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

We have MP Materials here today. MP Materials is a rare vertically integrated Western leader in rare earths. With us from the company is Ryan Corbett, CFO; and Martin Sheehan, Senior VP of Investor Relations. And with that, please take it away.

Thanks, George. Appreciate it. Thanks for having us. We're excited to be here. So I'll run through these slides relatively quickly just for folks who are a little bit newer to the story, and then we have plenty of time to do some Q&A and talk with you, George. So very quickly, safe harbor. We may make forward-looking statements. Please take a look at our SEC filings for the relevant risk factors, and we will talk about non-GAAP financial measures. So just to set the scene from a market perspective and sort of what we do, we're at the growth conference, so I'm sure you'll see a lot of charts that go up into the right like this at this conference. But this one is, I think, relatively obvious to folks who are paying attention to the global economy and what's happening in electric vehicles and the new energy transition. The world is rapidly electrifying. I won't pick a specific date. This is not our numbers. These are Bloomberg's numbers, but certainly, the world is rapidly electrifying. Why does that matter for us? MP sits in the magnetic supply chain, rare earths are of the fundamental building blocks of magnets, and magnets are synonymous with motion and are critical components of the electric vehicle revolution. Just to give an example of what that means from a demand perspective in our market. If you look at electrifying just the North American vehicle market, it would imply a 34x increase in North American demand for our critical material, which is NdPr oxide. So you would think with that, that there would be lots of additions to supply. In our market that is not the case, I guess the pun is relevant. Having a rare earth, a scaled rare earth ore body that can support what really is a lot more of a chemical process and a mining process is exceedingly rare. And what you see in this market is a pretty significant looming supply demand imbalance that started to manifest itself in a much stronger pricing for our commodity and we are executing on a multistage strategy that I'll talk about in a moment to capitalize on this trend. The interesting thing about this market is it has been absolutely dominated in China for many decades now. MP Materials sits as really the only source of scaled rare earth materials from mining all the way through to end products in the Western world. So a quick at a glance of our company and our history. There's about a 70-year history at our critical asset at Mountain Pass and nearly $2 billion of capital invested at the site since 2010. We are embarking on a 3-stage strategy to restore Mountain Pass to its rightful place in the rare supply chain and bring these critical capabilities back to the United States. The first stage is production of a mixed worth concentrate that is sold overseas and separated in Asia into the individual separated rare earth oxides. Stage 2 of our strategy is moving into separating those rare earth oxides on site at Mountain Pass. That's something that had been done for many decades before we took over the site in 2017, we're making some critical changes to the process flow and bringing that capability back to the United States. Stage 3 of our strategy is then moving to vertically integrate and take those rare earth oxides and turn them into rare earth permanent magnets that are directly using wind turbines, robots, industrial motion and electric vehicles. This is a quick overhead view of Mountain Pass. It is in San Bernardino County in the Mojave Desert. It's really the only scaled site of its kind in the Western world that is completely co-located. It's very unique to have the ability to do mining, beneficiating separation, product finishing, all in one site. And so as we talk about supply chain security, having all of these processes co-located has a tremendous amount of cost savings and certainly from a security of supply perspective, cuts out a lot of risk from an operational perspective. And the great thing about operating in California, a lot of folks are corporate headquarters is in Vegas, a lot of folks jokingly say, don't you wish the mine was right over the border in Nevada. We wear our position in California as frankly, [indiscernible]. We operate to the highest environmental standards in the world. We believe that we operate the cleanest rare earth processing facility in the world. We recycle water to meet 95% of our processing needs. We have eliminated what is typical with a lot of mining would be a wet tailings process. We have a dry stack tailings process. So we have no tailings dam that has risk of seepage. And we've really embarked on a multipronged approach to continue to leverage that inherent advantage and position to move into recycling, biodiversity, a lot of other things. We actually issued our first inaugural ESG report a couple of weeks ago, so that's on our website and talk a lot more about some of these initiatives. One item that I touched on, but just to focus it in a little bit more is where are we in our strategy right now. We are focused on completing the construction of the retrofit of our refining facility at Mountain Pass by the end of this year. With that, we'll begin to ramp NdPr oxide production throughout 2023 and expect to hit our run rate targets in '23. In addition to that, we are investing in heavy rare earth separation capabilities in the partnership with the Department of Defense. These are higher value, lower quantity rare earth found in our ore body that are critical for the next stage of our process in Stage 3 going into magnets, which I'll talk about in just a second here. So the magnetic strategies, what we call Stage 3. We're deploying capital into a first of its kind in the Western world, rare earth metal alloy and magnet manufacturing facility that will be in Fort Worth, Texas. This will be about 1,000 metric tons of NdFeB magnet, which if you look at the size of our upstream business, this portion of the strategy, this initial facility would consume less than 10% of our current expected output of NdPr from Mountain Pass. One of the things to quickly touch on in magnetics, that's so critical is one of the reasons this industry is so prevalent in China, and China has been able to dominate this market is in order for a magnetic strategy to be cost competitive, there's a significant amount of manufacturing waste that comes off of the magnetic manufacturing process called swarf. The way that you deal with that is through turning that swarf back into its original piece parts, back into rare with oxides in order to be made back into a proper magnet. In China, they have other than at Mountain Pass and 1 other facility outside China, they have all the separations capability globally. So with our ability to restore separations capability at Mountain Pass and then vertically integrate into magnets manufacturing, we will have that ability to recycle our magnetic swarf, which is really critical to driving the strategy forward. So someone wanted to come and build a magnet plant in the U.S., we certainly welcome that. We think there's a lot of room for growth here. But I think the critical differentiator for us is having all of the pieces of the supply chain under 1 roof to be able to leverage our position in solvent extraction and separation. For this initial facility, our initial foundational customer is General Motors. So we'll begin supplying General Motors with alloy flake starting in late 2023 and rare earth permanent magnet starting in '25 for their Ultium Platform. I'm not going to run through these. These are slides from our recent earnings from last week that just speak to our continued operational execution on our Stage 1 business. I think the critical point that I would make here and maybe it's better made on this slide is I think one of the things that's unique about our story right now and how we're executing on our strategy is while we are investing significant capital in Stage 2 and Stage 3 and getting those online, we have a very exciting cash flowing, highly profitable business behind the scenes, if you will, in Stage 1 that has continued to fund these investments. And on top of that, we have a fortress balance sheet over $1.2 billion of cash on the balance sheet to continue to execute into this opportunity. And with that, I'll come, take a seat and chat with you.

