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

Good afternoon, everyone. Thanks for sticking with us for TD Cowen Sustainability week. I'm joined in this session by Ryan Corbett, the CFO of MP Materials, the only active rare earth producer in the United States with several growth projects on the horizon right now to get to NdPr oxide separation and ultimately, bringing the downstream magnet making capabilities to the United States with their Stage III project in Fort Worth. Ryan, I appreciate you joining us today. Looking forward to our conversation.

Yes, David, thanks for having me. Happy to be here. I appreciate it.

For those of you on the line that would like to ask questions, feel free to drop in the dashboard, and I will filter them in their appropriateness to Ryan. For those who may be unfamiliar with the MP story, Ryan, why don't you give us like an elevator pitch on how much of the rare earths supply chain MP contributes to globally and some of the growth projects that you have in front of us because you guys certainly have a full plate right now.

Sure. Yes. Happy to do it. And maybe I'll just kind of step back for those that are -- for those that need the introduction, maybe they also need a little bit of an introduction to kind of why rare earths are important. And so the way we think about our industry is, as the world electrifies and automates, the focus to the raw materials that are required to power that revolution has come to the forefront certainly for a lot of investors. So think of EVs, wind turbines, drones, robots, all of those items rely on some form of electrified motion, which generally, therefore, relying on lightweight and powerful rare earth permanent magnets to translate stored energy into motion. And so the key building blocks to those magnets is Neodymium-Praseodymium which you referenced, NdPr, our core product. And so with the use cases that I mentioned, EVs, et cetera, the demand growth in the industry is pretty self-evident. And so we are building capabilities certainly into a growing market. And on the supply side, I think the thing that's interesting and to some of the stuff you and I were talking about before we started, David, is railroads are a very different story, a different beast than I think what garners a lot of investors' attention, which is the lithium and battery mineral space. Today, 90% of the world's permanent magnets are made in China. Most of the sourced material and refining and metallization is there. And so as you said, MP stands is really the only source of these materials at scale in the Western world. And so our foundational asset is that we own and operate Mountain Pass, which is one of the world's preeminent rare earth ore bodies globally. It's been mined in some form since the 50s and with very conservative S-K 1300 compliant, of course, assumptions. There's another 34-plus year mine life left. Over $2 billion of capital has been invested in the site in the last 10 years to build a really the world's only fully co-located state-of-the-art mining and processing facility made to California environmental standards in the middle of the Mojave Desert. And to your question on sort of where are we in our dirty, what do we represent in terms of the industry right now. We've been executing on a 3-stage strategy since we acquired the business. And so Stage I is production of a mixed rare earth concentrate and so mining beneficiation, flotation, that's what we are doing right now, if you look at our financial results over the last couple of years, those have been driven by our Stage I business. Today, we are roughly 15% of the world's supply of rare earth materials. And we put those materials as one of the world's lowest cost producers of our current product. If you also look at our investments over the last couple of years, the investment has been targeted into what we call Stage II. Stage II is leveraging the existing assets in Mountain Pass, which is a state-of-the-art separation facility in the chemical plants making certain tweaks to the process flow to reduce operating costs, upgrade material handling capabilities to handle the record output that we've been able to achieve in Stage I. And with the completion of this, we'll be able to produce our own separated rare earth oxides in the very near future. We talked a little bit about our commissioning progress on the last call. I'm sure we'll talk a little bit more about that, David, coming up here. But we are also well on our way to the next stage, which we call Stage III. We will be taking some of that NdPr oxide produced in California and bring it to our facility in Fort Worth, Texas. There we have over 200,000 square foot facility where the building shell is effectively complete. We're well on our way on a lot of the long lead equipment. We're in factory acceptance testing for some of that equipment as we speak. And that facility is sized to approximately 1,000 metric tons of magnets, which we intend to begin selling in 2025. We'll begin selling a precursor product alloy flake at the end of this year is our target. With that, we have our primary foundational customer with General Motors to supply into their LTM platform. And so stitching that all together, obviously, to your point, plenty on our plate, but we've made I think, really great strides in the last couple of years, and we are solely focused on our mission to take a large portion of this critical supply chain from mining through to midstream processing to downstream magnet manufacturing and bringing that back to the U.S.

