Shares of MP Materials (NYSE:MP) dropped roughly 13% in the first 30 minutes or so of trading on March 23. When considering the 160% gain the stock has achieved since its initial public offering (IPO) in late 2020, that’s not too big a deal. Still, the rare-earth miner did release two news updates after the market close on March 22 that investors don’t appear to like very much.
The first bit of news was that a large stockholder would be selling 8 million shares in a secondary offering. The underwriter has the option to increase that by another 1.2 million shares. MP Materials won’t see any of the proceeds from the sale and the shares won’t increase the total number of issued shares. This is likely because they are related to the blank check process used to bring the company public, which included issuing shares to insiders. That said, with insiders selling shares into the open market, investors are probably concerned that people are opportunistically cashing out. If insiders continue to sell, it could put downward pressure on the stock.
In addition to the stock sale, MP Materials also announced that it was issuing a green convertible bond with a due date of 2026. The company is looking to raise $500 million, with the underwriter holding the ability to add another $75 million to the tally. The cash raised from this sale is intended for projects that will lower MP Materials’ environmental footprint. But the conversion feature here is a potential issue for shareholders. There will be shareholder dilution if the bond gets converted, something that investors don’t generally like to see.
The big story here is that MP Materials and certain insiders are taking advantage of the company’s popularity and the current market environment on Wall Street to raise cash. The stock sale won’t cause dilution, but it will increase the amount of stock that’s in public hands. It also hints that there’s a chance more insiders will sell, which could depress the stock price. The green convertible bond, meanwhile, opportunistically raises cash, but risks dilution down the line. It’s understandable that investors weren’t too pleased with these updates.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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