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

Next session will be from MP Materials and MP is the owner of the Mountain Pass rare earth mining and processing facility in California. And I think it's worth noting that Mountain Pass is the only operating rare earth asset in the Western Hemisphere. So to say this asset is rare, is certainly an understatement. And so with me today from MP is Founder, Chairman and CEO; Jim Litinsky, Jim?

Appreciate it.

Thanks for being here today.

Thanks. We'll see how many times in a 2-minute span we can say rare. Where's the clicker? Okay. Hi, everyone. How's it going? It's like the post lunch one is always like a little quiet. So safe harbor, all that stuff. All right. This one is going to be a shocker. EVs are exploding in growth. I think we've all seen charts like this, and I know it's a theme already at the conference, but the world's electrifying. So I'd like to think of rare earth magnets. It's not a perfect analogy, it's imperfect analogy, but rare earth magnets are to motors what semis are to computers. We are a really critical input to the future of electrification. Regardless of how battery chemistries are going to play out. And obviously, you hear a lot of talk of NMC, LFP solid state, all these things. And energy gets to a motor and that motor moves via a rare earth magnet and the rare earth magnets are anytime efficiency, weight, size, matters and particularly in a world of very expensive materials in the rest of an EV or a wind turbine, a rare earth magnet is going to be critical, and that's why there's 90-plus percent share in EVs and whatnot. So this is a really critical niche and the growth opportunity is pretty enormous as we electrify. What's interesting about our business, the supply chain for rare earth materials and into the downstream into the magnetics business is almost fully in China. I think with the semiconductor issue and now, of course, with Russia and all of the things that we've seen over the last year and change with the supply chain issues. I think it's not a surprise to say that the entire industrial world is figuring out the supply chain situation and we offer a very unique value proposition, which is we can be an end-to-end Western champion in the magnetics business, and so this is an enormous growth opportunity for us. We're years and billions ahead of anybody else who could do something like this. And this is an industry that's obviously very critical to the automakers, wind turbines, drones, we'll cover some of that. But -- and certainly also the government in the United States, we've had both President Trump and President Biden issued executive orders on getting this rare earth magnetic supply chain home. So this is certainly topical. So let's talk about MP. Our site and Mountain Pass and Lawson also mentioned, I founded the company in 2017. There was a predecessor. Some of you may know who've been covering the space long enough. There's very few people who've been covering this space for so long because it's been like a decade long fair market in commodities. And so like the last time things have been good was kind of GFC time. That's the opportunity, right? We've had sort of a decade of negative or low cost of capital in growth and technology. The real economy has been starved, so the cost of capital is very high. So everything in this conference is probably a buy or most every -- but -- so our space, so I came across this -- failed. We can kind of go into that in the Q&A. If you want, bought this out of bankruptcy, but this is a world-class asset, the analogy I give is in the aerospace. This is like owning Saudi Arabia and oil. It's a scaled deposit, and it has the capability of being extraordinarily economic, which we've now proven. And we also have the benefit of having in-place assets that make us certainly the most environmentally friendly rare earth producer in the world, if not one of the most environmentally friendly mining and processing operations in the world. We have a dry tailings process. So these are just some of the stats. This is an overhead of our site. And again, I think what's really important, you can see the mine there and the rest of our facilities down over there is on the left side, the tailings facility and the mill. And then up over up to the kind of top over there is a lot of the separation. And I think what's really important is this is a co-located site. So the processing, the mine and the processing are co-located. Even in China, there really are no sites like this that are co-located. This is just covering a couple of the attributes that I just mentioned. By the way, 90% -- north of 90% of our water realized is recycled. So we're really proud of all those attributes. And so what we've been doing as a business is moving downstream. When we bought this, I got the site. It was 8 employees in care and maintenance, in the other creditors in the bankruptcy wanted to send a reclamation. So we thought and we really relaunched this as a startup and turnaround at the same time. We've restored the operation. And from day 1, the plan was to move downstream, but to do so methodically, making sure that we could execute. And we did that our Stage 1 business. As you've seen, you can kind of see in our latest quarter is we're doing depending on where pricing is, but if you just kind of annualize our latest quarter is approximately $500 million of run rate EBITDA with just selling an intermediate product. And we'll be moving downstream, we have our Stage 2 project that will be complete by the end of the year. We'll hit run rate with that sometime next year. And then we're moving downstream into the magnetics business. We announced and you may have seen a lot of headlines on this, but we announced a long-term contract. We've signed definitive agreements. We've broken ground on the facility in Fort Worth, Texas. So we will be shipping mined refined material from Malpass, California to our new facility in Fort Worth, Texas, and we have a long-term contract with GM, so we'll be supplying magnets for the Ultium platform. So for a number of models of GM EVs. It's very exciting, and this is a really exciting development for the U.S. supply chain because -- and this has been, as I've said, a couple administrations. It doesn't matter your party have talked about this. There's been a lot of hope, but we are actually getting this done. So these are financials. I won't go too deeply into them because you can look this up, but this is just kind of our last quarter stuff, and I'm sure I'll get some questions from Lawson on that. But that is us in a nutshell. And so I'm excited to be here, and I'll answer any questions, so let's do it.

