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

Okay. We're going to go ahead and continue. My name is Michael Glick. I am JPMorgan's North American metals and mining analyst. Up next, we have MP Materials, which is the largest producer of rare earth materials in the Western Hemisphere through its key asset in Mountain Pass, California and is working on providing a fully integrated Western supply chain, including some very interesting stuff downstream with magnets. Presenting for the company is Ryan Corbett, CFO of MP. With that, I'll turn it over to Ryan.

Thanks very much. Appreciate you guys having me. Good to be here. So I'll run through a presentation pretty quickly and then leave plenty of time for Q&A at the end. Obviously, we may make some forward-looking statements. So I would direct you to our SEC filings for the proper caveats to those statements. And of course, we will also be referring to non-GAAP financial measures, the reconciliations to those as well in our SEC filings. So I'll start overall with the market. Lately, I've been calling this the captain obvious slide, which is that the world is obviously rapidly electrifying. This is a snapshot of the IEA forecasts for how quickly we may get to higher share of electric vehicle penetration. I think the important thing that I would add on to this other than sort of the obvious story you can see from the slide is you can take your pick on how quickly you think we'll get there. But the thing that we find interesting is with the transition we've seen, and this is just EVs, obviously, but in that industry, if you look at the scale of capital that's been raised and that's being deployed as well as the announcements that you see incrementally every day on government policies pushing forward on electric vehicles, this is happening. And so supply chains are changing rapidly to be able to accommodate this really meaningful change in our industrial economy. Why does this matter for MP Materials? We are building a U.S. rare earth supply chain to support the growth that's required in rare earth permanent magnets to drive this electrification in the electric vehicle space, wind turbine space and really, anything that requires industrial motion often has a magnet. What you see over on the right-hand side is if we were to take a snapshot of the North American automotive business and look at what it would take from a magnetics perspective to fully electrify the North American fleet, we would need 34x more demand of magnetic materials in order to achieve that. The nice thing about where we sit in the supply chain is, from our perspective, the battery chemistries, the way that energy is stored, that technology in a lot of ways is not fully settled. What is very well settled is how that energy is converted into motion. North of 90% of electric vehicles today have a permanent magnet motor in them, and the way we think about it is really anything you can do without a permanent magnet, in a lot of ways, you can do more efficiently with one. And so it's a nice position to be and more of a technology-agnostic piece of the supply chain to power this coming growth. With the demand growth that we see on the horizon, it puts us in a position where we are in a very attractive market environment for the materials that we produce. And what's becoming clear, and you can see it from this slide and sort of the supply-demand imbalance, if you just look at the current supply situation and how difficult it is to add incremental supply and then, importantly, looking at this like where the supply exists, it puts us in a very interesting position where the focus of the market has quickly become security of supply. OEMs care about -- they care a lot of things, but what they are really focused on at this point is how are we certain that we have the security of supply all the way upstream to the ultimate mine material? What I'll talk about in a moment in terms of what MP is building is we are focused on achieving a fully integrated supply chain for the Western world that really has not existed in a meaningful way for many, many decades. As you can see, we're a little bit lonely on the left side of the map here. The rare earth mining, refining and magnetics industry has really moved completely into the Eastern world, and we are busy at work building a Western champion for magnetics. And so a quick overview on exactly what we do. MP Materials owns and operates the Mountain Pass rare earth mining and refining facility. It was a 70-year history at this site, and we have, in our opinion, one of the world's preeminent rare earth ore bodies. While there's a 70-year history, we've got a 35-year plus mine life. We have north of a 6% ore grade, and we've approached building this company in 3 stages. The first stage is producing what's called a mixed rare earth concentrate, which is a semi-refined product that is sent over to be further refined in Asia, primarily China. Our stage 2, as we call it, is restarting assets that primarily are already built on site at Mountain Pass, which we are retrofitting to go further downstream into separated rare earth oxides. We are aiming to have that complete by the end of this year and ramp our refining facility over the course of 2023, and then we're moving further downstream into metal alloy and magnet production. We've recently announced our initial magnetics facility in Fort Worth, Texas, with General Motors as our foundational customer. Our view on this market has always been that multibillion-dollar supply chains are not going to move overnight. And so we have been methodical in our approach to this, in being sure that we walk before we run. I think we've done that very well at the Mountain Pass asset by driving incremental productivity to the point where, today, we are 15% of global rare earth content produced. We obviously are very focused on getting our refining facility complete and commissioned and ramped over the course of 2023. And with that, we'll bring that same mindset to our stage 3 business in starting with an initial magnetics facility at about 1,000 metric tons and