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

All right. Well, good morning again. Thank you for joining us for the second session of the mining track. Before we begin, let me read some disclosures. For important disclosures, please see Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley representative. With that, it is a pleasure to introduce and to host Jim Litinsky, Chairman and CEO of MP Materials. A very interesting story that is unfolding in front of our eyes. Thank you for being here.

Thank you. It's great to be here in person. Nice to see you. And over the last couple of years I've done this, and it was virtual. So it feels good to be here.

Yes, for a change, now we are in person. It's great to be back.

So Jim, clearly, you guys are in the middle of a revolution, right? And it has many angles that are potentially of huge benefit for the company. So maybe why don't you give us a little bit of a ramp -- a summary of what is your mission, a very critical mission based on what the world is facing today? And then we will come back and discuss a little bit of the growth path and the future that MP offers.

Sure. So our mission is to restore the full rare supply chain in the United States of America. And what that means is from essentially the materials out of the ground, the mining aspect, to the refining through metallization, alloy and magnets. So we want to have the full supply chain here. Right now, as we look around the world, 90-plus percent of rare earth magnetics are made in China. And for those of you who are new to our story, rare earth magnetics are critical for electrification. So think electric vehicles, wind turbines, drones, robots, essentially the -- really the center of the world right now as we think about kind of how the global economy is evolving. One interesting thing to note about magnetics is that -- we talk a lot about batteries and materials, and that's very topical. And battery chemistry has evolved. But regardless of how the energy gets to a motor, it's 90-plus percent chance it's a rare earth magnet that is moving that motor. So we're really -- we have a lot less risk from a technology perspective, if you will. So we're really critical, and we want to get that supply chain here. We operate Mountain Pass, which is -- as you know, we are the second largest producer of rare earths in the world. We're approximately 15% of global supply. And we mine materials in Mountain Pass. Our Stage 2 is refining. And then those refined materials will get sent to a magnetic facility we're building in Fort Worth. And by the way, I don't know if you've seen this, but we actually tweeted the other day kind of our progress. So for those of you who don't follow us on Twitter -- and you'll see the walls are up in our magnetics facility. We're putting the roof on very soon, and we're making a lot of progress. And again, I'll just conclude for those of you who are new. We have a deal with GM at the -- where we will be supplying magnets to the Ultium platform out of our Fort Worth facility. So we've been doing a lot. We've got a lot of work to do. But it's very exciting. We're at the center of it. And this industry will really explode in size as we electrify.

Yes, definitely. I was there -- Tommy and I were there in August, I think, early August. We saw a lot of progress. We were discussing with investors that had been in April or March, yes, and we compared notes. Clearly, a lot of progress has been taking place. And I understand that, that has continued based on what we saw on Twitter the other day. So congratulations for that. So Jim, maybe just for the benefit of the audience. So still the target is mechanical completion by the end of this year. How do you see the potential ramp up? Just broadly speaking, any milestones that you can share with us today on Stage 2? And can you maybe elaborate a little bit more on Stage 3? And clearly, the contract that you alluded to with GM, that really completes the circle for the company.

So we are on track for mechanical completion this year. And even, since you were there a month, I mean, the activity on the site, the energy is extraordinary. It's very exciting. And we've already started -- and we said this on our recent call, we've started precommissioning and commissioning certain pieces of equipment in the flow. And so there's a lot going on there. And I think it's actually just important to highlight, we had said going back a year or 2 that we expected this year to be a transition year given all of the activity. And I'm really proud of the team of how we've been able to execute operationally in our Stage 1 as this project is ongoing. And so that execution continues. The project continues. And so we're on track to be mechanically complete this year. As far as the ramp-up, that's where -- in any industrial process -- we'll -- we want to be very thoughtful about -- there are things you know, things you don't know. Our expectation now is that, that will be very smooth. We have the benefit of having -- there's an older facility on our site. So we've had extensive piloting. The NdPr separation facility, which shut down mass balance -- so we -- and the engineers that designed and operated that facility, some of them are our employees today. So we really -- we do not anticipate any major challenges, but we want to be careful and just say, "Hey, we've got a lot to do in the coming months on execution." And so hopefully, that ramp will be smooth. But -- and so far every indication that we have, we expect that to be smooth. But we'll update you as it progresses. And then as far as Stage 3, the GM contract that we just discussed, we're going to be selling alloy. So for those of you who don't know, you take a refined NdPr, which is the main magnetic input. You take the refined material. You metallize it. You turn it into an alloy. And then from an alloy, that becomes a magnet. In late 2023, we'll be selling alloy to GM that they'll then utilize. And by 2025, our Fort Worth facility will be supplying GM with magnets. And that facility is -- really represents a single-digit -- kind of a high single-digit percentage of our current expected output. And so what I've said -- and maybe we'll get more into this. But my expectation is our magnetics business, if you look out a decade from now, will be substantially larger than what our current expected feed is, not just our initial facility, but our current expected feed, because the growth in this industry is enormous. We are years and billions ahead of anybody else who's trying to do this. And I just don't believe that 100% of the supply chain or 90% of the supply chain is going to be in China. And obviously, we have something to do about that. But the opportunity for us is enormous, and so we're going to capitalize on that.

