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

Moving right along, we have a really unique company. Really truly one of its kind to present next, MP Materials, which is based in Las Vegas. It's the owner and operator of the Mountain Pass rare earth mining and processing facility. It is a critical component of the transition to electric vehicles, and really the only mine of its kind to be able to produce rare earth elements for magnets, for -- that go into motors for EVs. I'm joined by Ryan Corbett, the company's CFO. The company has 178 million shares outstanding, trades at around $31, $5.5 billion equity cap, good balance sheet and net cash of about $600 million. So I will gives the floor to Ryan. Ryan, thank you very much for being here.

Thanks for having me. Hey, guys, thanks for having me. Obviously, as you mentioned, I didn't have to travel very far. Our corporate office is down the street, but nonetheless, very much appreciate you guys having me out. Quickly, before I dig into this, I think you did a great intro. So this may be redundant, and you did it a lot quicker than I would. But I will note from a safe harbor perspective, we will talk about non-GAAP financial measures, we will make forward-looking statements, so please take a look at our SEC filings for the appropriate disclaimers on those. I'll also note, we do report earnings on Thursday, and so we will refrain from talking about anything relating to this most recent quarter. And please do so in Q&A as well. But as was previewed so well by Brian, rare earths are critical components to the electrification of the automotive supply chain and many other critical supply chains for our future that represent growth. Industrial motion, robotics are really synonymous with rare earths given their critical functionality within the magnets that power motion. I call this [ the "now the" slide ], particularly at an automotive conference, but I think it's quite clear that the world is rapidly electrifying, particularly in the automotive space. We get a lot of questions about what's different this time. And from our perspective, you've got -- certainly, we're very close to California. Our facility's in California. We're proudly mining materials in a very clean and green way in California. And so I think what's very exciting about what is "different this time" is you've got governments really putting their money where their mouth is. And so for example, with California, not only are they focused on transitioning us from a product perspective to EVs, but they're also supporting the infrastructure and supply chain that's required with companies like ourselves to get us there. This is also the fundamental change that we are seeing in the market that positions MP Materials so well and that we're excited to capitalize on and further our mission into which is the complete change in the supply chain and a very marked change in the way automotive OEMs go about procuring their materials. It's not just the shift that's pretty obvious here in moving from petroleum-based to mineral intensive. It's also how thoughtful some of them have become in the way they think about security of supply and how they ensure that they don't trip over dollars to pick up pennies in the way that many had in the past. So to be more specific on where you find our materials, neodymium and praseodymium are the critical elements that are generally found together and will produce at Mountain Pass an NdPr oxide starting next year, that makes its way as the fundamental building block of permanent magnets. Those permanent magnets are found in the traction motors for electric vehicles as one of the primary use cases. As I mentioned, there are plenty of others, gearboxes for wind turbines, things like that, which is -- if you think about it, is sort of the opposite of what we see with the traction motor. But the really interesting thing about where we sit here in the vehicle is we are agnostic to the battery chemistry. We're agnostic to the propulsion source. It could be hydrogen. And I know a lot of automakers are still sort of holding on to that hope. And frankly, whether that wins out, whether it's solid state, whatever it may be, if you're moving to an electrified future, those vehicles are very likely or have to have a traction motor. And right now, north of 90% of those traction motors are permanent magnet motors. There is a fundamental advantage of permanent magnet motors versus the alternatives. We may get to this in the Q&A. But given packaging requirements, lightweighting, et cetera, that is one of the main reasons why you see such a high percentage of traction motors deployed with permanent magnets. So what does that mean for what we make? This is just a depiction. Obviously, anyone can pick their time frame for when we get to fully electrified and then maybe any many, many, many decades. But just to give a sense of scale of where we are. And frankly, this chart probably looks better this way, same idea. We have a critical shortage of the materials that we make given the growth in demand that we expect to see from electrification, taking hold in -- at a greater scale within just the automotive supply chain. That chart before was just fully electrifying the North American automotive fleet. And so a lot of folks ask us, okay, this is pretty scary. So what's going to keep you -- keep automotive OEMs from seeking alternatives? I think the reality of this industry is there are scale players like ourselves that have the ability to continue to grow into demand. But what we see as very exciting for the medium and long term is for an ex-China supply chain -- and one thing we didn't touch on quite a bit yet, but I'm sure we will, is just how dominated this industry is by China right now. North of 90% of the industry is in China. But for an ex-China supply chain to really grow at scale, you're going to have to continue to see higher prices. And where we sit on the cost curve, which is very unique for being an ex-China player, is we are one of the lowest-cost producers globally of these materials. So if the incentive price needs to continue to