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

Thank you very much for joining us in the probably last Zoom webcast meeting that we're hosting in this conference. So we've kept the best for last. It's a pleasure to have Jim Litinsky from MP Materials joining us today. And again, being a participant in this conference, thank you very much, Jim, for you and MP's presence.

Thank you, Carlos. It's good to be back. Thank you.

Yes, definitely. Hopefully, next time we do it live.

In person.

Exactly. It would be nice to have a drink after the last session. I don't know if you're going to be the last next year, but definitely would be good to have drink in Laguna, looking at the ocean. Anyway...

May we all have the background -- next year, may we all have the background that Robert Friedland had this year.

Exactly. We're going to brag about it. That will be much better than the one that we have today. But anyway, so just before we dive into it, Jim, I need to read some disclosures. For important disclosures, please visit or see the Morgan Stanley research disclosure website at www.morganstanley.com-research disclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative.

With that out of the way, Jim, why don't we dive into it? And what I thought we could do maybe to start us off is for investors that may not be very familiar or as familiar yet with the MP story, why don't you tell us a little bit of MP's operations, where do you stay right -- or where do you stand right now at your Mountain Pass asset, and maybe a little bit of history of the story and the history that you have followed to be where you are right now?

Sure. I'll try to do the background really quick and efficiently, and so we can get into it. But so at MP, we own and control Mountain Pass, which is what we believe is the most iconic rare earth property in the world. I'd like to say, if it were oil, it'd be Saudi Arabia. We are responsible for approximately 15% of the end content of rare earths made globally. We believe we're one of the lowest-cost producers in the world. We're currently producing a Stage I product, which -- and to step back, we -- MP was formed in 2017. We bought the asset of Mountain Pass out of bankruptcy. Some of you may remember the predecessor entity that had a sort of a big rise and fall and failure. I think a lot of people thought that the site could not be economic and never work. I founded this company, took control of the site when it had 8 employees and was in care maintenance. We relaunched it. We now, again, produced 15% of rare earth content. We're profitable. You can certainly check out our numbers. We just reported a great quarter. And our mission as a company is to move downstream. We think that there's a very exciting opportunity. We'll get into it to move from a concentrated rare earth product to separate rare earths and then ultimately, the magnets, which are mainly what our products going to. And just last piece for those who don't know, rare earths are one of the critical elements that are really necessary for the electrification of the world. So if you think about the handful of things that many people have talked about at this conference, NdPr, which will be our primary revenue product or as the experts say, PrNd, it's the same thing, NdPr, PrNd. And that is the main use case for sort of ultra-efficient, high-powered magnets for EVs, wind turbines, drones, robots, pretty much any kind of motion technology for the 21st century electrification. Yes, that's the background.

That was great. And it actually answered one of the questions that I had also, like what are the key end markets for NdPr. So you addressed that already. So why don't we talk a little bit about Stage II? Because really this is what starts to transform the company from where you have been and already you have delivered much better results than the predecessor. But Stage II, you might argue is the beginning of the transformation of what we have known Mountain Pass to be -- and so can you give us an update how is the project progressing? How do you feel about the CapEx, the schedule? And probably more important, the uplift that you expect in EBITDA once this project is completed?

