Today’s recommendation is a little different that past ones. Previous investment ideas have had a “green” tilt. Today’s has a “tech/space” tilt. Materion is a mining company (a good one!) and mining is hard to do in an environmentally friendly manner. It is a necessary evil for a technologically advanced society. Eventually, this dirty industry should move off planet but for now we have to make do. Fortunately, the material this mine produces is particularly useful for aerospace applications and advances the cause.
Materion is the world’s largest producer of Beryllium. It has a near monopoly and is the only vertically integrated producer in the space. Beryllium and especially Beryllium alloys are important to aerospace as they hit the sweet spot balancing strength and weight. The metal also has attractive conductive properties and is resistant to decay. Transitioning any meaningful amount of Earth industry to space is going to require an enormous amount of Beryllium and Materion is the low cost producer.
The metal is useful in a large number of high tech applications. It is essential to the new Webb Space Telescope but also goes into electronics, X-ray equipment and more. The metal becomes especially useful as part of various alloys. Materion doesn’t just mine the metal. It also produces these important alloys.
Mining is a tricky business and a hard one to invest in successfully. The nature of the business is highly capital intensive and subject to commodity pricing risk. Only the best mining companies will do. I think Materion fits the bill here.
One of the most attractive features of Materion is the location of its mine. Mines are often located in places with governments that are hostile to the business interests of the mine. Materion’s mine is located in Utah and is largely insulated from government interference and risk of nationalization. The Utah mine has an enormous resource. An estimated 75 years of production exist with currently available technology.
Also of note to investors, the US Department of Defense considers Beryllium strategically important and military uses a substantial amount of the mine’s production. The government has proved to be a reliable customer since shortly after World War II. The special relationship the company has with the Military Industrial Complex ensures sufficient cash flow in lean times to keep the mine operating profitably.
The company develops specialty alloys, coatings, ceramics, optics, and other materials for a wide range of industries – including aerospace, electronics, defense, energy, and telecom. The company has a market cap of about $1.2 Billion. Sales are also about $1.2 Billion, making for a very cheap Price to Sales valuation of 1.0. The company operations 25 manufacturing facilities. There are seven additional locations focused on sales, service, and distribution. The primary asset though is the Betrandite mine in Juab County, Utah. Bertrandite is the ore that contains Beryllium (pure Beryllium does not exist in nature) and the mine in Utah is the world’s only commercially exploitable mine of its type of material size anywhere in the world. The company effectively has a monopoly. And based on current production and near term forecasts, there is about 75 years of production left in the deposit.
Materion isn’t just a near monopoly, it is the only vertically integrated provider in the market. It mines the metal, creates the alloys, and even produces finished products. It doesn’t have to go onto the open market to buy ore (although it sometimes does) which provides a great deal of protection against commodity price shocks. This is all in a market that has steadily grown and is expected to continue growing for the foreseeable future. In fact, the company has grown both sales and profits for eleven consecutive quarters.
For the most recent full reporting year, Materion reported three segments. These are: Performance Alloys and Composites (57% of revenue), Advanced Materials (30%), and Precision Coating (13%). Performance alloys include copper-beryllium, nickel-beryllium, and some proprietary products like ToughMet and PerforMet. Composites include metal matrix items such as AlBeCast and AlBeMet that combine beryllium and aluminum for use in satellite and aerospace applications. The advanced materials segment includes microelectronic and ceramic packaging, as well as evaporation materials for depositing thin films. Precision coatings include large-area, flexible thin-film products. Within these three reporting segments are eleven different product areas. The largest are Semiconductors, Aerospace and Defense, and Industrial.
The company has a pristine balance sheet. While it holds 47 million in debt, it keeps 94 million in cash on hand. Thus, the company has no net debt and is well protected from any scenario where its creditors can force it into bankruptcy liquidation. What’s more, is the company averages 37 million in Free Cash Flow (Free Cash Flow is operating cash flows less capital expenditures – the money the firm has that can be returned to owners without taking on debt.) The company has returned 80 million to shareholders over the past seven years. And it has increased its dividend by an average of 10% a year for seven years.
Shares have recently taken a small dive. This to me is a buying opportunity. The all time high was around $70 per share and the current price is $61.33 a share. I expect that the creation of the United States Space Force as a new branch of the armed forces spells increased demand for the company’s products. At the same time, commercial space flight is ramping up and stands to be another significant source of new demand. I consider the shares attractive below $75 dollars a share.
ACTION TO TAKE: Buy Materion (MTRN) up to 75 dollars per share. Put no more than 3% of your portfolio in this investment. Use a 25% trailing stop loss to protect your capital and adjust your stop for dividends received.
It has been my pleasure to offer an investing idea that advances the cause of space and technology. I hope you enjoyed this article.