Please take a seat. Thank you for that.

Sure.

Maybe let's keep it topical. We have a mega piece of legislation that's about to possibly surely pass, I think.

Yes.

And how does that impact MP Materials?

So I think there's 2 pieces to it. There's sort of a direct P&L impact and then there's sort of the broader message and sort of support for what is really our strategy. And so starting on the latter piece, I think it speaks to certainly the seriousness with which we have now really a whole of government approach to pushing forward clean energy, I think you wrote a lot about it and one of your pieces recently about how meaningful this really is and not just supporting demand. I mean, you see the incentives in there for wind turbine manufacturing. But bringing that to the United States, manufacturing domestically. That has been our strategy. We embarked on this since 2017 with the understanding that over time, as the economy transitions and electrification takes hold, the single point of failure risk for so many of these critical materials is not going to be acceptable to global industry. And it's not something to pick on any 1 country. Obviously, there's plenty of geopolitical issues with China in particular. And so it's very, very topical. But I think it's becoming clear with everything we saw in the supply chain over the last several years with COVID in particular, that any single point of failure risk is unacceptable. It's a typical tripping over dollars to pick up pennies issue that I don't think is sustainable going forward. And so the adage of just-in-time becoming just-in-case is true. I think the nice thing about what this bill pushes forward and what we're executing to is absolutely, you're seeing large auto OEMs, wind turbine manufacturers, you name it, really wake up to this. But the thing that's really exciting for rare earths, in particular, is it's not just about getting government support to be able to match what we -- what companies can source overseas, we could be competitive. We can be cost competitive here. Mountain Pass is probably the lowest cost producer of rare earth oxides based on third-party research globally given the asset that we have. Moving into the magnetic supply chain, our goal is not to beat China at their own game day 1, but absolutely, our goal is to gain scale and come down the cost curve over time. And so I think that this bill sort of signifies that not just in rare earth, but broadly for sort of this new green energy economy, the government is serious about pushing that forward. Specifically on the P&L side, there is a production tax credit that is part of this bill that if enacted the way the Senate bill was written could be really meaningful for us from a cash tax perspective. There's a 10% tax credit on cost of production for critical materials and neodymium counts as a critical material. So from that perspective, if that part of the legislation stays in there, that could be a meaningful advantage for us, and I think speaks to exactly what I believe a production tax credit is meant to achieve, which is freeing up capital for those who are investing in this and pushing the strategy forward. And so if it does come to pass, certainly, that frees up capital for us to continue to invest into some of the things I talked about.

