If in case you have been paying consideration in 2020, you then in all probability know that this has been a breakout 12 months for EV investor enthusiasm, simply see Tesla’s (TSLA) stock price. Just one 12 months in the past, shares of Tesla have been altering arms round $240 per share. In the event you look again in time and comply with the information move circa July 2019, there was a heated debate as as to if TSLA would run out of cash given its excessive cash move burn price. Lo and behold, not less than for now, shares of TSLA are up 5.25X and briefly hit $1,795 per share just a few weeks in the past. Tesla stock has entered ‘escape velocity’ and the bears have a lot egg on their face that they will make an omelette. Tesla’s meteoric rise has made well-known funding corporations like Baillie Gifford and Ron Baron’s funds, amongst others, look masterful. Supply: Looking for Alpha Relying on the day, and the place Tesla shares are buying and selling at that second in time, Elon Musk’s web worth surpasses the Oracle of Omaha, Warren Buffett. By the way, many individuals have been telling me to quick Tesla since $280 per share. I chuckle, and politely say I do not quick ‘cult stocks’, as I discovered that costly lesson (on another progress stock darling that I am unable to recall) way back. Anyway, at this time’s piece is not about Tesla.
As a substitute, it’s arguably probably the most underneath the radar firm that ought to profit from the EV revolution and its extremely anticipated progress price for years to come back. In the present day, I write to debate shares of Neo Efficiency Supplies (OTCPK:NOPMF). Now, to clue you in on the genesis of the concept, again on July 21, 2020, I occurred to note that enterprise capital, Chamath Palihapitiya, was speaking up his $200 million (PIPE) in Fortress Worth Acquisition (FVAC). After studying the headlines, I instantly labored out that Chamath and FVAC owned Mountain Move, the one ‘uncommon earth mine’ within the Western Hemisphere. By the way, Molycorp instantly took me on a visit down reminiscence lane, as I did a ton of labor on the corporate, whereas in B Faculty at Babson. I took an ideal technique class with a visiting professor, James Gilbert, again within the spring semester of 2011. Professor Gilbert is a superb man and his technique class was one in all my favorites throughout my time at Babson. For perspective, he was a accomplice at Bain Capital and was tremendous related within the enterprise world. Throughout that semester, the previous CEO of Dell Know-how (DELL) and former CEO of Biogen Inc. (BIIB) have been visitor audio system. Anyway, for my group’s last challenge, we did an in-depth strategic evaluation on Molycorp. To avoid wasting readers the excruciating particulars, my group labored out that Molycorp’s Mountain Move contained largely LREE and that the uncommon earth parts that have been truly ‘uncommon’ have been HREE. So, we beneficial that the corporate vertically combine in addition to deal with the HREE piece of the enterprise. Lo and behold, on March 8, 2012, Molycorp made this splashy acquisition of Neo Materials Applied sciences in a $1.three billion deal.
Supply: Businesswire By the best way, Molycorp filed for chapter again in 2015. In the event you peel again the onion, Chamath teamed up with non-public fairness traders that purchased Mountain Move mine out of chapter. Nonetheless, Fortress Worth Acquisition would not personal the Neo Efficiency Materials phase of the enterprise. For perspective, in June 2017, non-public fairness purchased Mountain Move in chapter courtroom for $20.5 million (see the WSJ article). Per the WSJ article: A buyout group led by U.S. traders and backed by China’s Shenghe Sources Holding Co. Friday gained permission to purchase a California mine that’s the sole U.S. supply of parts wanted to make digital units. MP Mine Operations LLC, an organization put collectively by Chicago hedge fund JHL Capital Group, New York’s QVT Monetary LP and Shenghe, was cleared by a chapter choose to take over the Mountain Move mine. An open-pit operation, the Mountain Move mine was idled throughout the chapter of its former proprietor, Molycorp Inc., and left behind in chapter, with scant cash and no patrons. Lower than a 12 months after the chapter trustee threatened to have Mountain Move mine’s case dismissed, it’s to be bought for $20.5 million, a price that Choose Christopher Sontchi at Friday’s courtroom listening to in Wilmington, Del., referred to as “a superb consequence” for an asset that had proved robust to promote. The mine itself and a few tools has been within the arms of the chapter trustee. Nonetheless, Oaktree Capital Administration, a big creditor that captured a lot of the Molycorp operation in chapter, owns main tools on the web site. And the mineral rights belong to a different firm, which can be managed by JHL. MP Mine is meant to shut the deal inside weeks.
