April 25th, 2022 | 12:55 CEST
Rheinmetall, Defense Metals, MP Materials - Until the next bubble bursts
Table of contents:
Rheinmetall - Bow overstretched?
In the past, Rheinmetall AG was not known as a growth stock. That changed abruptly on a Sunday afternoon in February. In order to ensure Germany's security in the future against aggressors such as Russian President Putin, Chancellor Olaf Scholz called for the German armed forces to be strengthened with a total of EUR 100 billion via a special fund for investments and armaments projects in 2022. In addition, at least 2% of gross domestic product is to flow into defense each year with immediate effect.
For Rheinmetall, this announcement was tantamount to a reassessment. Rheinmetall CEO Papperger noted in Handelsblatt only a short time later that his company had offered a comprehensive supply of defense equipment worth EUR 42 billion. The package would include ammunition, helicopters and tracked and wheeled tanks. However, it is highly questionable how the Düsseldorf-based company is to obtain the necessary raw materials. In the past fiscal year, sales here "only" amounted to EUR 5.66 billion. The limited availability of raw materials and semiconductor components weighed on earnings, leading to reduced delivery call-offs by important customers.
The global supply shortage is likely to strain supply chains further and lead to delivery bottlenecks for customers, lower customer call-offs and thus further sales shortfalls. In addition, price increases for raw materials such as aluminum, steel, silicon or magnesium and skyrocketing energy and freight costs could drastically reduce margins. At a share price of EUR 219.50, the price/earnings ratio for 2022 is an expensive 20.75. Various analysts, such as the major Swiss bank, have come up with new buy recommendations and a price target increase from EUR 187 to the current EUR 251. However, these high valuations are more than questionable. If you are invested, profits should be secured with tight stops.
MP Materials - The hope of politics
In the long run, the real winners are the producers of the scarce raw materials needed not only for the climate change for wind turbines and electric cars but also for the growing defense industry. The demand curve for rare earth metals is rising steeply due to the energy transition; the elements are needed for smartphones, MRI devices, catalytic converters, and permanent magnets for electric motors or batteries. In addition to the renewable energy sector, demand from the defense industry is now also steadily increasing. Neodymium-iron-boron magnets are considered the strongest permanent magnets in the world. They are included in many military weapons systems, such as precision-guided weapons, satellite and stealth technologies, unmanned vehicles, and modern communication systems.
Due to geopolitical tensions with Russia and China, Western industry is becoming increasingly nervous. China's share of "rare earth metals" production has fallen from 92% in 2010 to currently 60%. However, in addition to mining, the Middle Kingdom continues to dominate downstream processing, which is divided into three sectors. Namely, mining and processing to produce a rare earth concentrate (87% share globally), smelting and separation to produce rare earth oxides (91%), and refining to produce rare earth metals and alloys (94%). Western industrialized nations, especially North America, have been forced to act, promoting promising mines with multi-million dollar subsidies.
The Mountain Pass, California mine, owned by publicly traded MP Materials, produced 15% of the world's output in 2020. According to the US Geological Survey, it is the second-largest global production source next to the Bayan Obo mine, a mine in the Inner Mongolia Autonomous Region of the People's Republic of China. MP Materials currently has a market capitalization of approximately USD 7 billion.
Defense Metals - The insider tip from Canada
In addition to the Mountain Pass mine, the Wicheeda project, taken over by the Canadian exploration company Defense Metals at the beginning of the year, is one of the showpieces. The stock market valuation of Defense Metals is currently EUR 39.8 million and still offers considerable development potential for the future. Wicheeda shows great similarities in metallurgy with the only profitable mine in the western hemisphere, the Mountain Pass mine. According to the preliminary economic evaluation, it has the potential to become one of the most important global deposits for rare earth metals.
The deposit is 2,008 ha in size and is located approximately 80 km northeast of the city of Prince George. With first-class infrastructure, access to rail and port, rare earth metal content and good metallurgy, the conditions are extremely favorable for becoming the next profitable mine. After releasing positive boron results almost every week this fiscal year, results from an additional six diamond drill holes were added last week. Holes WI21-51 to 56 were drilled at the same location and in the southern area of the Wicheeda rare earth metal deposit.
Resource definition holes WI21-52 to 55, drilled with the same settings, all confirmed significant intervals of high-grade dolomite carbonatite, which was expected from the geological and mineral resource block model. This included hole WI21-54, which returned 3.06% total rare earth oxide over 145 m and extended the zone of high-grade dolomite carbonatite 25 m beyond the geological model boundary. It is anticipated that these holes together will contribute to the upgrading and extension of the existing suspected mineral resources in the southwest quadrant of the deposit. A full report can be read at researchanalyst.com/en/report/defense-metals-the-dependence-of-the-defense-industry.
NATO countries' rearmament programs have allowed arms companies such as Rheinmetall to multiply in recent weeks, but whether this is justified seems more than doubtful. The primary beneficiaries are the producers of raw materials, particularly rare earth metals. While MP Materials already weighs in at around USD 7 billion on the stock market, Defense Metals still has significant development potential.
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