And how do you see this transition and growth being financed? I mean, clearly, the company has a strong balance sheet. But you'll still get a lot of questions from investors about, "Do they need to raise equity as they embark in this restoration of the supply chain, rare earth supply chain in North America?" How would you respond to those people that maybe a little bit concerned with the higher interest rates and everything that we're seeing?

Sure. Well, first and foremost, I'm the largest shareholder of the company. So I am maniacally focused on shareholder value for obvious reasons. We have $1.3 billion of cash, approximately $600 million of net cash. We're a cash flow positive business. Especially, in this space, that's a rare thing. And so I think it's important that we have that fortress balance sheet. But we -- if you kind of look -- and people can kind of do their own math. But if you look at the progression of events, I mean, we think we have the firepower to do a lot of building from here. And this is very high return on capital investment. And so there's no near-term expectation of any kind. I'm not contemplating any kind of raise. I don't -- especially, with the stock where it is. But we have plenty of firepower. I would also -- and we'll probably get into it. But the IRA also provides some very interesting incentives that make our ability to put together structures if we were to do 10x from here or whatever from a build. But we have a very cash flow positive business. We have high return on capital opportunity, a fortress balance sheet. And so we feel really good about our financial position right now.

And we have seen a lot of OEMs recently either participate in -- as equity stakeholders in some mining projects or others are trying to look at refining plants and get involved there. Does -- is this something that maybe could be in the future for MP, doing partnerships more directly, not only like an offtake agreement like the one you have with GM?

Well, we have the deal with GM. And our expectation is -- we sort of said, historically, we'll -- as we build our magnetics business, we'll buy, build and/or JV. We're totally opportunistic. I think that the OEMs right now are in -- depending on the OEM, are in a varying state of panic. Some are sort of in a more open form of panic and some are in a more quiet form of panic. And I actually think that, that will be -- and you've heard me say this. I think that will really be the differentiating factor. And I think this may have been mentioned at the conference by some of the companies. But when we think about competition in the EV landscape, you really have to look back to Auto 1.0 100 years ago. This is totally new territory. And it's not just going to be competition based on, "Oh, who's got a little bit more range? Who's got a better color?" This is a supply chain game now. And for example, credit to GM for being very forward in sort of recognizing that change and doing a lot -- aside from us, but just -- outside of us. But of course, we're excited about what we're doing with them. But I think you're going to see a lot more of these deals. I think you may see -- and again, it's probably an imperfect analogy, but you may see an AOL-Time Warner moment, where -- and it would be music to your ears I guess, where you kind of look at the multiples and the valuations in the mining and material space and you look at the downstream and you say, "Hey, wait a second." There are many, many multiples of enterprise value that are wholly reliant on a limited subset of materials, and there's musical chairs. Not everyone is going to get a seat when the music stops, so to speak. And so I do think you're going to see increasing fighting over resources, particularly given the geopolitical aspect of it. So -- but I don't know if that answers your question.

No -- I mean, I'm going to have to take you to have coffee with my boss after today's session, just talking that story. But yes, let me -- definitely...

He's a busy guy.

Yes, it's very interesting. Just -- on that Stage 3 and the magnetics facility, something that a lot of people are interested to know is how is the company tackling the IP situation, right? In some instances, proprietary by some Asian producers. How are you guys tackling that challenge of getting the IP, the know-how and the human talent to develop that stage?

