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

Got it. Okay. A lot to chew up there. So on Stage 2, so as I referenced in the prior answer, but just to reiterate that because I think it's important and you asked. So we -- in our last call, we noted that we had begun commissioning Stage 2. And again, our Stage 2 is actually refining the rare earth and [ on pass]. That process is underway. We -- I hope that we did a good job conveying to the Street that these when you're doing real stuff when you're making real things, these are challenging complex processes, standing up a plant, even of what is not a greenfield because this is a functioning facility. It's -- challenging fits and starts. And I think we certainly experienced that the first time around when we were getting Stage 1 going. And so I think we hopefully conveyed a healthy balance of our appreciation for those changes. That said, as I previously said, we've seen no show stoppers. We're now -- was pleased to break some news that we're now producing and packaging roasted concentrate, which for those who are newer, what that means is that the -- that is sort of a key step along the way of refining because at Mount Pass, we're going to take a concentrated product, we roast it, and then there are a number of steps, but then we extract the rare -- the different NdPr outside again being the key one. So a number of the other stages, we've begun on the commissioning process and run rate target that we've stated is that we'll produce north of 6,000 tons of NdPr this year, and we believe we're on track to do so. Simultaneous to that is our Stage 3 business, which is our magnetics business, so we will take the separated rare earths from Mountain Pass. We will send them to our facility in Fort Worth, Texas, where -- and again, if you go on Twitter, you can actually see this for yourself. We sent out a picture. But we broke ground on that facility in April is the shell is done, and we're working on the inside. Now we've -- we have a deal with GM, where they will be the foundational customer of that facility. And we said that we'll be making magnets for them in 2025, but we still have quite a ways to go on long lead equipment and some of the other things that have to happen inside that building. And so these are 2 processes that are going in parallel. And certainly, our expectation, our deal with GM is not exclusive. And the output at Fort Worth, the if we send all the material to that facility that we've stated as the capacity of that facility, that would represent a single-digit percentage of our output at Mount Pass. So we think we have quite a ways to go as far as growth opportunity in the magnetics business. And Carlos, as you know, I've publicly stated also that in the magnetics business, I think that ultimately, our business can be bigger than what our current expected output is upstream because this is an enormous amount of supply chain that needs to get built for electrification and there is no champion in the West. And just -- for example, this morning, I don't even know if you saw, but Dell announced that they're going to -- after 2024, they do not want to be buying any chips from China. And so I think that there's obviously -- the semiconductor analogy is there, but we certainly are all aware of the deglobalization aspects. And so this supply chain, I think it's less about the short term, next year or 2 where will we be cost-wise. But over the longer term, as the scale happens, can we be competitive? And we think absolutely. We already are competitive in our existing business, so we think absolutely we can be competitive over time. And then I know you asked me 1 more question there, I forgot.

Just maybe walk us through the expected improvements in profitability as you become a fully integrated producer. And maybe go a little bit into the specifics of the realized price, as you mean from concentrate to oxide and then eventually permanent magnet?

Yes, absolutely. Well, the -- so the easiest way to think about it is when -- if you -- we sell currently a concentrated product where we don't get the full value for the basket of commodities and the concentrate. Once we are selling the individual products, we will get the full value for those products. Now if you sell into China, you still have to pay that. And to the extent that there are tariffs or other things like that, where the Chinese are taking advantage then we are subject to that. But to the extent that we are selling outside of China, we should be able to achieve market price. And if you can do the math, the actually -- the easiest way to follow the NdPr price is on Bloomberg, just go to the Shrapnox index. And you can see and you can do the math on if you take our concentrate in what is the rough mix and -- and really, you'll get 90-plus percent of the way there if you just look at the price of NdPr because that's the lion's share of our basket. So keep it simple and just look at the price of DPR and -- we actually -- if you go back about over a year ago now on 1 of our calls, we stated that we laid out some of those economics about the uplift in our business that we believe would go from Stage 1 to 2 to 3 NdPr was at a different level. And so you can kind of take some of those numbers and play around and I'll let people. We've never really given guidance. So I want to be helpful and guide you to an area where you could probably figure out some things. But I would look back at that call and kind of you can kind of extrapolate from there what the Stage 2 and 3 uplift would be. But it is quite significant. And again, as an aside, you announced this, but I think what's really important is we are profitable today. So we have a very good business today just selling concentrated product. And so the fact that we have the balance sheet and the existing business, particularly in an environment, Adam, as you noted in the beginning of how challenging this environment is, we think we're very unique in that we are -- we have this enormous growth opportunity in this vertical. And there's for lack of a better -- and now there's no gun to our head on time, we'll get there over time.

