MEMO: Chamath SPAC for FVAC

Tl;dr: Chamath Palihapitiya invested into a publicly listed company called Fortress Value Acquisition Corporation or $FVAC. He shared his memo on Twitter which was just one page. It’s his own money so who cares

Background

Chamath Palihapitiya did a Tweet storm and shared the memo and these thoughts:

Last week I co-led a $200M PIPE into $FVAC. My first big bet on climate change. This will allow $FVAC to scale the largest rare earth metals mine outside of China – based in California. Because it was $200M, I decided to write a 1-pager which you can find below…

My belief is that rare earths are a highly assymetric way to bet on a multi-decade trend of electrification and climate change tech. Demand can easily outstrip supply when you factor all the things that will run on electricity vs fossil fuels: EVs, turbines, drones etc

In many ways, rare earths are to electrification what Intel was to the PC Boom of the 1980s and 1990s: a common component in every solution. Being long Intel in those days was equivalent to being long the PC revolution. In my mind, this is the same point in time.

Layer in the geo political value of having a critical supply of rare earths onshore in the US and there are a lot of tailwinds. Price also gave me a REALLY good margin of safety: .88x invested capital, <6x 2023 EBITDA

Let’s see how this plays out over the next few years, but I’m excited to be involved. My memo is below. Questions welcome…

Investment Thesis for SFVAC

Summary

• Rare Earth Metals are an increasingly critical input in electrification and national security Issues wrt geopolitics
• Long term, large supply constraints with no resilient vendor diversity ex-China currently available
• SFVAC is the largest mine US. only mine in Western Hemisphere, based In CA, green and sustainable
• Good margin or safety buying at .88x $1.78 or paid in capital less than 6x 2023 EBITDA
• Lots of high margin opportunities to expand and become a full life cycle player in climate change/ electrification: mine->manufacture-> recycle

Qualitative

• Electrification/Climate Change technologies are here to stay because government regulation (push) and consumer demand (pull)
• Standard configuration of all electrification processes. across all markets (EVs, wind, drones etc.), is a combo of batteries + electric motors
• Battery technologies are diverse. Hard to pick a winner and battery chemistries are changing rapidly.
• Electric motors a.re consistent and don’t change much. Permanent magnets are the critical component of electric motors.
• Rare earths are needed to make these permanent magnets. Substitutability is low because of the physical properties of rare earths.
• In this way Rare Earth Permanent Magnets are similar to Intel during the PC boom in 1980s and 1990s –
lots of players in software but intel was the monopoly provider or the common input (i.e. their x86 chips)
• 80% or all permanent magnets come from China
• SFVAC creates a monopoly provider in the Western Hemisphere – about 20% of the world supply.
• SFVAC can create an end-to-end solution. Stage 1 is mining based in CA. green and sustainable. Stage 2 is making the magnets either alone or through JV. Stage 3 is recycling.
• Current rare earth supply won’t meet 50% of forecasted EV demand within 10-15 years let alone any other
End markets. So market is supply constrained which should mean prices or rare earths can go up.
• Increasing Interest from DoD and USG as a critical Input to US national security should create margin of safety and incentives for OEMs to diversify supply to include SFVAC

Quantitative

• Original mine went bankrupt after spending -S1.78 or paid in capital. Bought out or bankruptcy.
• 2023E revenue-> S450M
• 2023E EBITDA-> S252M
• Price is S18pre:S1.58 post
• Price is 5.95x 2023E EBITDA
• Price is .88x paid In capital
• Price is 3.3x 2023E revenue

Risks

• China prices aggressively to keep share- historical prices and supply/demand imbalance would seem to
mitigate this risk, also foreign stockpiling could then happen which isn’t good for them
• Other synthetic materials emerge to displace rare earths will need to monitor progress but total BoM cost is
less acute risk than for batteries
• Environmental impacts of operating in US- much higher bar than operating a mine in China but CA has some of the toughest environmental laws so meeting this standard should give SFVAC confidence they can operate in a green/sustainable way for foreseeable future

 

You can read the rest of the memo collection here.