That was excellent. Thank you so much. Nice way to set the tone. Can we start off with your view of the market? So what's your outlook for NdPr supply demand over the short term and the long term? And if you don't mind sharing your price outlook.

Yes. Well, with the commodity specific price is always a challenge. But I've said repeatedly, and I really believe we are in beginning stages of a very big broad bull market in this. And as you've heard me say, I think that's all of these EV commodities. We are positioned, but let's take us specifically, just one fun data point for you. If we were to electrify just the U.S. auto fleet, we would need 3 mountain passes. So if you kind of pick your start number, $16 million, $17 million, $18 million, just the U.S. auto fleet, forget wind turbines, drones, robots, and then, of course, the rest of the global auto industry, we need 3 mountain passes. So the supply deficit you can -- you just see is really acute. So I think if you project that out, and then of course, we have enormous growth coming in wind. And so I'm very bullish. And I think also -- and this probably is a great thing to understand with respect to all commodities, and I think this will kind of -- a lot of people in this space are so psychologically positioned from the last decade of -- with many of these sectors, whether it's steel or aluminum and [ brass ] that the Chinese have satisfied incremental demand. And so you've seen this sort of deflationary period in the last decade in all of these commodities as China has sort of brought on all that incremental supply and pricing has been painful and it's been very painful for investors. What's happened is if you look at the recent data this year, 4 of the 10 largest global battery electric auto OEMs are Chinese companies. And so the Chinese have moved downstream. And now as we look around the world and we realize the scale of the growth that is to come as we electrify and the push on climate change and the push on just the 80% of the steel and aluminum in China is made with coal-based power. I mean rare is probably a similar number. And what you find is that the backdrop here is that the Chinese are done destroying their environment and subsidizing their downstream competitors now that they've moved downstream. And so I think the backdrop for the rare earth industry is that we should expect that Chinese industry is going to produce the materials to satisfy their downstream needs, their OEMs. But Western industry is going to really be left in the lurch. And so I think that, that is extraordinarily bullish for our strategic position and for pricing in general.

So one thing I think about a lot, and I do get a lot of questions on it is the idea of substitution. It is important to frame this from the point of view that there's these applications that you're speaking to. They're extremely important, extremely high growth. They're about 20% of the market, at least by our estimates. So we estimate that other 80% of the market is more standard applications that we think are probably a little bit more exposed to potential substitution, but we haven't really been seeing that. So I'd like to get your thoughts on that, whether or not there is substitution happening? But secondly, I mean, is there the opportunity for significant substitutions?