hopefully growing that business over time. Here's a snapshot of the Mountain Pass facility. You can see obviously the scale that's required in order to be a large player in this industry. I think the thing that's very unique about our asset versus certainly some of the Chinese assets who the market tends to be dominated in China, there are some -- other players ex China, but the thing that is unique about our asset is the fact that it is completely colocated and self-contained with mining, milling, separations, finishing all the way to finished rare earth oxides all on one site. The other very unique thing about Mountain Pass is with -- we start with a tremendous advantage because of our ore body. We have what's called a bastnaesite ore and a very high grade ore. And with that, we have very low levels of naturally occurring thorium and uranium that is typically associated with rare earth mining. With that, we also have great assets that have been built on-site, including a dry stack tailings facility that allows us to eliminate high-risk wet tailings ponds. We are obviously incredibly focused on how we mine and refine these materials given we're in the state of California, obviously, not the easiest place to do business from that perspective. We wear that with a badge of honor given we think that it's incredibly important to be able to grow this industry in the right way. And certainly, what we are seeing from customers and potential customers is, of course, a very significant focus all the way up upstream across their value chain and understanding what are the impacts of the products that they're producing. And we think we offer a very unique advantage in our ability to produce rare earth materials and create the supply chain in an environmentally-friendly way. I talked a little bit a moment ago about our downstream strategy and bringing our refining facility on and moving downstream into rare earth magnets. This is just a quick summary on our latest plans here. I won't reiterate those other than to say one element that we haven't talked about yet is the addition to our plans of a heavy rare earth separation facility. And so for those of you that are newer to the magnetics business, heavy rare earths are generally lower quantity rare earth materials that are added to magnetics manufacturing generally at the tail end that support thermal resistance. This is something that we are adding into our flow sheet to be able to fully separate heavy rare earths that are contained in our ore at Mountain Pass as well as be able to take third-party feedstock into Mountain Pass and produce incremental heavy rare earths. The thing that we're clearly seeing with the development of this industry is that in the same way that it's taken us time to build out our refining capability, as we want to see incremental supply come online, the unique thing about being able to take third-party feedstocks in, which we will do as we add our heavy rare earth separation capability, is we can play a real role in enabling other potentially subscale projects that don't support the billions of dollars that are required in capital to build out their own separation facility. We'll be able to take intermediate feedstock similar to what we're producing today into our own facility and support growth in the industry from that perspective, which we're pretty excited about. Just quickly on the initial magnetics facility that we talked about. We've broken ground and are making great progress on that. The initial design capacity is 1,000 metric tons of NdFeB magnets. What that means from a -- from the perspective of vertical integration, at that production rate, that would consume less than 10% of our upstream NdPr oxide capacity for Mountain Pass. So that gives you a sense of our ability to grow very significantly downstream over time as we sort of dial in our processes again. As I mentioned, we've approached this pretty methodically in a walk before we run mentality similar to what we did with the Mountain Pass asset, and that's obviously what we're doing here. We're very excited about our long-term agreement with General Motors as our foundational automotive customer. Our target is to be supplying them with alloy flake in late 2023 and finished magnets in 2025. I won't go through these. These are just a few snippets from our most recent earnings deck. I think the punchline here on these slides is, obviously, in a challenging economic environment, we've been able to continue to execute both from a production and cost perspective, and maintaining cost control and driving incremental productivity from our existing assets, it's certainly something that we are very focused on. Our primary focus at this point for the remainder of the year certainly is getting our stage 2 assets ready to come into service. And so that is the priority. But certainly, we've been able to demonstrate over time our ability to grow production from our current assets and maintain cost control in our business. That obviously translates into exciting growth that we've seen from a revenue and adjusted EBITDA perspective. The pricing environment and our core commodity certainly has been very strong given the supply-demand dynamics that everyone sees in the market, and so that has translated to very strong financial results. The other thing that's unique about, I think, the way we've approached building this business, as I mentioned, sort of with the staged approach is our current business is generating significant free cash flow that we are reinvesting into the business to move downstream. And so this is not a big bang, we don't have a cash flowing asset and we're putting hundreds of millions of dollars on the ground. We have a very strong highly cash generative business in the background, if you will, as we deploy all this capital. And so certainly, all of the learnings that we've been able to bring to bear from building out this stage 1 business have made us stronger both financially and operationally as we embark on our downstream expansion strategy. So with that, I will take a seat, and you can fire away at me.