And maybe what can you tell us about the -- what more can you tell us about the contract that you have with the GM because there is certain states to add. At the beginning, you're going to be supplying alloy and metal and permanent later on. Can you give us a little bit more detail as to what extent they are working with you and understanding that maybe you are not going to offer the most competitive product early on. As you just alluded to, you need to have experience some economies of scale ramp-up and then bring the cost down and be much more competitive. But what were the discussions like? What were the key concerns that they had that you were able to address and when can we potentially hear about other contracts with OEMs.

Yes. One important just get into GM as much as I can, which isn't much, but -- I can be helpful there. But one thing to really note that I think is important that maybe goes unnoticed is that the magnetics industry today, as it's done in China, this is not ultra high-tech sort of state-of-the-art manufacturing from the standpoint of where there are no efficiencies to squeeze out. I think it's certainly fair to say metal making and magnet making in China is not as sort of safety and ESG focused as I think many western OEMs would like to see. And so there actually is an enormous opportunity to make a leap ahead from a scale standpoint. And again, I go back to the semiconductor analogy, where I think Intel started out as a memory company in 1970. And there were technological breakthroughs, but actually the name of the game in that business was about understanding supply chain and understanding scale and having efficient processes to produce not just something that was sort of a technological move forward, but also at scale and cost effectively. And the magnetics business hasn't really been thought of that way -- and it's very different. I mean there's obviously -- I'm not making the direct sort of full comparison, but I think it's sort of a cousin of that in the sense that we're at the beginning stages, and so there's when you do the math of how much needs to be produced that -- and the capital required to do this stuff that there's going to be a handful of leaders. And so I think getting to GM, I think what -- and again, I would prefer they speak for themselves, but I'll sort of say what I publicly said, which is what I think they see, and I think that they've been very thoughtful and sort of visionary on this front. But -- if we think about just take the rare earth space in particular, there was a fear in the rare space a little over a decade ago about the Chinese cutting off supply. And there was an incident in 2010, and then people freaked out and then everyone references that incident. Fast forward to today, this morning in the FT, there was an article about BYD, launching 2 luxury EVs in Europe to compete directly against BMW and Mercedes Nadi, and the cars look spectacular. And the Chinese OEMs have moved downstream. And so in industry like rare earths and some of this upstream supply that was historically considered a strategic the fear was there be an instant cutoff and then what do you do and the prices could spike. And actually, what has happened is this industry has been utilized -- and, again, this is just one, the semiconductor is the same thing and there are others, but I think this analogy is broad and important is this industry has been utilized to go downstream for that GDP in those jobs. And so actually, I think what they see. And I think I've pretty good reason to say this, if you will, but I think what they see is that over the next decade or 2, the winners in this space are going to understand that analogy and understand that there is a bit of musical chairs with respect to this upstream supply chain. And I think that when people think about this, what is the battery cost and all that is maybe they're not fully appreciating, Well, if auto production in many parts of the world is effectively a state-backed industry. Germany will have an auto industry. Korea will have an auto industry. the Japanese lab and auto industry will have an auto industry and the Chinese will have an auto industry. And what that means is that if we're at the beginning stages of an area where there's going to be production, but then -- the key to success is going to be the upstream. Well, you better have deals to get this stuff and you better have deals that even if you foresee that there's a lot of potential supply coming, you better make sure that you've got supply that is not a strategic exposure vis-a-vis your competitors because you may enter a scenario 3, 5 years from now, where it's not like there's a free calls where you can't get something, although that may be something, but it may just be that you're significantly competitively disadvantaged vis-a-vis some of these other OEMs. And so I think that, that was some of what was the driver for them. And I think that the key thing for us at MP is there are -- this is a once in a generation lifetime opportunity that there's an entire supply chain being created from scratch. And so there'll be a handful of producers. And I think they recognized someone needs to do this. We are years and billions ahead on the way to being able to do it. And so now we have the opportunity to do it, which means we have to execute, right? We have to get our Pages 2 and 3 done effectively, and then we have to significantly expand our Stage 3 business. But if you look at the alternative to us, the alternative is 100% reliance on a Chinese supply chain or -- and that coupled with reliance on a producer that doesn't even have the upstream to be in the game, so to speak. And so that puts us years and billions ahead and then now the burden is on us to deliver.