Maybe just before we get into some of the nuts and bolts of upstream Stage II and then Stage III. Now taking a step back because this is our sustainability week, can you talk a bit about some of the points of emphasis that you all have made? I know I can think of top of mind of dry stack tailings, the water extracting process that you have. What are some of the things that, especially as I get a U.S.-based company that you think of as sort of being like the gold standard of a rare earth mining operation in the most sustainably conscious way.

Sure. Yes, I agree. The dry stack tailings and for those that are not familiar, obviously, mining projects are typically associated with a liquid tailing with a retainage pond somewhere, which comes with a whole host of risks with that with the facility that's been designed and currently operating at Mountain Pass in our Stage I business. We have, I think, the world's only dry stack tailings process for rare earths, they're present in other minerals, but in very, very small scale. I think it's low single digits percentage of projects. And that's for a variety of reasons. It comes with incremental complexity and potentially cost. But for us, what it allows us to do is recycle the water that is created in our processing and flotation, milling and flotation process to effectively achieve and satisfy 95% of our processed water needs are achieved by dewatering our tailings and recycling that back into the system. And so when we step back and sort of think about sustainability, frankly, the most important thing before we even get to the environment is our employees. And so safety is top of that list for us when we think about EH&S broadly. So if you can't obviously, you can't operate the site safely None of the rest of that matters. And so we're proud of our track record there. We want to continue to build on that. We recently actually just surpassed 3 years without LTI. So over 2 million work hours, which obviously, you don't want to rest on those laurels. You have to work on that every day. And as we bring Stage II online and introduce new and more complex processes, we need to redouble our efforts, but we're obviously very pleased with that. To your point on the facilities, that absolutely is a big part of it. I think that the design of the separation process and the upstream process at Mountain Pass sort of took this into account from day 1, given in the 2010 time frame, the prospect of building this greenfield in California, you had to do a lot of things to satisfy those requirements. And so we sort of wear the environmental requirements of California as a badge of honor. And then on top of that, there's the element of starting with sort of an inherent advantage that's built into our ore body and our colocation. So there are a lot of things there that are unique, for example, our ore is bastnaesite ore and so that tends to come with lower levels of thorium and uranium found in the ore that makes sort of our disposal and waste management issues much, much easier to deal with, a lot less headline grabbing, obviously. And that's a distinct advantage that just is geologic. And so there's a whole host of things that we focus on, but absolutely to your point, being able to produce the materials that we do that are so critical to this energy transition and do it in the way that MP does. I think there's a lot of appeal to a lot of downstream customers. We're continuing to invest in incremental studies and reporting of sort of how we compare versus the industry, obviously, with such a significant portion of the industry operating in China, the data coming out of that is relatively opaque. But there are third-party studies out there that try to compare what does it look like from an energy, GHG emissions perspective, taking a magnet that used rare earths coming out of Mountain Pass versus name your other -- name your other ore body, and we continue to compare really favorably. And we think that with the changes that we've made to the process flow with Stage II, that need hopefully will continue to get even better. We're going to walk before we run. We're going to get those results out there before we tout them obviously. But that's certainly the goal and the vision.

Maybe we can talk a bit about Stage II now since you introduced it. But the -- I see CH2 as very interesting in the context that MP has a core business that sells a rare earth concentrate -- and mixed rare earth concentrate that has a very, very strong margin, right? You manage your ore body, like you have the bastnaesites, you don't have separating and storage of perhaps harmful elements like you have a high total rare earth oxide content in the ore and you had an existing infrastructure in place, right? So how do you sort of think about when the pace of ramping Stage II with the cost of associated with doing that. Obviously, Stage III is iterative, and it depends on having inputs from Stage II, but you don't need that from stage II. You talked about like sort of walking before you can run. And you guys have talked about getting to that run rate capacity by the end of the year. But how do you sort of put that whole Venn diagram together of like even if we just did Stage I, we're a really good business. We're not going to grow, but we're making a lot of free cash, right? And the downside case is not so bad, but we have this other endeavor. We told the market we're going to ramp to this. We're developing Stage III, getting the downstream magnet is really important, but we only need 600 tonnes a year of NdPr. So how do we think about all those things? And maybe we can talk about like what's the next in the Stage II process before we even think about how fast we want to ramp now?