Yes. Sure. How should we think about progress on stage 2? What are the key gating items left to accomplish before you're online?

Sure. The good thing about stage 2, certainly, I think we get a lot of questions about permitting and those sorts of things. And because we are recommissioning a facility that was built in the 2010 time frame, the predecessor who operated the facility spent $1.7 billion on these assets. We inherited all of the operating permits and are leveraging the vast majority of that invested capital. What the stage 2 plan really is, is building in some changes to the flow sheet that we sort of think about as almost a back to the future, if you will. The concept of roasting bastnaesite ore, rare earth bastnaesite ore, was pioneered at Mountain Pass many, many decades ago. And that's the critical change that we're making in stage 2, is bringing back the roasting stage that was not built out under the prior operator. So we're building out that capability at scale, and then we're also bringing 2 other critical elements to bear. One is product finishing capacity for the scale that we are at. We're producing north of 40,000 metric tons of rare earth oxide and concentrate. The predecessor, when they went public, had targeted 20,000 as their stretch goal and never got close to that. And so we're producing far, far more material than they had planned for and that they had built finishing capacity for. So we're building out that incremental finishing capacity, and then finally adding redundancy all the way at the tail end of the process to deal with waste brine. And so we're building in a salt crystallizer and brine purification equipment in order to properly deal with the waste discharge at the tail end. So all that's to say that those are sort of the 3 critical vectors. We've made really good progress in getting that done. We've talked on our earnings calls about -- obviously, we -- everyone hopes that things would go faster. COVID has done what it's done to supply chains and to labor. But we still -- from everything we see right now, we still think we will complete the facility at the end of this year and the changes to the facility and then begin ramping over the course of 2023. Our goal is to hit our full run rate capacity in 2023, which would be just north of 6,000 metric tons of NdPr on a run rate basis. And so from our perspective, we've been at this for a long time. We feel good from a procurement perspective, all the long lead equipment is on site, all that sort of good stuff. And really, what it's about at this point is getting it built. Pipe fitters, iron workers, those sorts of things. We've had a really significant ramp in craft on site, and I think we'll continue to see that. And so what it's really about for the rest of the year is just getting construction complete, and then we'll turn our focus to commissioning.

And once it is commissioned, I mean, how do we think about the ramp up next year? Is it fairly linear? Or...

It's -- what I'd say is the nice thing about the fact that we are retrofitting existing assets is if you kind of look at the history of other rare earth plants, certainly greenfield plants, not that there's that rich of a history. But if you look at those, obviously, those have taken many, many, many, many months to get up and running. The nice thing is from -- with Mountain Pass, we shut down our solvent extraction facility's mass balance. And so that oftentimes is one of the issues that adds many months to a ramp process. And so while we certainly have new circuits that are going to need to get charged and are going to need to balance themselves out and feed their way through the rest of the cycle, I think that, that gives us a head start. But that's not to say that it's not going to take -- it certainly will take time to get things ramped and dialed in. And so it's something that certainly as we get closer to commissioning, we'll continue to keep folks updated on, but it will be a process to get it up and running over the course of the year.

And then how do we think about the timing of the heavy rare earth separation in stage 2?