Lo and behold, MP Supplies went public through a SPAC on July 15, 2020 (see WSJ article). Positive sufficient, FVAC began buying and selling on July 15th. It opened at $11.94 and closed at $10.99 on its first day. As a value investor, particularly given the valuation, I shortly handed on Fortress Worth Acquisition. Nonetheless, as a part of my analysis, I labored out that the opposite piece of Molycorp was spun out of chapter and created Neo Efficiency Supplies. By the way, on March 19, 2019, SA Contributor, Security In Worth, wrote an ideal piece on Neo Efficiency Supplies. In actual fact, it gained a coveted ‘Prime Thought’ designation by SA. Enclosed beneath is an excerpt from Security In Worth’s article: Neo Efficiency Supplies [TSX:NEO] (NOPMF) is an organization lively within the distribution and manufacture of merchandise constructed from uncommon earth metals. Their major enterprise is Magnaquench which produces powders and compounds manufactured from uncommon earth metals for the manufacturing of magnets, that are largely used for varied electrical motors. Additionally they have a chemical and oxides enterprise that produces varied merchandise, together with catalysts for engines. The corporate has its major itemizing in Canada however studies in US {dollars}, so all figures on this report are in US foreign money except in any other case famous. The stock is extra liquid on the Canadian exchange and that is the place I purchased my shares. The corporate had agreed to be taken over by a competitor, however that settlement was not too long ago terminated leaving their stock undervalued within the aftermath of the damaged deal. Per Security In Worth’s piece, additionally please observe: The corporate has a comparatively restricted float, with 65% of the agency owned by funds affiliated with Oaktree. They exchanged debt they held in Molycorp (which previously owned these property) for fairness in Neo when Molycorp went bankrupt.
My Thesis on Neo Efficiency Supplies So, my thesis is somewhat straight ahead. Again in March 2012, Molycorp’s administration group labored out that they wanted to be vertically built-in and that buying then Neo Efficiency Applied sciences was one of the simplest ways to try this. Lo and behold, circa 2020, Neo Efficiency has been swept into the dustbin of historical past, not less than in traders’ minds. But, here’s a firm that has actual income, EBITDA energy, an ideal steadiness sheet, and trades at a really low valuation. Supply: Neo Efficiency Supplies Investor Presentation As you may see, there are roughly 40 million shares excellent for Neo. Yesterday, its shares closed at CAD $8.90 per share. So, 40 million x $8.90 equals a market capitalization of CAD $356 million. Per firm’s May 2020 slide deck, they did almost CAD $400 million in income, have almost CAD $50 million of adjusted EBITDA, and have cash on their steadiness sheet. Supply: Yahoo Finance After I found this firm, once more, that had been swept up within the dustbin of historical past, I felt like Indiana Jones, discovering misplaced artifacts, the one nuance is that my proverbial canvass is funding analysis versus archeologist dig websites.
