MP Materials Corp. (MP) Earnings Call Transcript & Summary

Welcome, everyone, for our final panel of this conference. Thanks for joining me. I'm Timna Tanners. I cover metals and mining for the Americas here at BofA Securities. It is my distinct pleasure to welcome MP Materials. We're going to discuss rare earths. We have James Litinsky, the CEO, with us. And we're really going to take a high level start here because this is the first time we are welcoming MP to this conference. And the last presentation on rare earths was at a very early hour, at least for our U.S. investors. So we do want to kind of go through high level and talk with Jim about what the company is up to and why are you so excited about rare earth. So I know that's a great opportunity for you to launch in there, Jim, and I'll hand it over to you.

Sure. Well, thanks for having us Timna, and it's quite an honor to be the closing ceremony given that a year ago, we weren't public, and so now we get to be the closing ceremony of your conference. So you have rare earths, we'll just kind of start off for those who don't know, rare earths are really important materials for the electrification of the world. The key ingredient that we make, that will be the 90-plus percent revenue product is NdPr, neodymium, praseodymium. There are a number of rare earths, but those, in particular, are utilized in magnets for electric vehicles, wind turbines, drones, robots. If you think about sort of the sustainability transformation that we now have upon us, our materials are really critical for that.

Okay, super. So MP Materials, as you mentioned, just came public, has the I believe, the world's largest deposit of rare earth, I'm sure you can just elaborate on that. In California, which is remarkable, having lived there a lot of my life. I know that's not a place that is generally very mining friendly. So talk to us about your deposit and where you are in terms of your developments?

Yes, absolutely. And why don't I -- I'll use a dirty word, so to speak, and use a fossil fuel analogy. But our -- you can think of our deposit and our site as really the Saudi Arabia, if it were oil, it would be Saudi Arabia. We have kind of the iconic asset in the rare earth space. And the reason is you probably -- maybe some who don't even know anything about the industry might have heard the expression, rare earths or not rare. That's because they're not. If you have a backyard, you probably have a rare earth mine, some concentration. What is extremely hard to find is a high enough concentration of the rare earth that also leads to economic viability to process and separate them as well as to not have significant radio activity or environmental challenges like some other producers in the world or some sites in China. And so we have this unique ore body. It's been around since the '50s. It's had a couple of iterations. My team and I took it over about 4 years ago. And we relaunched the site. If you think about it historically, we haven't had the electrification of the global economy, the demand function for rare earths has evolved over the years. But here now, we are kind of on the precipice of this significant demand up cycle. And our sight is really the only scaled source of supply in the western world. We are and we believe we're on track to be the lowest cost producer of separated rare earths in the world, and you can look to. We treated it, but you can look to -- I'll mention a competitor of yours' research that did the analysis on the industry. So you can check that on our Twitter feed a couple of months back. But we are building the company in 3 stages. Stage 1, which is complete. Is where we relaunched the site. We now produce a rare earth concentrated product. We send that to be refined in China today. And just doing that, we are profitable, and we are the second largest producer of rare earth content in the world, just doing that. We're now in a Stage 2 where we will take the existing assets on site. We're adding a couple of things, a crystallizer and a roaster. So standard industrial items to optimize the refining capacity that we have on the site that will be completed sometime next year. We've said that 2023 will be a full year normalized of our Stage 2, where we'll be making separated rare earths. And then we have the profitability and the conservative balance sheet and then some the firepower to continue to move downstream to fulfill the full rare earth supply chain to the United States of America will move down into magnetics. And if you just think about it, when we think about, we're at sort of low single digit, call it, 3%, 4% penetration of electric vehicles, just the magnetics market for EVs alone will grow. I believe we're going to 90-plus percent penetration in EVs. I don't know by when, but 10, 20, 30 years, you can imagine that means that, that market will grow by 30x. And so it's a pretty tremendous opportunity. But in the short term, we want to continue to execute, build on our ore body advantage. And then the last thing I would just say, and I'll flip it back. I just want to make sure people have the background, but we have a co-located site. And so I said before, rare earths aren't rare, you have to have the ore body, but there's nowhere else in the world where the chemical processing piece of this, which is really the very challenging piece, you get the rare earths, you concentrate it and then you have to separate them. In every other site in the world, the mining and refining capacity are in different locations, that's obviously added cost, added environmental impact. We have that all at Mountain Pass, and that really enables us to be not only on our way to being the low-cost separated NdPr producer in the world, but also the most environmentally friendly. And as you know, being a Californian historically that to have a site that was built in the state of California within the past decade, means that we've been through some pretty extraordinary oversight. And so we're very proud that we are a California operator.