Sure. So we recently made that announcement that we had partnered with the Department of Defense to bring the heavy rare earth separation capability at Mountain Pass. That, from our perspective, is a critical element of the downstream expansion strategy. And so the way we think about that is as we look at bringing stage 2, ramping that through 2023 and then delivering our initial alloy out of stage 3, at the end of 2023, we've given ourselves some time before we're producing finished magnets out of Fort Worth. And so what we've said is that we expect to be able to be delivering heavies into our magnetics facility to support that ramp of magnetics in 2025. And so that's sort of what we're aiming for from a timing perspective to be able to support our magnetics capability.

And was the Department of Defense funding through the Defense Production Act that President Biden had invoked? Or -- and are there other opportunities for government funding for some of these projects?

Yes. I think you've seen a very significant focus from sort of whole of government on this supply chain. Certainly, we appreciate the support and engagement from DoD. You did see the Presidential Directive from Biden. You saw Presidential -- multiple Presidential Directives from Trump as well. And so I think it's one of those unique things that is very much bipartisan. You can think about it from the pure national security standpoint where, obviously, these materials are found in a whole host of things that are critical for our national defense, but it's also really a commercial national security thing. It's about jobs in American manufacturing as well. And so there is a real bipartisan focus on supporting this industry. And so we -- our support to date directly with the government in terms of monetary support has been with the Department of Defense first through Title III and then through the IBAS program through DoD. And so there was support for our light rare earth for what we call stage 2 and there was support as well for the heavy rare earth facility. And I think it's really just important -- I think it's great in the sense that it certainly not only improves returns for us, but it sends a critical message about how serious our government is taking this. And so certainly, we hope to continue to engage with DoD and others, particularly as we move downstream, given how critical building out capacity for magnetics is going to be. I also think that there's been a renewed focus on this, not just from the executive side, but from the legislative side. And so that's an area that we think could be very interesting. I think that lawmakers are really starting understand the industry quite a bit better, and that's helpful. Given our growth over time and our anticipated future growth, I think that the focus on the industry is going to increase and the sort of former defeatist attitude of we can't do this here is certainly going away. And so I think that the focus has been how do we ensure that we do this here and we do it in the right way and we incentivize supply come online. And we've seen some interesting things come out of various parts of D.C. on that, and hopefully, that will continue.

And could you kind of speak to your ultimate downstream ambitions? I mean using less than 10% of your volumes initially, how much do you want to grow that? And what gives you a competitive advantage in moving downstream?

Sure. Like I've said, we'll walk before you run, but we've also said that we would not be completely surprised if, at some point, you wake up and our downstream business is bigger than our upstream business. I think that if you think about the way OEMs go about -- not just automotive OEMs, wind, you name it, have purchased these materials. They're used to buying magnets, right? They're not used to buying oxides. They're not used to buying metal. They're not used to buying alloy. But they're also not used to worrying about if I go and contract for magnets, do I know that, that magnetics manufacturer is going to have access to raw materials? And so what we've seen from the craziness in supply chains over the last couple of years has completely changed the game in terms of the way the ultimate consumers consume this product. And so I think that from a competitive advantage standpoint, access to raw material is critical. And I think that is one of the absolute top priorities for any customer when they're looking at how do I acquire magnetics? And so I think that, that's really important. I think the thing that I'd say on that, though, as well is we do not intend to look at our upstream business in any way subsidizing our downstream business. We've been very clear that the returns of our upstream business are very attractive. We intend to maintain those returns. We think that our push into the downstream has very attractive stand-alone economics that do not rely on the fact that we would subsidize in any way our downstream business with our upstream material. And so it's not dissimilar to the upstream business. The downstream business ultimately is going to be a game of scale. And so given the tremendous scale that we bring to bear upstream, that is certainly our goal downstream is to continue to build on our capability, and as we do that, hopefully come down the cost curve really rapidly. But I think that what we've seen from customers is an acknowledgment that this function, this piece of the supply chain is absolutely critical to have in the Western world. And the processes for doing it of electrowinning and making alloys and centering and making finished magnets, it's certainly different than rare earth beneficiation and solvent extraction and all those sorts of things, but these are processes that are done discretely, either in other industries or in other ways in the Western world, but not all together under one roof. And so I think the thing that is going to be really interesting and that is going to give us a tremendous competitive advantage in the magnetic space, and it speaks to one of the reasons that China is so dominant right now in the magnetic space, is having all of the pieces of the supply chain in one place and then being able to leverage the enhanced economics of recycling waste material from production into the right spot in the flow sheet to come down the cost curve as rapidly as possible. And so to give a more specific example. While China has significant access to upstream raw materials and they've got a dominant downstream business, what they've developed is a healthy market for what's called swarf, which is really just waste that comes off of the magnetics manufacturing process, to be able to monetize that waste to lower the cost of production of each individual magnet. Usually, those businesses are not necessarily under one roof, but there has been -- there is a real sort of liquid market there for that swarf that gets recycled back into NdPr oxide and metal and alloy back into the process. We will have it all under one roof. And so what we'll be able to do is take the waste off of the manufacturing process in Fort Worth. And if it makes sense to recycle it back into the melt at Fort Worth in the metal process, or if it makes sense to send it all the way back to Mountain Pass. Part of the capability that we've talked about that we're bringing to bear with the heavy rare earth separation assets is recycling. And so we'll be able to take that magnetic swarf and recycle it back into NdPr oxide and send it back through the process. And so having that capability is a tremendous competitive advantage that you would not get as a stand-alone magnetics manufacturer without the upstream capabilities that we bring to bear.