grow outside of China to drive incremental supply, as one of the low-cost producers globally, we expect to be able to benefit from that trend in pricing over time. So just to give a quick sense of our business plan and where we've been. In order to really stand up the rare earth supply chain in the Western world, which, as I mentioned, really doesn't exist at scale in the Western world, we've approached this in a multistage plan. So MP Materials was founded in 2017. We took the company public in 2020. We currently are producing under what we call Stage 1 of our strategy, which is producing a mixed rare earth concentrate that we send overseas into China to be refined into the constituent rare earth oxides and eventually make its way into permanent magnets and much of which find their way into the automotive supply chain. Given where we sit on the cost curve, we knew that multibillion-dollar industries are not going to move overnight. You'll hear a lot about this industry and folks that want to do everything at once, but the reality is this is hard work. We have a north of $2 billion of invested capital in this site. It's taken us many years to achieve the results that we have. And we have a methodical owner-operator culture that is focused on executing. And so we've started with the Stage 1, generated a significant amount of free cash flow that enables us to invest what is required to maintain our advantage from a cost perspective as we move further down the supply chain. So when we talk about Stage 2, what that will be is bringing the refining capability that originally existed at Mountain Pass back online. Our guidance on that is we expect to be mechanically complete by the end of this year. We expect to be ramping into oxide production next year. And that will enable us to access further markets outside of China to sell into, namely Japan, Southeast Asia and others. And then, of course, we'll be able to eventually sell into our own supply chain as we methodically move downstream and vertically integrate. And so our view has been that you need all legs of the stool really for this to be successful. And when you think about why the magnetics industry doesn't exist at scale in the United States and in the Western world, it's primarily because there is not the requisite feedstock to support it. And so we're solving the chicken-and-egg problem here. And we're investing our own dollars into what we call Stage 3, which is vertically integrating into rare earths magnets. I'm going to talk a little bit more about our strategy there in a moment. So to give you a sense of what we've been able to accomplish in what we're doing today in Stage 1, we're producing north of 43,000 metric tons of rare earth oxide and concentrate on an LTM basis, obviously, as of June 30. This is about 15% of global supply. So we've taken the site from a standstill in 2017 to 15% market share. Given what we've been able to accomplish from a production efficiency perspective and certainly a favorable market dynamic as we've seen demand growth become more obvious, that's translated into adjusted EBITDA of approximately $380 million on an LTM basis. And we're using the cash flow from our current operations to invest in our downstream strategy. And this is partially what the downstream strategy looks like in terms of the refining operations at Mountain Pass. What we're doing in a nutshell is, as I mentioned, there's $2 billion of invested capital on site. The vast majority of that capital, one of those facilities, worked phenomenally well under the prior owner. And for those of you that -- who don't know the history, I'm sure we can get into that if it's relevant in Q&A. But what we're doing is reintroducing a roasting circuit, which is well-proven technology in the mining and materials space, and investing in incremental product finishing capabilities. Given the slide you saw before in terms of the scale and the volumes that we're producing, the site was never set up from a refined product perspective to support all of that volume. And so we're investing in those capabilities to be able to support that volume. And so what that will enable us to do is produce at our target run rate over 6,000 metric tons of NdPr oxide, again, the fundamental building block into magnets. One of the exciting things, I think, that's also not super well understood about our vertical integration strategy -- and I'll get to the Stage 3 piece of it in a moment. But one of the most important elements of moving into the magnetic space is the ability to deal with the waste that comes off of manufacturing magnets. And what is the technology that's required to deal with that? It's this. It's taking the original piece parts and using solvent extraction and other technologies that we are well equipped to do. And so having all of these stages under one roof, I think, is one of the major competitive advantages that we'll bring to bear. We get that question a lot. Okay, Stage 3, why make that investment? What I just spoke to is one of the critical differentiators for us. And of course, as I mentioned, our mission is to restore this entire supply chain. And we haven't had magnetics in the United States because we haven't had the upstream. We've solved that first problem. And so the logical next step for us is to approach Stage 3 in the same way that we've approached the upstream, which is a walk-before-you-run strategy and disciplined capital allocation to get this capabilities stood up and then move into further scaling it. And so what we've started with is our initial facility in Fort Worth, Texas. It's about a 200,000 square foot facility. We're very pleased to have signed a long-term agreement with General Motors, where we will supply a rare earth alloy and permanent magnets for them into their LTM platform. This is -- the original design capacity is about 1,000 metric tons. And as we've talked about, our desire here is to expand significantly over time, as we think about and methodically take the learnings from this facility and apply them in a similar way that we've been able to do in our upstream business. With that...