So it's interesting. So let's take the 80%. And I heard a story this morning of there was an Amazon speaker that there's a little rare earth magnet and then they switched out. And so because it was becoming a higher percentage of the price. And so then all of a sudden, there were a bunch of customer complaints and so they're having issues with it. But -- let's -- so let's just take that 80%, and let's just say that's going to 0 over a number of year, which it's not. But I'm just -- I was thinking about this math in my head because I really have spent virtually 0 time thinking about these little tiny element. It's in HVAC, which frankly is a growing space. But let's assume HVAC, speakers, HDD drives, all these other things that are not EVs and wind turbines. And if you have -- so you said 20% is your number, let's take 20%. Let's compound that at 30%. I think your estimate for wind growth is around 30% or -- and EVs has got to be about the same, just given -- so you compound that 30% -- I'm just doing sorry, I'm doing this math in my head really quickly, 30% over the next decade. That's a double every 2.5 years, 2 to the fourth, so that's 16x, right? So 16 times 0.2, right? And what you find is that even if the 80% were going to 0, which it's not, I think that's actually still growing because we have to think about drones and robots and all these other things. The scale of the compounding effect over the next 5 or 10 years of what's going to happen in EVs and wind turbines is just crushing all that. So I don't spend time thinking about it, not to dismiss it, but we found that any time -- the way to think about it is anytime size, efficiency, weight matters, you need to use, it's just -- it's physics, right? Whatever it can be done without a rare earth magnet can be done better with. And as other materials costs go up, that makes the importance of rare earth magnet that much more. And so for example, rare earth prices have a little bit more than doubled in the last year, but they've actually gotten cheaper relative to the fact that lithium hydroxide has gone up by 5x and some of these other materials. So we feel like the demand picture is pretty secure and substitution is less of risk. And then, of course, there are other applications and other growth opportunities. I don't know if that answers, but that's my riff on it.

That's perfect. Okay. The thing I was looking for. Okay. So let's look at specific about MP. So you have the operating line, you have the concentrators functioning very, very well, better than your predecessor, which you referenced in your introductory remarks. What about Stage 2? So I mean this is kind of the golden goose in a way because this is where you take that part of the supply chain from China, you bring it to the United States and you make it work here. So what are the risks to Stage 2 meeting that ramp-up goal for the end of this year?

Great question. A little understood fact about the reality of the last year is the challenges our predecessor had, we're really concentrated in what we would perceive as our Stage 1 business. Chlor-alkali, tailings, uptime, essentially, uptime, throughput, recovery, all of these things that were sort of Stage 1, which we've proven if you look at our -- take any quarter, annualize it, we're doing more than 3x the production that they did in their best quarter annualized. And obviously, that shows through in our numbers. But the Stage 2 business was actually operating perfectly well under the predecessor and shut down mass balance. The engineers, so the predecessor actually had a lot of talented people. It was sort of a rotten management team on top of a lot of really talented engineers. And we hired back the engineers, and so we've had for a number of years, our team that is running this Stage 2 efforts are the same people who designed, oversaw the construction and operation of the Stage 2 business that worked really well. So look, in this space, it's never as easy as just flipping a switch. There -- you just never know what you encounter, but we feel very confident that we'll get that done right.

Great. On the rare earth oxides -- the oxides as opposed to the concentrates, other way you cut it, you're going to get an uplift because the discount you guys get on the pricing of the individual metals because you sell it as a bulk concentrate. However, if you continue to sell that into China, I mean, there still is a 25% tariff. So I wanted to get your thoughts on how you think about selling those oxides into China versus rest of world?

Well, I think it's fair to say that there is no shortage of parties in rest of world desperately reaching out to us for product. And so obviously, we've made clear that we have a long-term vision. We want to build a magnetics business that, frankly, is multiples and scale relative to our existing current expected NdPr output. And so we want to balance the GM deal as we publicly stated represents a high single-digit percentage of our expected NdPr output. And so our next move, our next facility we could do it in multiple facilities, but however we do it, could be a 10x. And then I think we can grow from there because we'll have the ability to grow the business, take whether it's expanding an amount of pass or taking additional third-party fee. So we think that there's just such enormous Western demand and that we'll have no problem selling product outside of China, and that's really -- it's just a question of how we're going to do it. So we don't lose any sleep about that of finding customers.

So you're telling me there's upside in my model?

No comment.

Look, in the spirit of these events bringing investors together with management teams, I'd like to canvass the audience and see if there's any questions. Maybe you guys can think about that, and I'll ask Jim another question. I wanted to touch on the heavies. So you're going to produce 4 effective oxide products. The main one, obviously, is the NdPr oxide. But there's potentially some real value in some of the others, particularly the heavies. What is your plan to manage the heavies as you build out that facility once the facility is built and then going forward?

Sure. And so just so everyone who doesn't have the background, we'll produce the light products like neodymium and praseodymium being the 90-plus percent revenue product then there'll be serum lanthanum and then a SEG+, which we recently announced that we have a project with DoD, where we will move forward into building out heavy separation. So that project is underway. So we will be making separated heavies amount pass as well. Certainly, for magnetics, the key ones are dysprosium and terbium for -- in a typical magnet, there will be traces of the heavies and to have a full end-to-end supply chain, you have to have some heavies. So we feel -- we're obviously moving towards executing that project. So we're confident that we'll have that done in time for the magnets that we'll be producing for GM. And with that, and what was the second piece of your question?

