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

Okay. So good morning. It's a small audience, I think. But Ryan, thanks for being with us. Ryan Corbett, is the CFO at MP Materials. So I think we're just going to kick it in. I think this is webcasted as well. So I'm sure people know virtually, where the company. A big topic for investors right now is Stage II ramp up, the timing, maybe some of the challenges as well that you're facing or could come along later this year and then maybe cost profile, I think, is a big topic for people.

Sure. Yes, happy to cover them. Thanks for having me. Happy to be here in person and virtually. So I'm happy to start up with Stage II, undoubtedly a big focus. It's something we've been working at for quite some time, and we're really in the throes of commissioning as we speak. Our Chief Operating Officer gave, I think, a pretty good rundown on exactly where we are in the last call. And there's not a ton of updates from that call. What we talked about there is, certainly, we've made a whole host of progress on the most upstream piece of it, the drying and [ calciting ] roasting circuit. We've moved into the leach circuit and enter doing leach reactions. And we intend within -- in the quarter to be further downstream into separations, which leaves the back half of the year to continue dialing in all of those processes and then the downstream finishing process, which is super, super critical. The way I think about kind of progress and how we measure it, how we think about it is the downstream process, the Stage II process, particularly vis-à-vis Stage I, Stage I is kind of our end science, right? Making a high-quality, low-cost mineral concentrate is extremely difficult. I think it speaks to the quality of our team and our ability to execute the fact that we've been able to make the strides that we have on that piece of the business. Obviously, leveraging that now for Stage II. In the Stage II, the chemistry is the chemistry, right? It's sort of pure science at that point. And so the way I think about measuring success is looking at right now the chemistry results versus sort of what are the mechanical results. The chemistry results that we see so far are extremely encouraging. We obviously laid out, when we went public in 2020, sort of a profile to think about the business. Commodity prices have changed, both to the up and downside, many times since then. But hopefully, it gave a little bit of a framework for how we thought about our run rate production profile and cost profile. I think the very good news kind of hitting on both the progress question and the cost question is what we've seen from our initial commissioning is the chemistry is doing what we thought it would do, which is I think the critical piece. The mechanical stuff is always difficult and occupies a ton of our time trying to get it right, but it's imminently fixable as we run into issues. And so a lot of times, we get pushed pretty hard on timing, timing, timing, timing. And the reality is when you sort of separate that, now that we continue to feel good on the chemistry side. If I told you exactly how the mechanical side was going to go, I'd be lying because you don't know what's broken until it's broken. But launching and commissioning and recommissioning a site of the scale that we are, you're always going to run into those issues. And so, so far, we've been able to manage through them in the circuits that we've sort of tip through as we continue to move downstream. I think our team is going to continue to keep pushing and working hard to work out all those kinks that we possibly can. We've talked about our goal to get to run rate by the end of the year, and we're going to continue working as hard as we can to get to that goal. I think the interesting thing, obviously, commodity prices have changed quite a bit. And so it's one of those things where -- the nice part is as anything goes -- if and when anything goes slower, we've got our Stage I business, obviously, generating significant cash flow even at these prices. And so what we want to do is make sure as we execute on this, we are focused on the long term. We're not going to hit volumes just to say we hit volumes and then come back down, particularly with prices where they are. We're going to be thoughtful. We're going to execute thoughtfully to get the business set up for success and for long-term production and long-term production growth and to come down the cost curve. Talking more specifically on your cost question, I think, we'll see what we see. I think that one of the most critical elements to the cost structure is sort of exactly what I laid out before, chemistry. And so if we're getting the yields of NdPr in solution, we're getting the rejection of cerium that we expect, those are going to be the most critical elements of -- or some of the most critical elements of driving the cost structure. When we laid out sort of how things theoretically would look in 2020, a lot has changed since then, not just in our commodity, but in the commodities that we consume commodity reagents. So that's a big one that we obviously need to keep an eye on that has an impact to the cost structure of the business. Energy is a big piece. That's gone up and come back down. We luckily have a lot of energy infrastructure, our own combined heat and power plant on site. And so those are sort of the puts and takes. Our hope, as we've been able to do with Stage I is can we continue to even get better than what we laid out as we have on Stage I with what our yields are and what that means for the plant? Hopefully, yes, over time. And hopefully, there's that push and pull on the cost structure of reagents are going to do what they do, energy is going to do what it does. We don't have control over that. But the parts that we do theoretically, hopefully, have control over are the other pieces.