So let me give you my vision on this, big picture, and then I'll narrow in on that specifically. Because I think it's just really helpful to understand how I'm thinking about this. And as you know, I was in the investment business for quite some time, for over 15 years running a fund. And I founded this company and we -- this was a distressed turnaround and start up at the same time and have built this business. And I left to fully focus on this. And the reason is that I think that the opportunity that we have today is -- and again, another imperfect analogy, but I think it's relevant, is think back to the semiconductor industry in the 1960s. You knew that there were enormous growth opportunities ahead. There was a lot of scale that had to happen. You didn't exactly know kind of where exactly would be the use cases or who would invent what. But you knew that if you could lead in that industry, it was going to be an enormous industry. And obviously, the example would probably be Intel as kind of -- I think the magnetics industry is at a similar point today, where -- you can look around, it doesn't -- you don't have to be particularly observant to think about EVs, wind turbines, robots, drones, HVAC, all the things. And particularly, given what's happening geopolitically and then, of course, with the new IRA. And so magnetics is just going to be an enormous industry. And the reality is this is led by China. You have to have the supply chain. So what it really means is it's not just IP. You can't -- there's no way to go fabless here. You've got -- you've really got to have the end-to-end solution. And so we will be the Western champion, if not the global champion in rare earth magnetics. And there's -- we are years and billions ahead of anybody else who's even focused on this problem. And so that gives us an enormous advantage. And so what we've been doing -- and we've sort of been quite about, as you know. When we went public in 2020, we were very clear and we said to people, "This is a 2025-plus event." I mean I'd like to -- as I like to say, we like to execute first and press release later. There's a lot -- in this space, there's a lot of sort of press release and then execute. And if you just think back to when we went public, we just said, "Yes, that's a long-term vision." Fast forward to today, and we have an extraordinary team. I think -- and admittedly, there's not a lot of competition. But we've gathered an enormous set of minds and talent across the metallurgy space, across the magnetic space, the team that we built. And we're building our own IP today. And so as -- Fort Worth, our facility -- our initial facility in Fort Worth will really be the center of magnetics, I believe, in the world. And then from there, we will be able to scale that business. The next one will be 10x and then the next one will be there. So that's what I'm playing for, is that in the longer term there's an opportunity to create an enormous incredible American enterprise from the fact that we have this unique asset that gives us a tremendous lead. And so we have the cost of capital advantage, the scale and the materials. And so really for years, there's really just nobody who can compete with us. Now that said, there is various IP around. And we've said from the beginning, we're going to be totally opportunistic. We will buy, build and/or JV. And so to date, obviously, we've been mainly building. But never say never. We're totally open-minded to anything out there. And we'll just continue to tackle this, to do everything we can to -- in a thoughtful, shareholder-driven way, compound our years and billions ahead and build a big business out of this.

And Jim, as you expand the Stage 3 magnetics business, if you want to continue to be integrated, vertically integrated, you need to expand, particularly your heavy rare earth production. What are the avenues that you are thinking about in order to accomplish that?

Well -- so on heavies -- for our initial facility, which will keep us busy for the next few years, we've got everything we need at Mountain Pass. And we'll be separating heavies as part of our process at Mountain Pass. And one of the things that we're doing as we build out and finish our Stage 2 and then as we do additional recycling capability, is we are creating the capability to take third-party feed. And so my expectation is that there will be other projects around the world. And that's why I get asked -- we are so far behind in getting the supply online. So people -- sometimes they'll ask me, "Oh, are you worried that this person is out there raising money?" No, it's the opposite. We want as much capital to form in this space. We want as much supply to try to come online in this space. I think the practical reality is there will be some people who do heavy projects or light projects or both who will get almost the way there, and maybe we'll be able to buy some of those assets at $10 million, $100 million or partner with them or however that plays out. But there needs to be a lot more. And we will have the capability to process at Mountain Pass, not just from our own ore body, but third-party feed. And so we'll go out and get as much of that as we can. And then lastly, I would say, we -- it's a little bit -- sort of very relevant on this, but in case people don't know this, is that when we think about Fort Worth, typically 20% to 30% of magnet production is swarf fit. It's material that when you're cutting the magnet or in various parts of the manufacturing process will fall off the line. The same if you think about lithium battery cells. You may lose 10% of the materials. Well, in this case, we will be able to because we have Mountain Pass -- recycling is really solvent extraction. So we will be able to take the waste from the line and send it back into our process in Fort Worth and/or send it to Mountain Pass. And so -- and this doesn't even exist in China. So in China, in the various pieces of this chain, you have a magnet manufacturer that will sell their waste to another producer to recycle it. There is nobody who has a closed-loop operation. And so obviously, we've got a lot of work to get there. We've got to make magnets. But the long-term vision is that because of Mountain Pass, we will be able to have that close loop, which is a -- when you think about raw materials as a percentage of the product and then to think that 20% or 30% of the raw materials are wasted in the process. And if we can utilize all of that, that is an enormous source of additional material to grow the business and, frankly, just a cost advantage relative to anybody in the world, including in China, where none of this business is co-located. In China, it's separated. The mines, the refineries and the magnetics and the recycles are typically separate operations. So over a very long period of time -- and again, we've got a long way to go, but we think we can be a low-cost producer to the world because of this sort of unique colocation capability.

