To The Moon

Digging out dirt may sound like what it is. Dirt in your backyard is just dirt, or so you thought. Mining is merely a dirty art that nobody would associate with a moat. Ironically, why not? Isn’t physical moat generated by digging up dirt!? Obviously, we are referring to a barrier of entry, an insurmountable advantage here in this context, rather than the physical ditch. If we are talking about simply digging out dirt (minerals) to sell, that’s obviously is a no-brainer. Or is it?

The story of MP Materials, at least to me, is an interesting one. To know MP Materials formed a mere 8 years ago, we need to know Molycorp. Molycorp was an established rare earth miner with processing facilities. However, like many expect of a miner, it is at the mercy of commodity prices. China is so dominating in rare earth minerals that prices were depressed for a long period of time. Molycorp filed for bankruptcy in 2015.

The co-founders from a financial background stumbled into the industry. There was only the two founders and 8 employees. The founders had no idea how to mine, not to mention process the ores. As a small fry in this new found land, we could not simply poach the miners from those in the field. That was when they chanced upon the opportunity to work with Shenghe, a Chinese rare earth giant. With Shenghe’s know-how, they got the Mountain Pass mine going, bit by bit… They finally managed to mine some “dirt” (although they couldn’t tell them apart), and started shipping everything to China for processing.

The founders know that this is just the beginning as digging dirt is not a viable long term business plan. By now, they were staring at many years of losses in their operations. However, the founders were patient. Even though they don’t know the art, they understand finance. They knew that their time will come given the importance of rare earth minerals.

Joe Biden administration started the critical minerals project and rare earth minerals are obviously in the list. Support started to flow in and MP Materials began to restart their own processing plant.

It is only this year when Trump took over the US administration and kickstart the tariff wars that rare earth minerals took centre stage. China started to impose export restrictions on rare earth minerals. High tech industries all over world went into panic mode when they realised that all the manufacturing, from EVs to semiconductors, would ground to a halt. Black market for rare earth minerals started proliferating… those with stockpiles acted like God…

Yes, it may well be true that miners are at the mercy of commodity prices. Moat is perhaps a laughable notion. Try telling it to Donald Trump and all those manufacturers who were in panic mode. Try telling it to China in its face. Try to go without hand phone and all other convenience. Good luck getting the modern day missiles to work as it should.

Rare earth minerals are in fact not rare… but trying getting the mines ready in a year or two. Given time, the advantage does diminish. So moat? Nah… not yet.

The Apple deal is a game changer. Not only would Apple be paying for the minerals, they are collaborating to get rare earth minerals recycled. Processing and recycling are technology driven. This is why the moat comes in. Not just identifying and digging. The supply chain from front to back is where you obtain the process advantage. Not like Nvidia? Maybe. Try tell Nvidia they couldn’t get any rare earth minerals recycled. AI chips, what AI chips? In the past, this might seem like an absurd notion. With Trump changing how the world functions, it is not going to be straightforward to simply run to the cheapest supply.

If MP Materials can get more deals going in the tech space, never underestimate its potential and possibly moat creation. It could turn into an aka Microsoft in US rare earth industry and crash all rare earth mining startups before they have a chance to take off.

Just look at MP Materials raising $500M right after its Apple $500M deal! Still no moat? Think again… perhaps it is a moat giant in the making. Imagine what $500M or even $1B could buy… 

I won’t be too hasty to dismiss a miner even though conventional, commodity is a price taker rather than setter. China’s action in its US negotiations show us the power a dominant necessity commodity producer could bring. 

We maybe standing at the start of a new era of commodity power play! [Miser]  [Cool]  [Silence]  [Allin]  

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