Any question from the audience?

I have a question. Can you hear me?

Sure. Yes.

Yes. Thank you for coming today. So I don't know that much about mining. So my question maybe completely wrong and ridiculous I'm going to ask it anyway. And I'm kind of interested on 2 vectors. One, the economics and costs of what you do; and two, the environmental impact of what you do. So as you get to this scaled up better unit economic platform, however you want to think about it. How much of that is kind of well-known cost curves around physics, right? We're doing physical things to physical things, and we know how that plays out. And how much of it could come in the future from applying things like AI or machine learning at various points in the process to become significantly more efficient at what you do.

Sure. Well, in our -- trying to lean in, and I think it was a little loud, sorry. In our space, in every don't overly extrapolate rare earths to all the other commodities because every commodity has -- if you're a shale, that could -- shale oil comes online in 6 months, and it's kind of pretty easy. So there's pretty much a price floor and a price ceiling and it's a different dynamic than so I want to preface it. But in rare earths, the key thing, and I go back to this point, and so if you remember nothing else, just remember, they are not rare. If you have a backyard, you have a rare earth mine. What is rare is having enough of that concentrated in it to make it economic to process it. Because the better way to think about it is it's like a specialty chemical, right? It is -- if you look at the pictures on our website and see the video and drive by, whatever, you'll see that these are much closer. They look a lot like oil refineries, right? These are multibillion-dollar facilities because it is -- when these things come together very closely on the periodic table, they are very expensive and difficult to separate. And what that means to answer your question from an environmental standpoint is when you have elements that are close together and difficult to separate, there's a lot of energy, there's a lot of water utilized. There's a lot of these things. And then to the extent that you're -- depending on what you're mining, the lower the concentration, the more the tailings or the waste. So the higher the concentration of the stuff that you start with, the less waste there is, the less energy, the less water and all these other things that impact the environment. What's great about Mountain Pass is we have north of a 6% ore body. So just to kind of balance this, most sites in China typically have like a 1% to 2%. There are other -- there's 1 site in Australia that's similar to ours. And then pretty much everywhere else in the world, they're like 1%, 2%. And then there's some of these others that are hope for projects, they're typically 1% or 2%. So we start with an enormous advantage with that. And that also means all the way downstream. So from all of those environmental aspects, that advantage just is really enormous because if you think about what you have to process versus if you're 6% versus 1%, you can do the math on how different that is. But also, we have a bass in a site ore body at Mountain Pass, which you're not a geologist. I know that won't mean anything to you, but suffice to say what that -- for us, what that means is that we don't have some of the -- you may have read about radioactive issues that some of the other sites have, we don't have those issues. And so at Mount Pass, we have, again, a dry tailings process, which effectively means you may have heard, if you think back to like battery Tesla's Battery Day 2 years ago, they talked about 1 day, the fantasy of being able to mine lithium, take it out of the ground and send everything else back to the ground exactly as it came. I don't know if you remember that. We actually do that [indiscernible]. We mine it out of the ground. We take everything else out. Most of the water that is utilized is reclaimed back into the process. So think of it as like a closed loop. And then everything else kind of goes back into the ground into a line [indiscernible]. So there's obviously -- if you have a liquid tailing, there's risk of the water supply, there's a lot more risk. So that is very unique. And typically, I think I want to say it's about 5% of mining and processing operations in the world utilize that because it's more expensive. There's more challenges associated with it. There are none in rare. So we have an enormous advantage economically at Mountain Pass. We have an enormous advantage that we have this ore body that doesn't have some of the other issues that other folks might have. But then also we sort of, hopefully, are making the investments to do so in an environmentally friendly way.