And more on the downstream side. I mean GM is a kind of an anchor customer. I mean are you seeing interest from other potential joint venture partners or customers?

Yes. We're seeing a lot of interest. You can imagine we're having a ton of conversations. With the scale of our initial facility, we're obviously being pretty selective. But we see really good engagement across the board, not just with the types of customers that would be obvious, EV manufacturers and wind manufacturers. Magnets are found in a whole host of things. And I think that there are a lot of industries out there that are looking at this and having sort of the same realizations that I talked about a moment ago about needing to be sure, if they're going to be there for their customers, that they know that they have access to magnetic materials. And it's not about anti-China or anything like that. It's -- we're concentrated in any one country. The desire to have some level of redundancy and a more vibrant supply chain makes a ton of sense in the world that we're in. And so we're seeing a whole host of demand for that. It's been pretty exciting.

And then could you just maybe speak to your position financially for your growth projects? I mean do you see any need to bring in outside capital?

So we have been pretty methodical about being sure that we are capitalized to execute on this growth plan. I think also -- what I talked about is one of the unique things here is while we are in growth mode and we're deploying a significant amount of capital, we're also generating a significant amount of free cash flow or operating cash flow that we're reinvesting into the business. And so from what we see right now, we don't see any need to raise outside capital. We've got $1.2 billion of gross cash on the balance sheet. We raised a convert in March of last year. And with that and with the cash flow of the business and the capital plan that we laid out, which we talked about a couple of earnings calls ago of investing $700 million over the next several years into completing stage 2, bringing stage 3 online and bringing the heavy rare earth capability online, certainly, you can do the math on what our cash flow is and sort of how we're capitalized. And you can see that we'll come out the other side of that with a tremendously strong balance sheet intact.

And just on your upstream assets, I mean, is there the ability to continue to grow volumes there?

What we've said so far on that is that we don't believe -- I mean, obviously, we're going to get stage 2 commissioned, and we'll see -- we'll -- proof will be in the pudding, but we don't believe at this point that the bottleneck to adding incremental supply or incremental volumes is going to be the refining assets. And so what that means is that we could certainly and always are consistently thinking about thoughtful ways to bring incremental volumes online. We've also said that as we look at that looming supply-demand imbalance, it's certainly a good market opportunity and speaks to the strength and pricing that we've seen and the strength that we certainly anticipate to continue to supply-demand imbalance. But it's no doubt there is an opportunity for us to look at high-return projects to drive incremental volumes from Mountain Pass. That's something we think about a lot.

Okay. Great. I think we're out of time. But on behalf of JPMorgan, thank you all for coming and appreciate the presentation. Thank you.

Thanks. Appreciate it.