Fundamentals of the enterprise The enterprise has three segments: MAGNEQUENCH CHEMICALS AND OXIDES (“C&O”) RARE METALS In Q1 2020, listed below are the snapshots: Supply: Neo Efficiency Supplies The Enterprise Per the corporate MD&A, right here is how they describe their three enterprise segments. Neo has roughly 1,835 workers and has a worldwide platform that features 11 manufacturing amenities situated in China, the USA (“U.S.”), Germany, Canada, Estonia, Thailand and South Korea, in addition to two devoted analysis and growth (“R&D”) centres in Singapore and the UK (“UK”). Since 1994, Neo has leveraged its processing experience to innovate and develop into a number one producer of superior industrial supplies for specialty finish markets. Neo has established itself as a number one industrial accomplice to a number of the world’s largest clients within the automotive, semiconductor, superior digital and specialty chemical industries. Because of this, Neo is effectively positioned in markets which might be forecast to see strong, long-term progress pushed by a number of international macro traits, resembling car electrification, industrial automation, client electronics, power environment friendly lighting, air and water air pollution management, and superalloys. Neo identifies progress markets pushed by international macro traits resembling these, and produces extremely engineered industrial supplies which might be essential to the efficiency of purposes in these markets.
Electrification Outlook Neo continues to see longer-term progress in demand for a lot of of its key merchandise pushed by a number of international macro traits, together with elevated electrification of vehicles, which will increase the necessity for Neo’s purposeful supplies on a per-vehicle foundation; better demand for precision and environment friendly motors throughout a number of sectors, which inspires greater utilization of Neo’s magnetic supplies; progress in hybrid and electrical autos; extra stringent authorities regulation with respect to air and water emissions; and traits towards better utilization of lighter-weight supplies in industries resembling aerospace and client electronics. Neo’s superior industrial supplies are integral to applied sciences in all these finish markets. Magnequench Phase ï For the three months ended March 31, 2020, volumes decreased 12.0% in comparison with the primary The corporate cited decrease volumes and subsequent EBITDA as a result of international pandemic. For the three months ended March 31, 2020, volumes decreased 12.0% in comparison with the primary quarter of 2019. Revenues have been down $9.Zero million, as a consequence of decrease volumes and decrease materials enter commodity costs. Neo passes via these materials enter value adjustments to most of its clients on a lagged foundation. Volumes have been adversely affected by prolonged buyer shutdowns and slowdowns, primarily for patrons in China, attributable to the COVID-19 pandemic. Magnequench’s merchandise are finally destined to be used in purposes throughout the complete international market, however the first-level provide accomplice is commonly in China and the Asian area. Accordingly, the impression of COVID-19 was felt by Magnequench over nearly all of the quarter. Conclusion Given all the SPAC cash chasing the EV investor gold rush, I will not be shocked if Neo Efficiency Supplies will get scooped up. If it would not, the corporate needs to be a beneficiary of the EV progress tailwinds. In spite of everything, if the expansion charges for EV adoption are as strong as they’re implicitly mirrored in Tesla’s stock price, then Neo Efficiency Supplies’ stock needs to be a very good value and an underneath the radar technique to play it.
Additionally, please observe that Neo Efficiency Supplies has a U.S. ADR (NOPMF), however the underlying stock is predicated in Canada. So, when you resolve to take a position, you’ll want to put a restrict order in and one of the simplest ways to gauge the price of the stock within the U.S. is to take a look at the Canadian price of NEO.TO after which divide by the exchange price. So, at CAD $8.90, yesterday’s shut, this might roughly translate to about $6.60 in USD for NOPMF.
Second Wind Capital is a catalyst pushed/ buying and selling oriented service with an underpinning tied to value and out of favor sectors. The maintain interval can vary from just a few days to as much as six months (generally longer if my conviction stage for a specific thesis is elevated and basically and tangibly intact). Danger administration perimeters will likely be set primarily based on place sizing and/or cease losses. Nobody bats a thousand, so if you may get it proper 51% of the time and also you handle your danger, you’ll generate out-sized returns. Be part of now with a 2-week free trial and comply with my real-time portfolio. Disclosure: I’m/we’re lengthy NOPMF. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from Looking for Alpha). I’ve no enterprise relationship with any firm whose stock is talked about on this article.