Well, actually, I'll ask a second question, which is the quality of your -- the quality and the quantity of the dysprosium and terbium in your SEG-plus Oxalate. Is that going to be sufficient to meet your currently sized magnet plan? And when you finally expand to the point where the magnet plan is matching the production from the concentrator?

Yes. So we certainly are confident that we have the heavies to satisfy the deal that we have with GM, which is long term and in scale for that facility. Going beyond that, we will need to continue to grow our heavy capacity, whether that's expansion amount pass, additional third-party feed just as we will look to expand our existing light business. And so that is an area that we'll look to grow. And so that's what I'd say on that.

Okay. I didn't see any hands go up, which is fine. I've got lots of questions. I wanted to go back to the Chinese tariffs, not to dwell on them. But really, the reason I wanted to go back to those is because it begs the question like how fast can you go on the magnets? How quickly can you get your own demand ramped up to...

Well, really, is if we -- I am confident that if we wanted to sign a deal today to just 10x what we have without any consideration to the risks of execution, making sure that we do this right, making sure that we are on track to being a low-cost producer in the world. I think this is not a demand question. Without question, if you look at -- and again, just look at the U.S. EV market, 1,000 tons of magnets that we have announced for this facility in Fort Worth, that's for -- that would roughly the equivalent depending on contents going up, certain trucks may have more. But if you just kind of roughly average it, it's probably about 0.5 million EVs. And so then the question is, well, wow, 0.5 million EVs and then there's like 16 to 18 a year just in the U.S. and 90 million a year globally and you realize the scale of this business. And so it is not a function of demand. And certainly, just with all the supply chain issues with respect to China, and particularly post our deal with GM, it is fair to say that OEMs downstream, not just in auto, but obviously, wind and other areas would like us to be scaling the business as quickly as we possibly can. What we want to balance is we want to make sure, just like we've done for Stage 1. I think it's fair to say that we took on an asset that a lot of people thought we were crazy to do because nobody believed that we could be competitive. We clearly executed. We are an execution-focused culture. I mean it's an owner-operator culture driven from the top, I'm the largest shareholder of the company. And we are very focused on making sure that it's execution, execution, execution. And so there's no question that in any thing you build, there's going to be some mistakes. So we want to make sure that we make mistakes in small scale and not start out making huge mistakes in big scale. And by the way, that doesn't mean that we won't be able to quickly, wow, we're still building out Fort Worth, do something beyond that in scale and expand, there's a lot of directions that could go. But the strong underlying governor, if you will here, is that we will take on what we think we can thoughtfully execute with very high return to shareholders, which is us. That's -- we are the owner operators. And so this is not about just growing as aggressively as possible. The growth -- the runway here is enormous. We are on a long-term mission to be the American champion in this space, and that opportunity is so enormous. The last thing we want to do is screw it up. And so we don't -- we are years and billions ahead of anybody, and so we just have to get this done right.

Okay. One final question because we're getting close to end of time, but I had to smile when you advertised job openings on your last call. So thanks for the question. Speaking of governors, is talent the governor on expanding this business?

Well, so we have -- our magnetics business, I think people will be blown away by the talent that we've assembled just under the MP magnetics umbrella and our Fort Worth site will be the headquarters of our magnetics business. No, I'm a big believer that we're building a champion here. This is something that hasn't been done in the West. And it's, again, not to beat a dead horse, it's an enormous opportunity. And I'm a big believer that talent begets talent, scale begets scale. And so any opportunity I can utilize to attract somebody to this mission, we'll take it. But -- and we're hiring -- we get a lot of -- obviously, our success has continued to attract great people, and it's a tough labor environment for sure, but our team is extraordinary, and we'll continue to grow it. And it wasn't -- that wasn't out of any insecurity other than just, hey, this is a free publicity opportunity to get additional great people and why not say it. Maybe I'll just say that in every earnings call, you can say that right. Yes, if any out there wants to get out of the investment business and build some real things, come join us.

Send your resumes up here. Thank you, Jim.

Thanks a lot. It was a lot of fun.