Yes. We saw -- when we were in Mountain Pass, we saw a line where they were testing the recycling of materials. So quite interesting. So coming back to something that you mentioned several times already, the Inflation Reduction Act. Can you maybe elaborate as to what are the benefits, the specific benefits that you guys see for the company from this deal?

Sure. And I'll put my investor hat on for a moment and just say I think people should really look closely at this, because this will set off a boom of some sort in the sense that -- it's actually -- what happened in the IRA is really spectacular for the upstream. And I think there were a lot of -- there was a lot of discussion about what we might get for focusing on electrification and then the American supply chain. And frankly, historically, a lot of it has just been focused on tax incentive for consumer purchases. And what came out of the IRA, which I think, frankly, people hadn't really expected because it just sort of kind of came out of nowhere and it's great. But there are 2 major areas that I think -- well, at least from an MP standpoint that we expect to be great for us. And by the way, I should caveat that with saying that the act has a -- there's a 180-day period. The regs have to be specifically defined. Some of the -- so -- it's government, anything could shake out. So I want to caveat that with what we see today. There's 45x, which is -- which will be an operational tax credit. So our operation, our Stage 1 and 2 operation at Mountain Pass will be -- we will be able to have a 10% tax credit. So whatever your assumption is for our operating costs, take 10% off of that. And then there's also 48c. So that's 45x. And 48c is the extension of the investment tax credit to the clean supply chain, which we believe, as of now, the rare earth magnetics will certainly qualify for that. So in very simple terms, that's a 30% investment tax credit. So if we went out and built a $1 billion facility, that would be $300 million cash back from the government via a tax credit or actually a saleable tax credit. So it really does substantially lower the cost of capital to build out the -- what we need to build out. And so I think you're going to see a lot of investment in this thing, which is good. We need this. But it's going to -- I think it will be reflective in the sense that we will start to see big investments. It will feed on itself. And of course, I think that is great for consumption of all raw materials, steel, aluminum and all that good stuff. But certainly for us, it's going to help our business a lot.

A great story, definitely. Just coming back then to a little bit of a more macro question. How do you see the supply demand dynamics for NdPr? There is, as you said, investment that are planned and trying to get the money and the permitting and all that. China continues in the meantime to dominate the space from demand and supply. And prices have declined recently. And so putting it all together, what are you seeing in the medium to long term in terms of the supply-demand balance and conditions?