So I have to give you guys a lot of credit. When we first looked at the company, there were plenty of skeptics, like, well, how are they going to figure out how to operate this mine, many have tried and many have failed? You guys -- I think last year was the highest production of rare earth oxide in the history of the United States.

Correct.

But now you're embarking on another strategy. You didn't stop there, you're going to stage 2.

Yes.

And I wonder if there are ways you can give us confidence. You've already done a good job, but can you give us confidence that Stage 2 is going to start in 2023 that you've crossed all your Ts and dot in your eyes and you're you ready to go?

Sure. Yes. No, it's a great question, and I appreciate it. Certainly, it's been a whole lot of blood sweat end tears from the team on the ground. No question to get to where we are. We're thrilled and very proud of what we've been able to accomplish. But what we have set out to do has always been to restore the whole supply chain. What we do today is phenomenal and is a huge step forward. And the way that we've staged it has given us the free cash flow to invest into the various downstream components of the supply chain in order to do that the right way. And so what I would say in terms of our level of confidence and why we feel good about the strategy and why we're doing what we're doing is that if you look at the predecessor that has a storied past, if you will, 2010 time frame, the assets on site, over $1.7 billion was invested on site in a phenomenal state of the art facility, and we're leveraging the vast majority of those assets. We're obviously investing incremental capital into those to fix some things that we think were not done right. But what I would say is in the -- under the prior operator, what really did not work well and what led to the ultimate outcome of us owning the facility is they're equivalent of Stage 1. They were not able to reliably run the upstream portion of the business, and then they had other issues on the very downstream and dealing with waste and the waste prime that comes off of the process. The middle piece, which is really our Stage 2, solvent extraction, which is turning the concentrate into rare earth oxides, worked phenomenally well. The problem was just they didn't often have feedstock to run through the facility. And then if they did have feedstock to run through the facility, they often didn't have the ability to discharge the waste that came off of it in the right way. And so it led to lots of downtime, incremental costs. And the last thing I would say is there was a business strategy that was embarked upon where as you know, with rare earth, some are in very, very high demand, some are not. We are sort of less with an ore body that has a significant percentage of NdPr, neodymium, praseodymium that goes into magnets. With any light rare earth ore body, you always find NdPr alongside cerium and lanthanum, which are in much higher supply and lower demand and generally trade for 1/100 of the price of NdPr. The prior strategy was let's maximize the fact that we have lots of cerium and lanthanum and try to sell those and make as much of it as possible. Our strategy is exactly the opposite. There is a uniqueness of Mountain Pass that allows us to separate rare earth in a way where we reject the low-value cerium, all the way up front in the process. We don't have to carry it through the energy-intensive and chemical reagent intensive stages of production. That is part of our investment in Stage 2 is to basically go back to this process that actually was pioneered at Mountain Pass many decades ago. So putting that all together, what I would say is there's no new technology really here. This is something that the roasting step that I just talked about is something that has been done about in past for many, many decades. The issues of the prior operator in terms of upstream or stage 1 is exactly what you saw on those slides. We feel very good about our ability to continue to execute on Stage 1. And part of the investment in our Stage 2 retrofit is dealing with that downstream piece, the waste discharge where we've built in a brine concentrator and treatment step and it's all crystallizer to deal with the waste. And so putting that all together, we've seen these assets work very efficiently at scale. And so with those key changes we're making at the front and at the back, we feel very good about our ability to execute on this.

So rejecting cerium is the point that is a key part of the better efficiencies that you're seeing in the [indiscernible].