Excellent. I want to remind people, we have a number of people dialed in that you can submit your questions through Veracast. So we just got one. But I wanted to just go back because some people listening and may remember the Molycorp example may have been investors in Molycorp at 1 point, seen that goes down.

Yes. We've heard from a few of those.

That's 1 of the questions we get the most is like what are you doing differently than Molycorp? But I know I've heard your explanation, but I think it would be helpful to hear why -- is it the timing? Is it the technology? What are you doing differently that's going to allow you to succeed where they did not?

Absolutely. The first -- people who kind of know vaguely about Molycorp think that they went public and that the China -- there was sort of a spike in prices and then the Chinese put them out of business. And that's actually not what happened. The failure of Molycorp really had nothing to do with China. Molycorp, just for those who don't know, it was a group of people who bought this site from what was Chevron at the time and relaunched it with the idea that they would have a state-of-the-art environmentally friendly facility and that they were going to focus on serum, which is a byproduct. It's a low-value rare earth, but they were going to sell that as a branded wastewater treatment product for many times the market price. It's no different than if I bought an oil well in Texas and said, I'm going to sell Jim's oil for 6x the price. The logic really wasn't there. But frankly, you can't fault them so much because when they went public back in 2010, the model S wasn't even on the road, right? The electrification, the demand for NdPr wasn't there. They built this state-of-the-art facility. They failed to execute. They had significant challenges related to uptime. They were trying to operate a chlor-alkali facility with off-spec water. They were trying to operate a processing facility with extreme high temperatures, the tailings were never properly online, and they had significant challenges in all of these areas, just getting the facility online. We've solved the lion's share, almost all of those challenges. So when you think about our business today, they were never profitable. They were never able to achieve the level of production. In fact, I encourage people to go look at our numbers. We currently run rate produce north of 3.2x the annualized amount of rare earth content than they did in their best quarter leading up into their bankruptcy ever. So they're best quarter annualized. So we've already sort of solved those challenges. On top of that, we are focused on NdPr. Serum is really a byproduct for the most part. And so what that means is we're installing the roaster step, which is how Mountain Pass operated historically for decades successfully which means a big oven where you're going to roast the concentrate before you put it through the separation process. And so we are reinstituting that. So we then can have a much lower cost, higher output of NdPr, the good stuff. And that is the project that's underway. I would lastly say that the refining piece, what is our Stage 2, that actually operated perfectly well under the predecessor. So the 1 of the very few things that Molycorp did right is actually the equivalent of Stage 2. The NdPr separation worked perfectly well. And those assets are all built. You can kind of see that. If you look at the video on our website, that's built and that operated perfectly well. It's mass balanced. What we're doing is mainly our optimization project is putting in a roaster and then a crystallizer for water treatment. Those are standard industrial items, and then we'll get that going.

Okay, super. We actually have a question come in to ask you to talk a little bit more about your reserve and resource position. Can you grow -- like what's your growth potential, I guess, within the resource, especially considering the big EV opportunity?

Yes, absolutely. Well, the stated reserve, if you -- and obviously, encourage people to look at our filings. And I think our most recent filing had, it was like roughly a 24-year life, but that actually had some pretty stringent assumptions only on our -- only as if we were going to sell at Stage 1 forever. And to remind you, our Stage 1 is a concentrated product. So we take the rare earth, we concentrate it down into approximately a 60% concentrate and then we sell that to Chinese refiners. When we -- and if you just think about it, we're going to -- if you look at the numbers, we're going to have a significant uplift. If you look at the basket price of what we're getting today versus what we'll get when we sell separated products, you'll see there's going to be a significant uplift in our revenue, our cash flow, assuming we can complete our Stage 2, and we will get that done soon. And so that will dramatically expand our mine life. And then what I would also tell you is that Mountain Pass has been around for decades. And we still don't know the scale the extent of the ore body, we have not drilled to the bottom of it. So I think for all intents and purposes, for our discussion in our lifetimes, we believe that we have lots of material we don't lose any sleep about the reserve.