Yes. So just to give some people some context, the predecessor never got to profitability. We -- if you look at our most recent quarter run rate kind of coming out of that, we're pushing $200 million a year in adjusted EBITDA. So we're producing approximately -- or north of 3.2x the amount of rare earth content that our predecessor did in their sort of best quarter annualized prior to their bankruptcy. So we've really turned this into the world-class operation that the site would suggest it should be. And so we're really proud of that. We've got a great team that -- we've built the company from 8 people to now we're pushing 360. Our Stage II, so right now, we -- that product that we sell, that's very profitable. We sell to China. The only other processing capacity is that -- that market is all in China. They process it, they turn it into separated rare earths and then those separated rare earths get made into magnets that get sold to Tesla, GM, whomever. Our mission is to obviously make sure that we can get that supply chain over in the Western world and make sure that there's sort of a Western champion in the space. Our Stage II, which is underway. As we said in the last call, that project is ongoing. We had some cool pictures, Carlos, which I know you saw that kind of showed the project. And we think it's going really well. The project -- it's a lot of work getting one of these things done, and there are new challenges that come up in this COVID environment, and we tried to give a lot of commentary on some of the things that make executing a project like this challenging. We gave an example of resin. I think we -- if you have listened -- if some of the people out there who are journalists, if you have listened to our call, you might have had a preview of what GE and 3M and some of those others more recently said because we talked about resin shortages. The good news is we're a DPAS, a defense production activated project, so we were able to get resin. And so we're kind of fighting through a lot of these supply chain issues and getting it done. We talked about -- when we originally went public last year, we said that we expected 2023 to be a normalized year for us, where we'd be producing a normalized full-year Stage II product. We reiterated that that's on track for 2023. We also said that next year -- we're telling people in advance, long in advance, expect next year to be a transition year. I don't mean transitioning on Wall Street. Coming out of the investment world, you kind of hear a transition year and you think of like a big ugly write-down. They kind of totally blow the numbers and they fill up a kitty to kind of deal with for the future and may clear the deck, so to speak. That's not what I mean. I mean by a transition year, which is at some point next year, we'll complete the Stage II project. We'll have to ramp-up Stage II. Typically, when you're turning on an industrial process, there's a ramp-up period. The good news is that the [ SXD, what we call SXD ], which is the solvent extraction for the NdPr, that piece of it -- that's mass balanced. That actually worked perfectly well under the predecessor. The engineers that oversaw the design, construction and operation of that are some of our employees. So we feel very confident in that. And -- but certainly, as we build the team -- and we've already started hiring for that Stage II. As we sort of build the team and get everything going, we just -- we want people to kind of be fully prepared that next year will be a transition year and judge us on 2023 normalized. But the good news is that the only numbers that we've really put out, if you look back to when we went public, we said that 20 -- that Stage II would be roughly a doubling of revenue and EBITDA for whatever you -- if you look at kind of price. And so I think that certainly that -- you could sort of look to that as a way to start doing some math as to kind of how significant this isn't an uplift of cash flow for us, and we feel very confident that we'll be able to execute on that over time. And so that's the target. But I want to make sure that people understand that this is -- what's good is, this is a very -- it's a big real industrial project, and it just creates such tremendous advantage for us because getting one of these things done, the replacement cost of it is so high given what's now happened in the world that we feel like we're just creating a lot of value. And so, we'll get it done.

Yes. I want to get back to this point that you just mentioned, but there is a question that just came in from the audience around the Stage II and the commercial strategy. How that might change versus what you're doing today? Where you have this offtake agreement, most of it goes to China through Shenghe. How that might change as you get into a Stage II and you start to produce oxide?

Sure. Great question. I'm glad you asked it because it may actually be one of the more confusions or one of the most confusing things that people often get wrong about us when they think about Shenghe. Shenghe does not process our product in China. They are just a distribution agent. So Shenghe is our representative in China, think of them as a sales agent. At any one point in time, our product is bid out to maybe 6, 8, 10, 12 processors in China. And obviously, having Shenghe, one of the most respected companies in the space, as a representative to sell product is much more attractive than if Jim Litinsky or Carlos De Alba, if you showed up or I showed up trying to sell product in China. So it's actually been a very helpful relationship, but they don't process our product. So it's not as if when we turn Stage II on and start making separated oxides and start selling it ourselves that their plant is losing out in some way. It does mean, and this is actually also really important, that when we're getting that benefit of the uplift, so we're giving up a lot of revenue, a lot of margin by having to sell an intermediate unrefined product because the refiners in China are taking that margin, that revenue. When we get that uplift when we're done with Stage II, that won't be new supply into the market, that will just be us capturing more value from what we're already producing. So I think that's an important distinction is one, Shenghe is not processing our product, they're just a sales agent. And 2, when we then are making separated oxides, we're not new supply in the market. So even obviously, you see all the demand trends, and we can certainly talk about that, I'm sure we will. It's not as if all of a sudden, we turn on Stage II and it's like where all this new supply in the market, our supply is in the market.

Yes. Fair enough. And just talking about then the supply/demand outlook, particularly, demand has been, I guess, quite strong, right? And the prices for NdPr definitely have surprise to the upside this year, they have been quite robust. But a lot of people struggle with understanding the supply side. And there are a couple of aspects there that I would like you to comment on. One, is China, there is a lot of idle potential latent capacity that could, at some stage, maybe come back into the market or be restarted put into the market, and that is a concern that investors have. The other is there is a list of potential new projects. And I know you just talk about how difficult it is to bring projects online. So I wonder if you can share your thoughts on these 2 issues, supply chain issues with the audience.