Thank you.

No, I want to answer your question on AI, because I think that's important. There's -- so when you think about a rare earth and then down to a magnet, these are really tight. I mean these are scale-as-a-business. And again, I go back to that semiconductor analogy. So I don't think it's I don't -- I can't -- I mean there's probably people out there selling a story about how they're going to use AI and mining and I think that, that's -- maybe that was more of like a 2021 theme. But I think that's really tough. But I do think that what I -- where I think you will see sort of ultra high tech applied is that going back to that analogy, I told Adam about magnetics being like 1970 semiconductors. Look at the movies and you see these cool electrified machines going around or magnetic weapons and robot dogs, dancing around...

[indiscernible].

[indiscernible], yes. The mechanical actuators, that will be specialized magnetics that make that motion possible. So I do think -- and we are, by the way, at Fort Worth, we're building -- we are the center, frankly, for lack of an alternative option, but we're building an incredible team. We've hired a lot of people, and we have a research lab that will be at our facility that will be the center of magnetics, we believe in the Western world where we're going to be working on a lot of this stuff. And so I do think, though, that the high-tech I don't know maybe it will be AI, and we'll be able to look at sort of graphical representations of different magnets that we see to come up with advancements. But I do think over the next 20 or 30 years, you will see enormous advances in magnetics that will bring to life these things that you've seen in the movies, but that won't be done by somebody in a garage. It will be done by just like the semiconductor industry, it will be done by people who have the resources and the scale to both see that make those long-term investments and then bring it to scale. And that's our vision for the company. That's my vision.

So is somebody like WEG Group in Brazil, are they a customer of someday or a competitor?

Sorry, I'm not familiar with WEG.

[indiscernible], right?

I'm not -- I don't know them well, but you may even like a Bosch or somebody who's like a motor supplier, okay. They are -- well, we don't make motors. So we would be -- they would be a customer of ours. But I think you're going to see in the early years -- I think you're going to see -- you will see the motor makers feeding into the EV supply chain. But what we've seen from a lot of them is that they realize how competitive this is, and so they're going to make them themselves. So you can see kind of some of them who are making them similar. So I think that over the next 5 to 10 years, the OEMs are moving upstream. And so the kind of the legacy motor makers will be challenged, but maybe one of them will emerge and -- but I think our customers will be both in the short term. And then in the longer term, I think it will be the OEM.

And maybe since we're coming out at the end of the presentation. What can you talk about -- what can you tell us about the -- how do you see the IRA impacting the EV, the rare earth, the permanent magnet domestic industries? And in particular, any potential benefits for MP?

Yes. So there are -- so IRA, obviously, the macro backdrop is very bullish for electrification and battery materials and all of the things that go into the supply chain. And -- but for us, specifically, there are 2 key things. There's 45x, which is 10%, and this is a perpetual tax credit of the operating expenses for critical materials. So for our stages 1 and 2 businesses, we will get a 10% tax credit in perpetuity for those annual operating expenses, which is quite an enormous amount of money, and that's great. Then -- and the regs are still being finalized, so it's unknown, but then there'll be 48c, which is a 30% investment tax credit for new supply chain. And so in theory, and again, this is still unknown as to kind of exactly how it will be implemented. But in theory, if you're building a $1 billion facility to make magnets, you get a 30% tax credit that's $300 million back to you from -- straight to you from the government, and those are salable credits. So that's effectively as good as cash. But I do think also the -- so those are the 2 things for us directly. And then I think as this incentivizes further investment, just in general, the fact that more supply chain is being localized means that there's more confidence that this stuff becomes reflexive on itself. And so it, obviously, makes it easier for any kind of upstream producers. And so we think we'll benefit from that both directly and indirectly.

Any final questions from the audience? Well, if not, Jim, thank you very much for joining us today. All the best in this transition year for you.

Thank you.