S.
You would think this would be bad news for MP Materials stock, as those imports will compete with its own production!
Image source: Getty Images.
Reading between the lines
But here’s the thing: The obvious answer isn’t always the right one.
As I explained back in April, President Trump’s trade war with China hasn’t been unalloyed good for MP’s business. On the one hand, yes, imports of rare earth magnets from China undermine MP’s efforts to build a rare earth magnets business of its own here in the U.S.
On the other hand, though, that magnet manufacturing business is only just getting started. For now, MP still makes most of its money selling rare earth ores to China for refinement. Indeed, according to MP’s own annual report, rare earths refiner Shenghe Resources Holding accounted for 80% of all revenue MP collected last year.
What this means for MP Materials
What does this mean for MP? In the near term, MP will be hoping trade talks reduce Chinese tariffs on rare earths exported from the U.S., to not decimate MP’s business in that direction. Later on, if China restricts magnet imports, that could be good for MP’s sales of its own magnets — but only after MP’s magnet business is up and running full steam.
For now, MP remains a commodities exporter, heavily dependent on China, and very interested in seeing free trade restored.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends MP Materials. The Motley Fool has a disclosure policy.
