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

Well, I'll start at the end. I'm not going to give you my hurdle rate live here. But what I would say is on the Stage 2 piece, the thing that I think is not super well appreciated as well about the history of Mountain Pass is if you look at the assets that were invested over the 2010 and forward time frame, it's been about $2 billion of invested capital. The critical sort of heart and soul of separation is solvent extraction. Those facilities were built and operated extremely efficiently under the prior operator of the facility. The issues that the prior operator faced were all the way upstream and all the way downstream at the facility. So upstream, meaning our Stage 1, their ability to produce mixed rare earth concentrate at scale with the recoveries that we have, with the uptime that we have, they were not able to do. And so there was generally a lack of ability to have feedstock for the midstream, if you will, for the solvent extraction. That's been solved. The other piece was waste discharge all the way downstream, where they had a full tie-in to a chloralkali facility that I won't go into the details, but tended to create a tremendous amount of downtime and an inability for them to run the midstream process without an issue downstream. That's a significant portion of our investment and our Stage 2 retrofit is fixing that it. So we feel very confident that, that issue will be fixed. And so when you put that together, we've got a really, really solid base, starting with our Stage 1 output and the efficiencies and reliability that we've been able to achieve in Stage 1. We're bringing the roasting and simplified leach circuit back which, again, is not new technology, new process technology in any way. It ran at Mountain Pass for many, many decades. So back to the future, if you will, there. Solvent extraction worked great. We feel good about our downstream. You put all that together and that gives you a sense of why we're so confident in our ability to execute on Stage 2. Obviously, as we bring the facility online, we're bringing that facility online parts of which are new, parts of which have run before. But of course, that will come with its ramp, for sure, and the typical heartache that comes with turning on a new industrial facility. But overall, once we are through sort of the initial ramp stages, we feel very, very good about our ability to execute. And given the fact that these facilities have run in the past, we know the mass balance. We know what's required. And so it's just a matter of getting to operational stability. And so from that perspective, we feel very good about the return hurdles and our confidence in being able to hit OpEx targets. I think what you've also seen in our current operation is a focus on cost control and continuous improvement that we've demonstrated over the last several quarters of being public and a couple of years before that, where we are -- despite how exciting our market is, we are -- we fundamentally operate as though we are in a commodity business because we are. And our ability to continue to have the capital to invest in growing the downstream and growing upstream production, all of those things fundamentally rests on our ability to continue to drive cost out. And so that's something that we've been completely focused on over the last several years in Stage 1. It's something that absolutely we'll be focused on in Stage 2. And so we will bring that focus and continue to come down the cost curve. And I think with the fundamentals that are readily observable from the quality of our ore body, the quality of our production in our Stage 1 in our upstream and the fact that the downstream is -- in this case, midstream, if you will, is relatively well understood. I mean it's not just us that have confidence in this. If you look at third-party research, they have sort of placed us where we think we belong on the cost curve pro forma for Stage 2 as well. And so proof will be in the pudding, and that will come to pass over the next several quarters, but we have a lot of confidence in that.

And so as we look at 2023, 2024, how much CapEx is left for Stage 2, I mean, within your overall CapEx spend? And you mentioned like the heartache of ramping up. How linear should the ramp be? Or how -- to put it another way, I mean, in chemicals, we're used a fairly painful transition year, so how painful a transition year should we be thinking about for 2023?

So what I'd say on the capital side is we laid out before fiscal 2022, a $700 million plan, taking us through basically end of '24 for 3 critical projects, which is finishing the Stage 2 retrofit on site, bringing the heavy rare earth and recycling capabilities and third-party feedstock capabilities to Mountain Pass as well and then our initial Stage 3 facility in Fort Worth, Texas. And so that has not changed. You've obviously seen the capital spend we've had over the course of 2021 to date, we expect that to pick up in the back half of the year, but there's no change to that capital outlook. I'd say from a transition ramp-up perspective, it's been a little facetious on the heartache thing. But for sure, what you've seen over the last several quarters is we produce flat out, and we sell everything we produce. I think the way to think about how we may transition going into 2023, the beginning of 2023, certainly, is we will consume some product in our charging of our various circuits, and we will do that in process order over those couple of quarters in the beginning of the year. The great thing about the situation that we have at Mountain Pass is we have an upstream business that will continue to have marketable products sold into the market while we ramp the Stage 2. So there'll be a ramp-up of oxide, there will be a ramp down of concentrate. And so while we are working on perfecting the downstream facilities as we ramp them up, we will continue to have concentrates sold into the market. And so while there could certainly be lumpiness as we get that right and we will sort of pull some product into WIP as opposed to being sold out into the market, that's kind of how I would think about the next several quarters.

Okay. How are you thinking about your distribution channel? There has been kind of an inordinate amount of debate around the distribution channel. How is that going to change as you move to Stage 2 and then first thoughts on Stage 3?