Sure. Let me -- I'll cover it all and give some great historical rare earth context as I talk about the past and the future and all that. So what's really important, I think, in -- particularly in commodity businesses, but in cyclical businesses, in general, I think people often look at the last 10 years and extrapolate. They tend to -- when you have sort of boom-bust cycles, you tend to only know sort of your prior decade. And if we look at our space, many people who follow it a little bit would remember 2010, the China-Japan shipping incident, rare earth prices went somewhat parabolic. But then they ultimately crashed because it was a short-term supply shock where the market thought there was going to be no product available. And so people started to bid it up very quickly, but then the practical reality is the Model S wasn't even on the road, right? Tesla was basically a pipe dream in 2010 and maybe a little more than a pipe dream, but you get my point. And so there just wasn't a demand use case. And so I often -- I like it and its sort of internet 1.0, 2.0, where if you think back to pets.com and all these fantasy projections of internet and telecom, but the world wasn't even mainly on broadband yet. It took another decade before all that fantasy could become a reality. Obviously, in sort of our small version of it, I think you're going to see a 2.0 that's going to be much more powerful and sustainable than people even realize. I'm a big believer that when it comes to prices again, I can't predict the next month or 2 months or I don't know if it's going up or down next week. But over the medium and long term, I believe that the new cycle exceeds the prior peak inflation-adjusted and then some. And so when you think about kind of prior peak of NdPr around 200, inflation adjust that and do a lot of [indiscernible] because we're now upon a decade to come boom in demand. And so I think that that's the demand that is to come is the thing that I think people could -- will not really recognize when they're kind of looking backward and they're thinking, well, oh, 10 years ago, the Chinese just put a bunch of supply in the market. And so let me address China. China is certainly a black box in many cases as far as kind of what they can and can't do. We can only kind of read the media, talk to people over there. But if you think about their industry, the leading rare earth official -- and I actually gave some great commentary, I think it was a couple of calls ago. So maybe I encourage people to read that. But the leading Chinese rare earth official talked about rare earths as -- specifically referred to them as industrial gold and that the prices reflect the earth not that they're rare and that the Chinese need to start incorporating the cost to their environment of the production of rare earths. And more importantly, actually, the Chinese are very worried, I believe, about having enough supply for their own industry. And I think if we think about the decade ahead, what do we see today that we didn't see a decade ago? We see it on the New York Stock Exchange, Neo, Xiaopeng, DYD, Lee Auto, these are major -- the Chinese have moved downstream into the $1 trillion-plus electrification market. And so they're worried about enough rare supply for their own industry, but it would actually make zero sense for China to destroy their environment to subsidize Tesla, GM, Volkswagen, whomever, with flooding the market with rare earths. And so I think that this idea that, oh, if the world electrifies and we go from 3% to 90% penetration, the Chinese government is going to decide to lose $10 billion a year to make sure that the Western automakers can compete with their automakers, that's kind of nonsensical if you just sort of think about it from a logical sort of cool hard capitalism rational perspective. And so I think when people think about this, sort of, can the Chinese put supply in the market, of course, any government can do anything that's uneconomic or idiotic or intelligent or whatever, but the practical reality is if you actually just read what they're doing and saying and look at what their strategic aim is, they're after GDP and jobs. They've moved downstream. And so when people look at sort of the 2010 movie, I think that the sequel is going to have sort of a very different ending, so to speak. And I believe that that's why we are headed to a new cycle of sort of again exceeding the inflation-adjusted prior cyclical peak, it's a mouthful, and then some. And then the last thing I would say to that, and I think this is what fuels cycles. And I think, Carlos, you've covered this really well in a lot of your research in a number of areas of commodities. But very often, there's a tendency for people to look at a commodity and say, "Oh, well, the cure for high prices is high prices. Where is sort of the incentive cost of production? And when prices go to that level, they can never go beyond because all the new supply comes." And -- but I think what people forget is these are long boom-bust cycles. If you look at -- and this isn't just rare earths, but this is copper, nickel, lithium, et cetera, all the things that are going into this new demand-led boom. The commodity space -- there aren't crazy deals. People aren't over levered. It's all about capital allocation, dividends, buying back stock. People haven't made the investments. And so I think when I look at the rare earths space in general, I think there's a tendency to believe, "Oh, there's just a couple of projects out there." We don't see anything remotely on the horizon. Just to give you a small example, we're, at MP, Mount Pass is a 7% rare earth ore body. Some of these juniors that are fantasizing about our project, and we wish them well, we hope they're successful because it means that things have gotten so good, but we're talking about 1% ore bodies. And even if they had unlimited capital -- unlimited human capital, environmental permitting and it makes -- prices made sense for a 1% ore body, which would be materially higher from here and all of the steel and resin and -- all of the piping and instrumentation, all of the billions of dollars they would need to spend. You're still talking about a minimum of 3 years that they had go on a plant today. So I think we're going to have a very long lead time, and maybe we can get into kind of my predictions for the supply chain and what this means for OEMS. But so I think that we'll see supply coming online long years ahead. And so it doesn't matter what prices are. This takes a long time to get this stuff done.