Sure. great question, stuff that we think about quite often. And I think the huge benefit that we have is when you think about the volatility in pricing, we started $1.7 billion ahead of everybody else, right? Are you going to go and build a Mountain Pass today even with the fact that it is one of the world's preeminent ore bodies? Are you going to build that at today's prices? Who knows? And so we obviously have a distinct advantage, and it speaks to I think to your point, I guess, if you're looking at it from an investor's perspective, from a downside perspective, the asset value implicit in Mountain Pass is absolutely tremendous. However, with the fact that we've got our integrated strategy that we are executing on, we've built this business with the fortress balance sheet that we have and we've started in such a favorable capital position that we're able to withstand this volatility to put the business in the position to benefit from the upside in prices, right? And so we don't think that NdPr is going to be $60 or $70 forever. We think that the laws of supply and demand absolutely are relevant in this industry as they are in all industries despite some of the influence from some more opaque markets in China. And so we want to position the business to capitalize on those opportunities. And so from a strategic perspective, we've got our initial stage III business. We're very excited about Stage II. Yes, Stage III draws a small percentage of Stage II. But as we've talked about, we think that the opportunity set for us in Stage III is many multiples of what we're executing on right now. And so we are building a bigger, broader, fully integrated business. And certainly, while the uplift in earnings is different at different prices of our commodity, it's still present, right? And so particularly with the level of invested capital that we started with and even at lower prices, looking at the return on the invested capital that we've put in place since we've embarked on our stage II, even at lower commodity prices is still quite attractive. It gets more attractive as the price goes up as with any commodity business. But that is the uniqueness of what we were able to put together with Mountain Pass and the assets there. And getting into the nitty gritty of pace of ramp, it's a good question. And I don't know if you asked -- somebody asked it on the -- on our last earnings call where Michael, our Chief Operating Officer, kind of spoke to this. But to your point, in prices in the 60s and 70s, it's very unique to see what we are doing where we've got the entirety of our revenue-generating business in Stage I. Effectively going from being a revenue product to being consumed downstream run through our circuits and then turn back into a new revenue product. And so when that pricing uplift is less powerful, do we have every incentive in the world to just go pedal to the metal just because that incentive is less, of course, the incentive is to be thought of. I think we would always be thoughtful, but it's certainly a fair point. And so we're not focused on just generating volume to generate volume because we said we'd generate volume. We are focused on generating the best return for our investors. I think we were talking a little bit about this too. Our management team is -- are uniquely large shareholders in this business. We care about cash flow and we care about doing the right thing over the long term. And so we continue on our plans to ramp the Stage II business. But we obviously will continue to always be thoughtful and respond to the market. But from what we see so far, and we talked quite a bit about this in our most recent earnings call, we're encouraged by the progress that we see.

Based on -- for based on what you know engineering-wise is Stage II, as you scale the process, as you start to feed -- consume all of the 42,000 tons of REO in the Stage II process. Is the yield assumption like held constant for what NdPr you're going to make at those levels versus if you just fed 4,000 tons of REO. Is it like -- is it static throughout the tonnage that like your yield is still going to be x percent?