So the way we distribute our product today is through a distributor through Shanghai and into China. That obviously is a prerequisite for the type of product that we are producing right now is to distribute it into the area of the world that has separations capability other than our own. As we move into producing Stage 2 oxide, finished oxide products, we can sell this globally, which is a big portion of the change that we will see in our business. We are very encouraged by the demand that we see in Japan and the Southeast Asian region for oxide products. Certainly, the focus will be to grow that market as quickly as possible. I think everyone who follows the magnetic space is well aware of who the other magnetics producers are in Japan. And there are several other opportunities to sell that are sort of less well known in broader Asia. But the focus certainly other than our facilities will be Asia for the time being. We do have the flexibility with our existing offtake agreement to the extent we would like to sell into China, some volumes, we have the ability to do that, but it's completely at our discretion. And so we will certainly follow the market. I think that as we ramp up our production, certainly, there'll be, again, a transition period where we're providing product to customers, they're qualifying it and then we're off to the races. And so I expect that to happen over time, but we're very encouraged by what we see about the development of the ex China market. If you look at how the magnetic space needs to grow and if you look at the way some of the ex China magnetics players have responded and frankly, even some of the Chinese magnetics players and what they're talking about doing outside of China. There's no doubt that there is a really tremendous need for our material outside of that portion of the world. But I think the great part about the way we've set up the business is we have the flexibility to distribute where we would like.

So there's a need to grow and then there's the capability to grow. And I think there's a lot of debate around how easy is it to do -- vertically integrate into mandate production. How much process know-how is at your fingertips or easy to access? And to what degree is lining up additional OEM partnerships contingent on you hitting some technical milestones? And if so, what would those be?

I'd say, certainly, the transition downstream is not easy. We had plenty of skeptics when we looked at and talked about what our plan was for Stage 1 and for Stage 2. And no doubt, there will be the same for Stage 3. But what I would say on that is -- this is something that we've been focused on for several years. We've built an in-house team that are material scientists, PhDs, experts in their field. And the thing that's also sort of not perfectly well understood about what we are trying to do is the fundamental process steps to get from an oxide to a metal, from a metal to an alloy, an alloy to a magnet, are done in other industries and don't at scale in the Western world. They're just not necessarily done with rare earths. And so from that perspective, we feel very good about the technical partners that we've brought on, the internal capabilities that we've built and the ability to sort of transfer knowledge from industrial processes that take place every day that are a very big piece of the U.S. economy and take that into -- the electrolysis step going from oxide to metal is not new science by any means. And so we've brought folks on to our team that have done these various steps, the critical metal, alloy and magnet-making pieces in the Western world. There are plants in Europe of various sorts, other parts of Asia. And so we feel good about the fundamental building blocks that we've brought on to our team and the technical support that we're getting from our partners. I think that to your question on OEM partners. Certainly, we are very excited about our agreement with General Motors to begin producing alloy at the end of next year and then magnets in '25. I think what's clear from that arrangement is that we and they feel good about our technical capabilities. I don't think our go-forward deal-making in any way is contingent on anything other than us taking the right partners for us. I think the way we talked about it on the call, which is absolutely true is, we are supply constrained in Fort Worth. We are not demand constrained. And so what we are looking for are the right partners, the right commercial partners to continue to grow that business over time.

And so somewhat quirky question to close on. But as I've seen a dozen odd of these industries where skill sets are scaled elsewhere and then brought in. And there's usually something very finicky, either philosophically or technically, that the particular industry that's trying to leverage other people's know-how and experience sort of run into, it becomes a real differentiating point. What do you see currently as where if you can solve it, it would really differentiate you from other magnet producers or other North American producers want to follow in your footsteps?

One of the critical go-forward problems that I think the industry is starting to see, and you see some headlines about this and not everyone sort of follows exactly what the headlines mean, but it is reduction of heavy rare earth content in magnets. And so people say, oh, less rare earths in a magnet. Generally, what that technology has been is less heavy rare earths, which, in a lot of ways, necessitate more light rare earths to make up the difference. And so I think from that perspective, the ability to continue to bring to bear the different types of technologies, to drive lower heavy rare earth content is something that I think is certainly could be a critical differentiator in the market and something that would play to our strength. I think the way that we think about going to achieve that and some of the other differentiators is just thinking about the scalability of recycling as well. And so whether it's third-party feedstock or our own manufacturing process waste, that is something that I think absolutely may be the real initial differentiator for MP Materials because if you think about why is the magnetic industry so large in China? There's a whole host of reasons, but one of the critical ones is they have the separations capabilities upstream to deal with the process waste downstream that's made in magnet manufacturing. And so one thing that, again, I don't think is perfectly well understood about how well our strategy hangs together is having the separations capabilities with magnet manufacturing means that not only do we have that all in country, we have it in the same company. And I think that being able to provide scaled recycling of process waste is going to be absolutely essential for any magnet manufacturer to come down the cost curve. And so trying to stand up this industry in the Western world without access to that, I think it's going to be very difficult. And so I think that's going to be a real differentiator for us as well.

Okay. Great. Thank you very much for the time today.

Thanks. Appreciate it.