Investors love companies that under promise and over deliver. Today’s company is a classic example as it continues to grow its highly valuable global advanced materials business that includes rare earth alloy powders and magnets.
Neo Performance Materials Inc. (TSX: NEO) (“Neo”) is a profitable processor and manufacturer of advanced industrial materials including rare earth metals, alloys, and “bonded” rare earth permanent magnets, specialty chemicals, technology metals, and alloys. These are all critical to the performance of many everyday products and emerging technologies such as the high-powered magnets used in electric vehicles and in direct drive wind turbine electric generators. Neo operates globally with sales and production across 10 countries including Japan, China, Thailand, Estonia, Singapore, Germany, the United Kingdom, Canada, the United States, and South Korea.
Neo is the only company in the world that operates dual supply chains inside and outside of China for rare earths, rare earths separation and the commercial production of rare earths advanced materials. Neo owns and operates the only operating commercial rare earth separation facility in Europe.
Furthermore, Neo’s Magnequench unit is the global leader in bonded neodymium-iron-boron (NdFeB) alloy powder based magnets and their applications. Its powders and magnets are used in high-performance components for the OEM automotive, factory automation, high-efficiency motors, residential appliances, and in many other applications.
Neo Performance Materials global operations that manufacture advanced materials that incorporate rare earths and other rare element metals
Source: Company presentation
Establishing a new Western rare earths supply chain incorporating USA and Europe
As a reminder, in July 2021 Neo announced the commencement of commercial shipments of mixed rare earth carbonates produced from monazite from which the uranium and thorium had been removed by Energy Fuels Inc. (NYSE American: UUUU | TSX: EFR) in the USA, to Neo’s rare earth separations facility in Estonia, Europe. This first shipment was a landmark for establishing a new non-Chinese Western rare earths supply chain. Energy Fuels has been sourcing ore from third parties such as from Chemours’ (NYSE: CC) heavy minerals sands operations in Georgia, USA; then processing the monazite residue at their White Mesa Mill in Utah, USA, to extract the rare earths, remove the radioactive elements, and then process the rare earths into a solid mixed carbonate form ready for delivery, in this case, to Neo’s operation in Estonia according to its specification. The news stated:
“This new supply chain will initially produce rare earth products from monazite that is processed into mixed RE Carbonate at Energy Fuels’ Mill in Utah. This RE Carbonate is then further processed by Neo at its Silmet rare earth processing facility in Sillamäe, Estonia (“Silmet“) into separated rare earth oxides and other value-added rare earth compounds. Neo is the only commercial producer of separated rare earth oxides in Europe.”
Neo’s CEO, Constantine Karayannopoulos, stated: “This innovative U.S.-to-Europe supply chain will supplement Neo’s existing rare earth supply from our long-time Russian supplier. It will enable Neo to expand value-added rare earth production in Estonia to meet growing demand in Europe for these materials.”
Neo’s financials keep getting stronger
As announced on August 12, 2021, Neo produced another stellar financial result in Q2, 2021. Highlights included production volumes increasing 59.6% YoY, revenue reaching US$135.1 million and up 99.5% YoY, adjusted EBITDA of US$22.2 million massively up YoY (an increase of $21.0 million), and adjusted net income of US$14.1 million, or US$0.37 per share. The chart below highlights the financial improvement in Neo’s financials over the past year.
Neo’s consolidated revenue and adjusted EBITDA keep rising due to a very strong operational performance
Neo’s revenue by segment and geography is led by Magnequench and China
Source: Company presentation
Neo’s CEO, Constantine Karayannopoulos, stated: “We had an outstanding second quarter that exceeded our expectations, with record revenue and robust profitability, while our plants operated at near-record output…….With the organic growth we are seeing across all business units, the significant macro tailwinds boosting the entire rare earths sector, and a number of strategic growth opportunities on the radar screen, we remain confident in the sustainability of our long term vision and growth strategy.”
Looking ahead to the rest of the calendar year 2021 analyst’s forecasts remain strong with CY2021 revenue forecast at US$503 million, net income US$39 million, and 7.82% net profit margin. These estimates may soon need to be increased given Neo has already achieved US$266 million in H1 2021. In terms of multiples, they are also appealing with Neo trading on a 2021 PE of 16.7x and an EV/Revenue multiple of 0.92x.
Closing remarks
Neo is currently riding a wave of demand for its advanced materials as we move to a greener economy, especially for the high-value rare earth alloy powders and magnets made with neodymium. These magnets are key to achieving greater power and efficiency from electric motors, the demand for which in the large drive motors for electric vehicles is surging.
Neo Performance Materials trades on a market cap of C$670 million and a very reasonable 16.7x PE. One to definitely consider.
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