So it's a great question. Obviously, I am not the technical expert, but from a financial modeling perspective, what I would say is first of all, introducing the drying and roasting step that was a critical piece of our investment in Stage II. The nice thing is not all 42,000 metric tons of REO have to go through all the processes. We get to separate off early on in the process in the leach stage, a significant portion of the thorium. And so in that portion of the process, we are able to really dial in what our recoveries are in leach of the REOs that we want and then the rejection in leach of the REOs that we don't want. And with a well-established upstream track record, we expect to be able to achieve that. And we've seen those results already. Certainly, in answering your question more broadly, there are always puts and takes as you feed the facility at different throughputs. But I think in general, you can -- once you get through certain processes, as I laid out, the downstream should track rather linearly. But I think the most important thing is that I kind of look at Stage II and our progress there as the chemistry to your point, kind of what you're getting at recoveries and then sort of the mechanical blocking and tackling of getting the thing constructed and running a run rate. What we are seeing so far is the chemistry is working as we intended. And it is just chemistry. It's a big chemical plant. And so with that, it gives us a lot of confidence, whether we're running at full run rate immediately or not that the results that we intend to get, the cost position that we intend to occupy will be there. Of course, as with anything, when you've got labor involved and all those other things, volume makes a difference to your cost position. But interestingly, the difference between Stage I and Stage II is Stage II is highly variable cost driven, right? There are significant commodity reagents involved. There's a significant amount of variable energy involved. And so there is that element where if you're producing less, the diseconomies on a volume perspective are a little bit less. But what I'd say is we continue to think that from the results that we've seen so far in commissioning, we're on the right track from a chemistry perspective. And it's just a matter of kind of debottlenecking and blocking and tackling as we move through each successive stage in the commissioning process.

I guess that -- where are we right now, I guess, with stages of testing? Because I think last we left off on the earnings call was testing the asset leach process, if I'm not mistaken?

Yes. And frankly, not a ton of updates to give you in terms of breaking news here, I'd probably kind of reiterate the commentary that we had put on that we discussed on the last earnings call, where again, our goal is to continue to execute towards that target. This quarter, to your point, we have begun feeding product into our leach circuit. The expectation that we talked about is to get through the impurity removal circuit, the bulk separation circuit where we separate lights from heavies and then begin sending feed to the individual separations building where we'll get separation into NdPr within the quarter. So that would allow us then to start turning our focus once we accomplish that towards the finishing aspect of the business, which doesn't get quite as much industry or investor attention, but I think it's absolutely critical to maintaining on-spec product is ensuring that we've got our finishing assets dialed in. And so that's sort of where we are. So no material changes to talk about since the earnings call.

Okay. And I guess when you think about the price of NdPr enduring the volatility and making decisions around that, right, it's -- I know everything is sort of long-term oriented. But do you all have views on like what you think the incentive price per kilo is on just maintaining production of NdPr? Because the industry is growing at, call it, 20% a year, right? If China quota is proxy for the industry right now, then effectively, that's where the market is. And I suppose we can talk about like what happened in the beginning of the year with the price collapse and a lack of Chinese bids in the market and maybe destocking of inventories and the fact that EVs are not the majority of demand right now. But I guess, like as you kind of square all of it together and you look at from the vantage point of having the most prolific orebody of rare earths in the world. What do you think is sort of like the mid-cycle incentive price on a per kilo basis that you think is worth underwriting?

A lot higher than today's price. I think, obviously, it's hard to pinpoint perfectly because the thing that's a struggle is really understanding what the actual cost structure of -- of what -- of the swing producer, right? And I think the swing producer, the cost structure there is significantly higher than where we see pricing right now if you're looking sort of at equilibrium. And so to your point, we could spend a lot of time trying to fit a narrative to what happened at the beginning of the year. I think in general in this industry, when you've got a relatively thinly traded market that has 0 financialization and is purely a spot market, small gyrations, very small changes in supply and demand can cause pretty outsized moves on the pricing in the short term. We're much more focused on the medium and long term and kind of to your point on trying to back into some sort of incentive price. I think the reality is that you have to think about not just where do these businesses potential projects breakeven, make money. But when you're underwriting some of these NPVs and IRRs and all these things that some of the developers put out there is like, what is their cost of capital in order to actually get these things in process, everything on a piece of paper, it looks great. But what is the real cost of capital. And I think with pricing doing what it did last year and then pulling back this year, so in other words, volatility. I think the volatility has arguably meaningfully raised the cost of capital for new projects. And so if you're raising the cost of capital, I think that, that it's all interconnected, but that actually raises, I think, the shakeout price, if you will, as to where this needs to go. But it's likely north of $120 at least, I would think, to even start thinking about in general, what are incentive prices, but it's so dependent on what project you're talking about. I think that the interesting set of dynamics that we face are that -- and you talked about Chinese quota. There are certain producers that aren't even producing to their quota at this point. And I think what that speaks to and again, the data coming out of China is very opaque and there's cross holdings and JVs and things that make it particularly difficult to understand exactly what the economics are. But Jim talked a bit on the last call about our view of profitability of the Chinese industry, where a lot of these prices. I think they got a decent amount of attention. But I mean that's what we see. That's what we've -- it's not perfect data, and it's from conversations and our own analysis, but that is what we see. And so in terms of trying to think about, how does that influence our decision making, what we fundamentally believe is that there is a supply-demand mismatch. We've talked about before the tripling of demand if you come up with reasonable assumptions for some of these new growth areas. And the reality is, from a supply perspective, there's no chance that we triple supply. There's just not. And so what we need to think about is, therefore, where does supply come and meet demand and what does that mean for pricing? And so we heard a lot about certainly discussions on substitution and things like that, driving some of the short-term changes. And the reality is that we see that in order for supply to meet demand, pricing is going to have to go up and demand is going to have to come down versus what's on everyone's Excel sheet. And so that's the reality. I think the last thing I'd add is what's new in the last couple of years, which I think is fascinating, is this has been talked about for a long time, but it's just finally happening. China is the world's largest exporter of automobiles now. That has never happened before. And that is a sea change in an incredibly important industry for us and for raw materials writ large. And so the rare earth industry is a tiny piece of that puzzle. And I think we're -- if we're going to speak about China as a monolith, which it's not. There's a lot of different decision makers and a lot of different incentives across the industries and across our industry. But I think the overarching goal from a central planning perspective is ensure there is enough new material to meet the growing supply of automobiles coming out of that country. And so if you just think about that fact, I think that the incentives are to make sure that pricing is healthy enough to incentivize new production there because that's not free.