But suffice to say, you had higher prices. And then when you did that analysis, assuming that's how it works like it does in other -- in oil and gas, for example. And if you were to drill further or you could easily have more life span? Because 24 years if you're thinking 30 years of EV demand, is that something that you think is extending?

Well right. And yes, so that's the point is even without more drilling, just the fact that we're getting a fraction of what the price is. It'd be like saying, what are your oil reserves if oil was $12, right? And well, oil is in the 60s, so you'd have a much larger reserve. Again, not a perfect analogy, but that's kind of similar to us that we're getting reserve credit for our concentrate. There will be a significant uplift when we're making separated products. And then from there, prices have also moved materially higher. And we will continue to drill. And so anyway, it's not -- for those who are thinking of it as a question about reserves, I think that, that is not something for a number of decades that will be a concern for us.

Okay. That's helpful. Thanks for that. I want to switch over and talk about you -- the rare earths actually go into motors rather than batteries. We have a lot of talk about battery metals. And so talk to us about the motor and the -- I also want to understand a little bit, like what are the substitution? What are -- what makes motors different than batteries just because it's -- again, it's not as much of a focus traditionally?

Yes, absolutely. And I think this gets confused a lot. The -- because there's a lot of battery, lot of motor players out there. And then there's also a lot of different commodities and different mixes that go into the battery. And so no 1 knows exactly the ultimate battery will be? Will it be lithium or solid state, how much nickel, how much cobalt, all those things. But that energy source goes to a motor. And regardless of how that energy goes, again, lithium, solid state, capacitor, hydrogen, whatever, the way the motor moves -- that energy moves a motor is via magnets. And 90-plus percent share of electrification of an electric motor is a rare earth magnet. And the reason is that because the properties of rare earths are such that on average. And again, it ranges depending on the kind of motor, the kind of magnet, but think of a typical neodymium iron boron magnet in a Tesla or Volkswagen or a new Ford Lightning, whatever, that, that should be about approximately 5% to 15%, just call it 10% more efficient in the usage of your battery materials, 10% more efficiency and significantly smaller in size. And so when you think about it, a rare earth magnet that may cost a couple of hundred dollars, actually leads to probably north of $1,000, and that's assuming Tesla's costs obviously, the material savings depends on the car. So there's lots of different assumptions. But if you kind of take the most stringent and just say, assume Tesla's kilowatt hour battery cost and the savings, we believe a rare earth magnet creates, you're talking about north of $1,000 of battery material savings. And of course, Range Eyeing's anxiety is a big issue. Not to mention, if you think about the Rivian tank turn or even the Ford Lightning that was just announced, any of this e-axle technology, some of them have permanent magnets in the motor. So you're actually seeing permanent magnet content go up, if anything, and so we've actually done some back of the envelope math at MP, and there's lots of different assumptions. But right now, a permanent magnet motor is a little bit more expensive, the magnet contribution from a permanent magnet versus an induction motor, which is the alternative. It's a little bit more expensive, but the savings, if you held all other commodities constant on an apples-to-apples basis, our estimation, and again, there's lots of assumptions on the kind of car or the kind of battery and all this, but we think NdPr prices have to go 5, 6x higher before substitution even makes sense. And by the way, that's withholding other commodities prices constant and induction motor, Bernstein, forgive me for mentioning a competitor, but they just put out a report estimating. I believe that an induction motor has 11 to 24 kilos more of copper in it. And so obviously, given what is happening with copper. So we just think that there's a reason that NdPr magnets, rare earth permanent magnets have such high share and that goes across, you can think of it as anything where motion, where you have sort of electrification and size and efficiency and weight matter. So wind turbines, air taxis, drones, robots, all of those things, that makes a rare earth magnet that much more important. And so we think the future is particularly bright on a demand standpoint beyond EVs. But just with EVs alone, it's pretty asymptotic.