Great. Ryan, thank you very much. Let's get into some Q&A, if you don't mind. And just as a reminder, we certainly encourage this to be an open forum to ask your questions. And pursuant to Ryan's request and all of our desire to stay out of trouble, no questions about earnings, please. So thinking about the considerable progress that's been made towards becoming a vertically integrated miner, what's been more challenging than you would have otherwise expected? And what are some tailwinds that you didn't expect to have encountered?

I'm sure this is probably an expected answer, but the reality is, I think, COVID and the supply chain concerns and issues that we've seen have really -- or frankly, the answer to both sides of that. I think from a challenge perspective, this is a several hundred million dollar project to restore the refining process at Mountain Pass. That has certainly been an incredible adventure in getting that done on time and on budget as much as possible. But I think on the same token, what COVID brought to the forefront is a realization of the fragility of our supply chain. And I think that, frankly, we've been on this mission since 2017, and frankly, earlier, when the original investor group identified this asset and identified its capabilities. And the view was the single point of failure risk is never going to be acceptable when we move to electrification in an industry as important to employment and GDP and all of those things, natural security as automotive. And so that has always been the view. But when you see, a, how quickly demand is growing for electric vehicles and some attribute some of that to things that occurred over the course of COVID, but very importantly, the shift in mindset for automotive OEMs, wind turbine OEMs, you name it, to understand that globalization, the way that we had it before likely is not going to work. And I think that what's so exciting for us is we don't need to have the largest market share in magnetics. We need to be thoughtful about how we allocate capital to drive our mission forward, and we see very, very exciting high-return projects to methodically get us there. And without that realization, in terms of the way OEMs need to think about their supply chain, this will probably take a little bit longer. And a perfect example is when we went public, we talked about magnetics being a 2025-plus event. And here we were December of last year announcing, "Actually, we're going to do it now," and that's really because we saw that demand pull from customers.

I'm really interested. This is clearly out of my bailiwick as far as it relates to my own career, but this refining -- let's move towards refining. Talk about maybe the purity levels that you need to make these goals a reality? You get physical development by the end of the year, but how long do you anticipate that [ proving strategy to take ]?