That basically echoes what Robert -- we're talking about, Robert, what he said about copper, right? Even if prices, in his view, even if copper prices double from here, that's not necessarily going to accelerate the timeline of when the new supply will come. That will be driven by approvals [indiscernible] and the unions and stuff like that.

That's exactly it. And I think that's why I made the prediction on our last earnings call. I believe that at some point in the next 5 years, we will see a major global household name OEM fail or need a bail out due to this supply chain issue. And what I mean is it -- I don't mean prices went too high. I mean, I call it the -- maybe the Lehman-like moment of the industrial world, and I don't mean it will be like a GFC, I just mean it will be like a shocking moment is when people will realize, to Robert's point, to the point you made, which is, okay, let's say, the price goes up by 5x and the CEO says, okay, well, we want it. You can't get it because the supply has been secured by another party, and so it's just not available to any price. And so I believe that you will see people downstream in the supply chain fail over this, where it's not about price, it's really just about who has realized strategically that the supply chain is now existential when you're talking about the total transformation of an industry. Electrification is Auto 2.0, right? And not to go on a crazy tangent, but Auto 1.0 was originally won by Ford when there were hundreds of competitors and it wasn't because of their exciting colors in fund marketing, right? It was any color you like as long as it's black originally. And the reason was because they understood scale and the supply chain and they mine the iron ore that got made it to the steel to make the car, they have the rubber for the tires. And so people couldn't compete with that. And so I think, certainly, there are OEMs out there who've started to kind of understand that analogy. We certainly see it in the conversations we've had. And if there was any doubt, certainly, the semiconductor issue is like the most glaringly obvious ghost of Christmas future you could possibly have. And so you think about these multibillion-dollar costs to have short-term shutdowns. Well, some of these items, maybe you can get in 6 months or a year, but what if it's some kind of critical material or some other part where you just can't get it for 3 or 5 years? What happens to your business then? And so that's why I believe that we're going to see some dramatic disruption in the supply chain more so than people think. We really haven't seen this kind of movie before in our generation.

That's certainly a fascinating discussion. But before we run out of time, I do want to address Stage III. In the second quarter earnings call, you announced that the decision to build a metal alloy and magnet manufacturing plant in the U.S. It's still early days, I understand that. But to the extent you can, maybe with very broad strokes, what can you tell us in terms of the size of the investment, the timing of the investment and maybe what sort of IRR or payback periods you are expecting and contemplating in this project?