Okay. That's great. There were some tax alternative motors that were able to be made without rare earth a while ago, but I think they're uneconomic. Is that -- is that the same argument you are making?

Yes. I mean what taking -- yes. What I'd like to say is, I mean, it's a law of chemistry or physics, right? Whatever can be done without a rare earth magnet can be done better with. And so if competition matters, which it does in the EV space, certainly with all of the players, do you want to lose out on thousands of dollars of materials costs in your battery, in your ability -- in your range and your -- in the sizing of your machine to switch this out. It just doesn't make sense. The alternative ones -- and again, by the way, that means much higher copper content, and it means you're exposing yourself to other commodities, which may also have those issues and so -- and then sometimes you hear a reduction of rare earths and sometimes that relates to the trace amount of heavy rare earths that may go in these magnets. And so again, there's a reason why you see 90-plus percent share rare earth magnets. On occasion, you'll see sometimes an automaker when they're switching from an internal combustion engine platform to an EV platform, that very first time, they may stick with an induction motor because it's more simple with what their legacy platform is. But then what they soon find, in fact, Tesla, the very first model S was an induction motor. They switched. Others -- and the reason is because you just can't beat the fact that 10% efficiency when your battery cost $10,000, $15,000 or more for a car that's many multiples of the cost of a rare earth magnet. So we feel very confident that headlines aside, and there'll always be people who want to raise capital around new concepts but for the foreseeable future, we're pretty confident that we're going to be part of the solution for electrification.

Okay. I think that's really helpful. Look, I need badge you but very polite question that came in earlier on the size of your resources come back and want more detail. So well, the potential to increase your output at the resource? Is it double or triple once you've gotten to Stage 3 to finish magnets, like what's the scope of what size it?

Yes. So we get this -- this may reference -- and because I think what you're seeing and, in particular, with the semiconductor issue that's just happened, people are obviously very worried about supply. And we are very unique in that, we are the sole source of scaled supply and any reasonable economics in the western world. And so one of the key questions we've been getting asked very recently is, without saying anyone sort of how can we accelerate your Stage 3? How can we get you to do more? And so this question comes up, what I would tell you is, without question, the single -- the lowest risk, highest return on capital, nearest term source of new supply in the western world would be an expansion at Mountain Pass. I mean we certainly have the resource. Aside from that, if you think about it, we have a north of a 7% ore body. The typical sites in China may be 1% or 2% for many of them. Some of the other sites, there's typically some junior or penny stock type capital formation around some of these sites around North America. They're talking like they have sub-1% rare earth. If you think about a 7% ore body and you say you have a 60% or 70% recovery, that means that our tailings have a higher rare earth content than a lot of these other speculative projects that are hoping to raise feasibility capital. And so we've also -- so our tailings, aside from sort of additional mine expansion, our tailings could be a source of new supply. And then on top of that, we've said, if you look back to when we went public last year, we stated very clearly that our NdPr target for normalized 2023 does not assume 100% capacity utilization. And so we do believe that assuming we can continue to execute efficiencies that we have and continue to get better in our operation that we can produce more output than we've guided to. But obviously, we haven't put any numbers around that. And so obviously, we think about all of these things. It's not lost on us that we can create literally billions of dollars of enterprise value to the extent that we could dramatically extend our output. But frankly, the press releases are nice, but the single most important thing is execution. It comes down to execution, execution, execution. And we want to make sure -- we are convinced. We know that the market opportunity is there. We see the same thing as you see as far as electrification. And we just want to make sure, particularly given the challenges the predecessor had. I think we've already blown past that with flying colors. The fact that we're producing where we are, that we're profitable, sort of against all as we've been achieved all of that, but we want to make sure that we execute our Stage 2, and then we'll think about all of those things. But it is not lost on us. The question you're asking, which is how can we more quickly continue to expand and add more supply in all aspects of our business. But we're -- by the way, I'm the largest shareholder of the company. It's probably a rare thing in the mining materials space to have a real owner-operator where the Chairman and CEO is a Founder and the largest shareholder of the company. And so I really do want to make sure that we properly utilize our capital and execute.