Yes, let me address both of those. And there's actually 2 key questions there. And first, I should say, when it comes to commodity price, who knows? You've been doing this long enough. I'm certainly -- you have to be very humble when it comes to commodity prices. Who knows what happens next week or a month or 2 months or whatever. But in the medium to long term, we're extraordinarily bullish. Obviously, in the recent months, given what's happened with the world economy, in Europe, we've seen a pullback in NdPr prices, no different than we've seen in copper and oil and all of that. There's nothing we see from a demand standpoint other than the auto markets around the world. It's actually more so some of the others -- Europe, Japan, U.S., they are a little bit weaker, frankly, than China. And some of that is just -- I still think it's lingering supply chain issues because -- I don't know about you. But if you go to buy a car these days, you're paying MSRP or more. So there is pent-up demand. So I don't think that this is like a -- this is very unlike prior cycles from a demand standpoint. So when this snaps -- and again, it could be tomorrow, it could be 3 months, but it will be enormous. So I really don't worry about demand. From the China -- so when we think about supply -- there's a little confusion in understanding the Chinese, and frankly, in the West, it's virtually impossible for us to understand what's going on there. But in reading the tea leaves -- I think it's really important to have the context of the rare earth space with respect to what we believe are the strategic objectives of their government, which is -- this is a means to 2035 standardization. The Chinese want their OEMs, which are the big jobs -- the big time jobs, big time GDP contribution to compete in the Western world and dominate. So right now, Nio, Xiaopeng, there's -- Chinese manufacturers that are selling very well in Europe. The rare earth industry is just a feedstock to the magnetics that ultimately are the feedstock to that -- a bigger industrial hope for standardization, i.e., domination globally. Our expectation -- and everything we've seen from the quota system in the recent -- they recently raised quotas -- is we should expect the Chinese to raise quotas to supply their own industry. And that will be -- they will supply their own industry so that there is orderly supply and reasonable pricing for a fair profit and that there's not too much environmental destruction, that the illegal mining is cracked down and that they can then provide the feedstock to their downstream industry. What I think is very unlikely and what we shouldn't rely on in the West is that the Chinese are going to subsidize Tesla, GM, Volkswagen, whomever, as they try to make EVs. And so I think that the prior 10 years -- and this probably also goes for other materials. And I think that this is sort of the big disconnect we have in the West as we kind of look at the market today and, "Oh, copper prices have pulled back, aluminum price" -- the big picture theme here -- and again, by the way, this is -- it gets -- the longer we have sort of a higher cost of capital and a pullback, the more magnified the snapback pain will be and it kind of speaks back to this idea of supply chain really mattering for the future. But I think we're going to find in the West that China to their credit, competitive credit has made sure that their industry has what they need. But then there will be a scramble for the rest of the world to figure out how they're going to get the supply. Because it makes no economic sense for the Chinese to subsidize their competitors when the idea of gathering all the resources was what they were focused on 10 years ago. For the next 10 years, they're focused on industrial domination. And so that, I think, sets up an enormous bull market for these materials. Again, the economy has kind of got to work through a lot in the coming months, certainly. But I think that is the landscape through which you should view supply and demand certainly in our space. But I think that analogy applies kind of across your space.

Yes. And some -- one statistic that I keep mentioning to investors is that NdPr prices are down, yes, but when you look at what EV sales and EV production in China is doing, it's still growing 125% plus year-on-year. So demand is there. And commodity prices go up and now for various reasons.

With respect to us -- and then -- when you have a commodity business, but you have a fortress balance sheet, there's a lot of latent option value in owning that enterprise because it's really just a timing thing, right? If you -- okay. So sure, NdPr prices could stay here for a few months. I don't know. They could go lower. They could -- but longer term -- we know what's happening in electrification. I mean, here's one -- I love giving this stat. But if we think -- if we look at the NdPr market today, let's just say about a little less than 20% of it is focused on just EVs and wind turbines. And these are very rough numbers. You can kind of get your own. There's a lot of great third-party research out there. You've certainly put out some. If that compounds at 20% to 30%, that's really -- over the next 8 or 10 years -- do the math on the multiple of NdPr demand, what that means 8 or 10 years from now. Even if the other 80% went to 0, right -- but by the way, that other 80% is also growing because you have HVAC and all these other use cases, robotics and drones and who knows what the use case will be. So the longer-term demand backdrop is outstanding. I mean, I don't -- our vertical is -- I would argue is the best of any of the commodities out there. It's just because of how -- and also because of how hard it is to get this stuff online. And you know because you've -- as you've seen in Mountain Pass, this is not just taking rocks out of the ground. This is -- you look at a picture of our site, this is much closer to -- from a mechanical standpoint, like an oil refinery. Obviously, we're a clean business. But this is a highly complex specialty material that takes a lot of capital, a lot of expertise to produce. And so you'll hear of some capital formation. But even if you had all the money, all the human capital, all the permitting in place tomorrow for a site and you had an economic ore body, none of which really exist in great scale now, you're still talking 3 or 5 years to get one of these things online because it's like building a new refinery. So again, I think with a commodity, you really have to look at what is the capital and what does it take to get this stuff online. It's not -- I think Wall Street tends to have a view of, "Oh, if there's an incentive price of supply, I should just assume that price can kind of never exceed that level." But that's not how commodities work. That's not how cycles work. The pendulum never sort of hits the incentive pricing and stays there because you got to get stuff online. And then if you have a very expensive long challenging period of time and you have to discover the ore body to get the stuff online, obviously, the pendulum goes the other way. And that's what makes a bull market.

Yes. All right. Listen, thank you very much, Jim. It was great having you here in person, I guess, for the first time since you went public. Thank you again. Good luck with everything that you guys are doing.

Thank you.