Sure. Well, for these materials, namely for NdPr oxide, which will be the building block that goes into magnets, there's a "market spec," 0.99 -- 99.99, whatever it is. And for different materials, they're a little bit different. But I think the thing that's critical to understand about our assets and Mountain Pass is the vast majority of what is needed to produce on-spec NdPr existed on site before we purchased the site, operated at scale, operated efficiently and effectively producing on-spec material. So we get lots of questions like this, how are you going to be able to do it? Well, we did it before. And what we're doing is introducing optimizations that, in fact, should make that easier. Make no bones about it, commissioning and getting all of these assets up and running is not a walk in the park. Commissioning any sort of scaled industrial process like this is going to take time. And we've been very clear that next year will be a transition year as we ramp this. This is not as easy as flipping a switch by any means. But I think one of the things that's unique about our asset versus if you think about a greenfield, generally brownfields are a little bit easier, but in particular, the piece that takes the longest to start producing on-spec products is the solvent extraction process. And so that's -- if you go on our website, you'll see our solvent extraction facility. I think it's in the top left of your screen. It's like 3 football fields long. That's all filled with solvent extraction cells of mixers and settlers. Those need to be at the right balance in order for on-spec product to come out. What's great is when we took over the site, that asset was shut down mass balanced. And so what otherwise could take 6 months, if we really wanted to, you could turn it on and have product come out today. You wouldn't have feed to keep feeding it. But that just gives you a sense of we have a nice head start from a variety of vantage points. And so that gives us a lot of confidence in us being able to execute on moving this forward. The historical know-how capabilities, intellectual capital is all there, and so it's just a matter of executing.

Also helps you don't have the massive debt that Molycorp had to deal with.

Yes. So you used the M-word. So yes, obviously, we've also positioned, to your point, the company to withstand whatever exogenous shock we could think of and also, of course, be prepared for whatever execution challenges may arise. I think we've -- we spend a lot of time thinking about controlling risk. And to your point, we've got north of $600 million of cash -- net cash on the balance sheet, $1.2 billion roughly of gross cash. And we've been very thoughtful about ensuring that we can withstand, like I said, most market environments. And in addition, we fundamentally believe in a business like this that our shareholders should benefit from what we see from the supply-demand dynamics in the market. So there certainly is plenty of operating leverage in this business from a price perspective. And so adding financial leverage when we are purely commodity levered is not something that makes sense to us. Will we continually reevaluate that as our business mix changes? Sure. But for right now, we think that's the thoughtful way to approach it.

When we were here a year ago, we were talking about $7,300 in realized price per metric ton, which was up roughly 100% from the prior year from $3,700. You are now at $13,900. So that inflation -- let's talk about discussions with your customers and what they are doing to be able to handle these increases in their own costs for whether it be rare earth or other parts of the supply chain.

Sure. Yes. I think the benefit that we have versus what I'm sure some of the other materials companies that are presenting at an automotive conference are most of the focus in this industry from a raw materials perspective is on lithium or nickel or cobalt or whatever is required for the battery. And clearly, the battery is a huge percentage of the bill of materials of an electric vehicle. The nice thing about rare earths is the magnet is a very, very small percentage of the bill of materials. Of course, with the mission to drive further EV penetration, every dollar matters, and we are absolutely committed to, as we move downstream, trying to be as cost competitive as possible on the magnetic side. But from what happens when NdPr prices go up a bunch, if they double or triple or whatever from here, the reality is if you look at the technologies and what the alternatives are, you've got an NdPr permanent magnet machine or you've got an induction machine. And a lot of folks will try to sensitize and say, okay, now leave the induction machine at price x. How much of the efficiency advantage of a permanent magnet motor do you get such a -- try to measure how much NdPr prices could go up to eat into that efficiency advantage? The problem with that analysis is in what world are NdPr prices triple? And the copper, 2x, 3x as much copper that's required in an induction motor isn't also up. And so that analysis is just tough to do. I think what I would say is that the fundamental advantages of a permanent magnet machine give us a lot of confidence in the demand picture. And so I think last month, we're at 94% of traction motors deployed from a kilowatt hour perspective were permanent magnet machines. That could go to 90% or 85% or 80% or you name it. And with the sheer volume of units underpinning that from a growth perspective, that's still fine and very good for us. And so I think that there's always a focus on being as effective and efficient as possible, but there's also a recognition on the part of many of the OEMs that right now, the trade-offs and any really foreseeable scenario from a commodity price perspective, making sure you've got the magnets is much more important than really worrying about if prices are plus or minus 20%, 30%, 40%.

We have a question from Chris in the corner there. One second, please.