Okay. I hope that answers the question. Thanks for asking again.

I hope so. Yes. And if not see our filings. Yes.

Yes. I tried. I tried. I do want to ask, we only have about 10 minutes, and there's 2 things I really want to focus on. And that's been the Stage 2, Stage 3 execution, as you just said, is key. But I want to take a step back and talk about the rare earths. And the phenomenon there is fastening because in many commodities, China is short in copper, and that's positive. In this case, China is the market, both on the supply side, right? Usually, it's the demand side. So that creates kind of a unique set of risks and opportunities, I would say, right? So I think part of the thing was rare earths, that's a little tricky is just the lack of transparency. The market does some things that we don't fully understand. So wanted to get your perspective. So NdPr is scarce and the demand is there and governments are concerned about availability. But the price has actually been slipping. And I know Lynas said, and when we talked to them, they weren't terribly concerned about it. It may be a short term phenomenon. But I would just love to get you to the way and on helping us understand the near-term market conditions.

Yes, absolutely. And so a little background because some people are probably very new at this, and some people know. In the rare earth space, there was a spike in prices in 2010, kind of around the same last cyclical commodity market peak. And then they came down and Molycorp had its challenges. And so there's a perspective that China has unlimited supply and that this is such a strategic industry that they will keep prices low and they want to dominate it. And that is sort of the backward-looking mindset. What I think people need to understand is that the Chinese have utilized this industry to move downstream. So if you think back a decade ago, they didn't have really -- they were just starting a rare earth industry. They then took over the magnetics industry. And now if you look at just the New York Stock Exchange, there are a number of Chinese automakers that are as large as the major other global OEMs. And so the Chinese have always wanted to compete in the electric vehicle space, right? They knew they lost the internal combustion engine. Now it's about the EV. And so for those who were thinking about rare earths, I think what you need to understand is that you'll see reports in Western Media that the Chinese will use this supply chain to kind of -- that they might cut off supply like they threaten to do in Japan. But actually, if you step back and use your common sense, what they're doing already is actually much more strategically valuable. They have wanted this as a Trojan Horse to compete as they should for the much higher dollar value of GDP, the trillions of dollars of downstream GDP with -- from magnetics to the actual OEM becoming the leading OEMs in the world, I'm sure they'd love to make cars in South Carolina, just like anybody else. And so when you think about this market, you need to think about -- I don't look at what the Western Media says. I look at what the Chinese officials say and if you look, the leading Chinese rare earth regulator, who was the former Chairman of Chinalco, said very recently that rare earth prices represent prices of the earth not that they are "industrial gold". He used that word industrial gold. And went on to talk about the environmental impact of rare earths and the mining and processing that has happened historically. And I think this is an analogy for some of the other commodities that and I'll address that in a second. But the concept was that China now does not want to subsidize the rest of the world competing against their OEMs by destroying their environment. And so the -- everything the tea leaves that we read out of China are that actually, they want the price of this commodity to reflect its actual economic attributes because it doesn't make sense to produce supply for anything beyond the Chinese OEMs, right? There's all these other OEMs they're competing with, why would China destroy their environment and subsidize GM, right? That doesn't make sense. And so I think what you're going to start to see. And then I think there were some comments from a competitor about China northern expanding. We never saw anything like that. So I don't know what that was referencing. No one we know in China knows anything about that. And actually, if you look at it, what you've seen over the last decade, is a lot of the illegal mining that had been done historically in China that was very environmentally disruptive, has been pushed into the 6 super majors. And now those super majors are increasing cost to deal with the environmental issues. And so we believe that sets up an extremely bullish backdrop for pricing because you now have this sort of sustainable level where pricing needs to reflect the economic cost, both the variable costs and the environmental impact. And then you have the demand curve, which is just getting started. And so I think you're going to see a very different forward decade than you've seen as a prior decade in the rare earth space. On top of that, I would add, at MP, we believe we're on track to become the lowest cost NdPr producer in the world in the coming couple of years. So once we're normalized. So to the extent that it doesn't take off, we think we're really sort of well positioned as a company. But from everything that we see the demand is just really -- it doesn't take a rocket scientist to see EV penetration going from 3% to wherever we're going, extrapolate that math. Now do it for wind turbines, drones, robots, air tox, taxis, robot dogs, who knows, whatever is being electrified, you're seeing significant demand increases. And so I think it's going to be just a really -- I'm a big believer in the 2.0. Every cycle typically exceeds the inflation-adjusted prior peak and then some of the prior one. And I think that, that's going to be the case here. And I would just lastly say because Timna I've watched a few of your panels on this. I think you could say the same thing across copper, iron or aluminum, a lot of even the managers in this space, people have come off of a decade of a bear market, it's been very painful. People got overlevered. They did bad deals. They wasted a lot of capital, then the market crashed like inevitably it can do in a cycle and people have spent a decade, they've repaired their balance sheets. They haven't invested in new expansion. They feared the China Bogeyman as we now embark on this new environmentally friendly regime, including and specifically out of China in making sure that prices reflect the environmental costs on top of the fact that you now have all these commodity prices starting to take off which means that replacement costs for all these things are going higher. And of course, that feeds on itself of sort of the reflective nature of as these costs go higher, as the investment has been -- there's been no investment as the management teams have been extremely reluctant to add any supply, you're going to start to see, I believe, a powerful cycle really kick in, particularly across the electrification space where demand is just really just getting started.