Yes. Sure. So let me start broad and I'll go narrow, but I actually -- a number of people recently asked me, is our expectation that our magnetics business will utilize all of our NdPr output at some point in the future. And I said, well, actually, we're aiming for having a magnetics business that dramatically exceeds our NdPr output because we believe the opportunity is so large. I mean, we're talking about tens of billions of dollars in your industry a decade or 2 from now. It's fun to look ahead. It's fun to realize that there's a really enormous industrial opportunity in front of us. But we have to balance that with, we're an owner-operator culture, I'm the largest shareholder of the company, we need to methodically execute this. I think we've shown the market and the world that we certainly were able to achieve something that nobody believes could be done, not a single financial or strategic showed up to buy Mountain Pass because no one thought it could work. We showed that we could be great operators. And so I want to make sure that we execute methodically each step of the way. We said on the earnings call that we're going to announce sometime this year a location, which means, obviously, that we're going to build something. But I think you should expect it will be what we would consider to be a reasonable and prudent risk. We're not going to swing for the fences in some massive existential way and bet the company on something we've never done before. We're going to look at returns on capital as owner-operators would, and we're going to build something that we believe is significant but manageable. And by the way, though, it's kind of like -- it's -- we will be the tallest midget in the Western world in the sense that regardless of what we announced, and we'll hope to give more details over time, but we would certainly expect to be right away the largest producer in the Western world just because there isn't much of an industry. Everybody out there is somewhat small relative to what needs to be done. And so -- but expect us to do this methodically because we want to make sure that we kind of do this right so that we can prove economics, learn from mistakes and then obviously dramatically scale for the demand that is to come. We'll try to give people as many updates and as transparency as we can. But the honest answer, Carlos, is that we don't yet know all the exact economics, and that's what we're working through as a team. What I would tell you is that versus last year, and this is sort of the point that I tried to make on the call is, when we went public last year, the vision for magnetics was -- it was a strategic vision, right? It was a 2025-plus concept. Fast forward to today, we've built a really tremendous team. I mean, we have experts in a lot of the verticals. I believe we've got the most expertise in magnetics in the Western world, and we're certainly positioning our company to be a leader in the space. We've got to execute. But we've really built an extraordinary team. We've made a lot of progress. Obviously, our green bond gave us further firepower and credibility in the supply chain to be a substantial counterparty to foundational customers. You can imagine that we're having those conversations, particularly given the semiconductor issue, what were kind of fun and appreciative conversations before have become somewhat urgent, hey, how can we get you to accelerate Stage III? How can we get our supply chain fully out of China? Those are the kind of conversations we're having. And our view is we have a multibillion-dollar asset and, frankly, a unique asset that gives us a significant head start from a business risk and an economic standpoint, and we're going to utilize that to build a business, but it's going to be painstaking. We're going to do it thoughtfully. But I'm really excited about it. I mean, we've really made a lot of progress. And I guess that's a long-winded way of saying, Carlos, we'll try to -- we'll provide more details in the future, but we will make this happen.

Fair enough. And just a detail, as you progress on Stage III, any sort of -- it did relate to a question that just came up in the webcast. You will need heavy rare earths that you don't necessarily have right now what you're mining at Mountain Pass. So could you talk about what is the strategy there? How are you going to complement or source the heavy rare earths that you will need as you get into the magnet production? And a question from the audience is, and it's Stage II, but it's a little bit about separation and the type of rare earth that you produce. The question is, can the Stage II facility separate other lanthanides besides NdPr, like cerium? And will you be doing that? So maybe this takes us a little bit back to Stage II, the basics of what you guys are going to be doing. But if you explain that and then you link it with Stage III heavy rare earths, that would be great.

Sure. And I can -- so yes, Stage II, we've stated we'll be making NdPr oxide, cerium, lanthanum and then a heavy SEG. That heavy SEG further separated would become a number of heavies. The key ones for magnetics are dysprosium and terbium. And I think one of the things that people, when they say, oh, you don't have the heavies, we actually will ultimately make a number of the heavies. And the analogy I like to give is, what would you rather have half of 2-liter bottle of Coke or 1% of Lake Michigan. When you're talking about percentages, what's really relevant is the totals. And so we do believe that we'll have a lot of heavies for certainly the beginnings of the foundation of our magnetics business. But certainly, over time, if we know already that our long-term vision is to produce more underlying magnets than even the NdPr we expect to make today, you can assume that we'll want to also gather more heavies. And certainly, our expectation is we believe that we can make a heavy separations business also commercially viable at Mountain Pass, expect, hopefully, some details on that to come from us. And so there are a lot of moving parts here. There are also -- heavies are -- there are a lot of -- typically, when you hear people kind of producing rare earths, what they mean is producing the heavies. If you think about certain magnetic technologies, grain boundary diffusion and some of these others, there's a move to produce some of the heavies. But that -- heavies will certainly be a component. And so we're working on all of these things. And so I just wouldn't underestimate the fact that we've got some ourselves. We'll certainly go out to try to get more heavies, more lights, more magnets, more everything. But for the foreseeable future, we're -- we have our hands full. I don't know, did I miss anything in the question that...

No. I think that addressed everything, Jim, and we're running out of time. So it's always great to catch up, great to understand a little bit more and more about the project. Good luck with the execution of Stage III and with just closing all the planning on Stage III before you can give us more details. Certainly, we're looking forward to it. Thank you again, Jim. All the best, and we'll be in touch.

Thank you, Carlos, and I hope we're doing it in-person next year. Thanks, everyone.

From a jet.