What Stock Could Benefit Most From the Inflation Reduction Act?

On August 7, the U.S. Senate passed the Inflation Reduction Act, authorizing $740 billion in spending. Days later, the legislation passed the House of Representatives as well -- and it is now on its way to President Joe Biden to sign.

That's a lot of federal money flooding into the economy. Of that total, $369 billion was earmarked for U.S. energy security and fighting climate change. So which stocks will benefit the most? Clearly, green stocks will emerge as big winners from this legislation.

What's more, the U.S. is worried about China and access to rare earth metals. Ultimately, I think this law is going to be very bullish for MP Materials (NYSE:MP). Let's see why.

The future is obvious

In the future, we're all going to have electric vehicles (EV). We're going to charge them at home, overnight, like we do with our mobile phones. Tesla (NASDAQ:TSLA) is the company leading this change; it's the Apple of the EV industry. Right now, however, less than 1% of Americans have an electric car. The rest of us are still guzzling gas. One of the goals of this legislation is to move the electric car out of the early adopter phase and into widespread adoption.

Under current law, new electric vehicles qualify for a rebate of up to $7,500. But there's a catch -- manufacturers qualifying for this rebate are capped at 200,000 cars. Tesla and General Motors (NYSE:GM) passed this mark years ago, and Toyota Motors (NYSE:TM) just passed it as well. Ford (NYSE:F) and Nissan Motor (OTC:NSANY) are about to hit the cap, too.

This new law removes the caps for all these EV carmakers. So that's big news. But there's also a huge wrinkle. Starting in 2024, none of the EVs that use rare earth metals sourced from a "foreign entity of concern" (i.e. China) would qualify for the rebate. That's a massive shift in American policy. Right now, for instance, it would be almost impossible to find a single EV on the road that doesn't include rare earth metals from China.

It was Senator Joe Manchin -- the key vote in getting the bill passed -- who insisted on that stipulation. "I don't believe that we should be building a transportation mode on the backs of foreign supply chains," Manchin said. "I'm not going to do it."

This is a big deal. China is a major force in rare earth metals around the world. In 2018, the U.S. imported 95% of its rare earth metals and alloys from China. This future law is a carrot/stick approach to EV automakers that is designed to break the Chinese dominance in rare earth metals.

Image source: Getty Images.

What this means, obviously, is that there's going to be a big demand for rare earth metals that are sourced and refined in the U.S., or from our allies. Rare earth metals like neodymium and praseodymium (NdPr) are incredibly important in high technology. It's not just electric vehicles that need them, but also smart phones, wind turbines, medical devices, robots, lasers, and drones.

MP Materials should be a big winner

MP Materials is a major miner of rare earth metals, and the largest provider in the Western Hemisphere. MP delivers about 15% of the world's supply of these metals. And demand is sky-high. As management likes to say, "We are not demand constrained. We are very supply constrained in this space. There is no shortage of (demand)."

MP data by YCharts

MP stock has been wildly successful since the company went public in 2020. MP already enjoys high profit margins (49%) and revenue growth (96% in Q2). Right now MP has to send its metals to refineries in China. But that's going to change as the company's Stage 2 and Stage 3 facilities come online. The company hopes to start ramping up production in 2023. MP has already signed a long-term supply contract to start providing EV magnets for GM engines.

Earlier this year the Department of Defense gave MP a $35 million contract to refine heavy rare earth elements (HREE) at the company's site in Mountain Pass, California. In the DoD's view, rare earth metals are a strategic asset. MP has been focused on "light" rare earths like NdPr, which are highly valuable and extremely profitable. China dominates in "heavy" rare earths. The DoD contract is an attempt to rectify this situation.

MP is a powerful choice for a green economy

MP does have some friendly competition. While it's the largest source of rare earth metals in the Western Hemisphere, there's a miner in Australia called Lynas Rare Earths (NASDAQOTH:LYSDY) that is also highly profitable (45% profit margins) and has higher revenue ($600 million over the last 12 months, compared to $500 million for MP).

Lynas not only has a rare earths mine, it also has a refining facility in Malaysia that's been up and running for years. Unfortunately, this refinery might be similar to the mining operations in China that are bad for the environment. In fact, Lynas got in trouble based on suspicions that it is contaminating the drinking water of the nearby city of Kuantan (population 600,000). After complaints and investigations, Lynas has agreed to remove its refinery out of Malaysia entirely in 2023, and will relocate it to the outback of Australia.

That's one of the dirty secrets about rare earth metals -- digging them out of the ground is not very clean at all. MP Materials is a big improvement on this score. The company is spending a lot of money to make sure that its mining operations will not ruin the water supply. MP operates a "zero-discharge" facility with no processed water disposed offsite or to the ground. Dry tailings are instead retired in lined impoundments.

I think both of these companies will profit from the new law, and the federal desire to break the monopoly in China. But I think with its environmental record, MP Materials is the stronger pick for a green future.

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Taylor Carmichael has positions in Apple. The Motley Fool has positions in and recommends Apple and Tesla. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.