Yes. That's fair. I'm curious just on -- I hate to ask so much on Stage II, but I think it's just like an interesting intellectual exercise and capital allocation is. You talked about being, I think, it was $1.7 billion ahead of competition, right, but also probably 7 to 10 years, right? So in the event that something like Stage II is not performing where you want it to be? Does that become something where we're willing to devote intellectual capital to solving it, but not necessarily financial capital until we're confident that it's there. Let's say that the recoveries or the yields are they're just not acceptable, whereas perhaps we could make NdPr, but we're not doing it efficiently. And we think that maybe $500 million of spend would solve it. Like how do you think about like that iteration? Or is it really something like that's not really a practical outcome. It would be more like we're going to be testing things for things like recovery at much more limited quantities until we get recipes correct and it would just be a function of time, not capital dollars.

Yes. Look, I don't think, hopefully, knock on wood, I don't expect this to be an outcome that we need to wrestle with. And I think the thing that's interesting for MP, I mean, you've seen -- and I think a lot of investors' minds are colored by the one other only greenfield production site that came up had a pretty challenged ramp process and probably had to make a lot of those decisions because they didn't know if the yields were going to be there. Obviously, eventually, they've gotten there. For us, the vast majority of the infrastructure has run and has run at scale. And we've got many years of experience under our belts with a lot of the folks that designed and operated those processes under a prior operator. And what we've seen from the changes that we've made to the process flow is that we believe they don't just work on paper, they work in reality. This is not new technology, right? The introduction of roasting is something that actually was pioneered at Mountain Pass and was done for many, many, many decades. And so this is not like there is -- at least in my mind, a question as to whether the chemistry works. And I think to the points that I made earlier, I think what we see so far from the chemistry is extremely encouraging. And so if you if you sort of segregate the chemistry and the mechanical, there are going to be mechanical issues that we hit, hey, this is a bottleneck that we didn't think was going to be a bottleneck are we going to throw some capital at it? And generally, at almost any price not any price, but almost any price. Those problems tend to be small enough where you put some capital into it and you get it addressed. And so that is generally where I think we're going to be. And hopefully, that kind of gives you a sense of at least where the types of decisions I expect to have to be making.

Absolutely. I appreciate the straightforward answer and fulsome answers. I know we're a little bit over time at this point. I always feel like every time we talk, I want another 30 minutes, but it's a good problem to have. But Ryan, I appreciate you and the MP team joining us for our sustainability week. I'm looking forward to connecting with us again soon. Best of luck.

Thanks, David. Take care.

Appreciate it. Thanks, everybody.