Look, I get the demand story, I get the excitement is palpable, obviously, Jim. It doesn't really answer the question about the very near-term move NdPr, right now? As I guess...

Oh, sorry, yes, let me address that. Yes. Let me answer, I didn't mean to avoid that. I was trying to give a full perspective and was not avoiding. So near term, yes, we -- just for those who -- this was a question, NdPr has essentially nearly doubled since last year. And then in the last month, it pulled back from around $90 million to around $75 million and I really -- I think it's very difficult to read anything short-term with respect to China. China is a very seasonal and momentum driven market. You often see kind of volatility around Chinese New Year kind of getting -- coming out of Chinese New Year purchasing around year-end, where people want to conserve cash. And so you will see in Chinese markets, different activity that is seasonal. And then, of course, in China, it's just a very momentum market when things go up, they go up and then down. And then -- but as you look at this industry, and I could invent some narratives like the semiconductor shortage has caused shutdown in auto production. So in the very short term, there's been a little bit of a hiccup as people kick into gear, and so you see a couple of months of a pullback, but all of that would be guessing. From everything that we see, whether it's customers in China or demand in the supply chain here, about how we can accelerate more production at you, everything we see is bullish in the backdrop as far as demand. And so I would read nothing into -- again, prices in the short-term will be volatile. I don't predict prices. I do believe that over the long-term that we are headed to, this is a new cycle, which means pricing typically does go to the inflation-adjusted prior peak. I believe that inflation in the inputs. And by the way, in that whole speech I gave you before, if you had all the capital, you had the resource, which doesn't exist that we know of in the western world, you had the human capital, you had the permitting and the feasibility, it would still take 3 years to build the mine in the chemical plant to get the supply online. And so I just think that before we even see -- we haven't even seen that. And when you see that, then you know you've got 3 years to where that supply can really come online. So I don't know where it's going to come from. I think whatever hiccup this is, I think it's going to be pretty short.

Okay. Thank you for that. I just want to explore magnet making, but we have run out of time. So we'll have to stay tuned. We'll ask you at next conference. We'll ask you. So I'm sure every time we see you ask you about magnets because that's the next final frontier, and you touched on it already. So with that, if you want to wrap up this entire conference. It's an honor to do so. Thank you so much for your presentation, Jim and for all the great details.

Thank you. It's an honor to close out the conference. So maybe I'll get to doing it again next year.

Excellent. I want to thank all the participants for them we had a huge participation being virtual. Hopefully, you all can make Miami or we'll find a hybrid way to include more people in the future. I know that we all here at Bank of America, appreciate your support. And I want to make a special thank you to all of the people who work in the background and the organizers who spent incredible amounts of time and energy for making this all a success. So thank you, everyone, for your participation, and please be in touch if we can help any further. Have a great rest of the week.

Thanks.