Makes sense. And without questioning you too much on the time line, I think you're going mention by the end of the year, right, for Stage II, which gives you a little bit of room for flexibility. What would be your best-case scenario? Like do you think you could reach like a full ramp-up by September and October is already everything align and goes well or...

I would say for time line, what we laid out in the call was getting into separation this quarter, right? And so we're coming to the end of this quarter. We'll obviously update you guys as we go. We'll update you on the next call, of course. But what that leaves is 6 months to get all the finishing dialed in and then obviously dial in the rest of the plant. And so again, trying to bracket it is difficult, right, particularly when what we're dealing with is on the finishing side a lot of brand-new assets. And so again, we're going to be very methodical, and we are just as aligned and focused as investors are on getting this up and running as quickly as we can. And so we will keep you guys updated as we go.

Makes sense. And just to rebound on the cost because I think investors focus a lot on it on a quarterly basis, right, even as we go into 2Q and 3Q. What do you expect to see some like opportunities or a profile that is similar than what you saw in 1Q? Or do you -- I think, like most of the hiring like new staff. It's also has been done, right?

Yes. Yes. So from a cost structure perspective, particularly when we're looking at kind of the Stage I business, what you've been able to see is if you strip out the investments that we've made in the cost structure to prepare for Stage II, we've had a pretty stable production cost profile, but you have seen those costs for Stage II continue to flow in as we get closer and closer to oxide production. And so I do expect those Stage II-related costs to continue to slightly tick up ahead of actually producing that product in sort of attaching it to the oxides. So I would expect that to tick up a little bit. Other than that, there are not massive changes. Generally, the world is still seeing some level of inflation. We're not immune to that. And so we still do see a little bit of that impact. And so I'd expect Stage II cost to continue to flow in. And then the one thing to think about from a quarterly basis, obviously, as we talk about our biannual plant shutdowns, which drive some incremental costs in the period, both from a denominator effect of often lower sales and production and on top of that, the incremental cost of doing the turnaround. And so that is something to think about coming into this quarter as we did that. We had a very successful, probably our -- one of our most successful turnarounds in the mill and flotation plant and tailings plant. And so those are sort of the puts and takes in the near term.

Makes sense. And then you talk about energy cost rise, obviously being up. Do you have any hedge, like a hedge solution in place to kind of protect you or...

Yes. We've talked a little bit about these. We do have some hedges on for natural gas, since we have our own combined heat and power plant we have hedged some of that exposure. Those are -- some of them are longer dated, and it's only a hedge for part of our consumption profile. And so as we bring Stage II on consumption of power, and therefore, consumption of natural gas will continue to tick up. And so the proportion of our business that's hedged will actually come down a little bit, which, frankly, with prices, where they are right now is not necessarily a bad thing.

Makes sense. So that's Stage II. You guys are now going to go to Stage III, right, which is already started and ongoing. How confident are you to be able to have, I would say, a smooth transition, right? So it's a very different business model being upstream and being a miner that has been fully integrated and tapping into the downstream part of it.

I would put our move into the downstream in context of sort of what we originally saw in -- we went public in 2020. We said Stage III, very exciting magnetics opportunity is clearly there. It's a 2025-plus event. And here we are in 2023, and we've got a 200-plus-thousand square foot facility basically built and long-lead equipment on order, and we've built a world-class team and we're getting geared up and ready to go. So to your point, it has come very fast and furious. The reason we did that is because we saw this market opportunity -- it's sort of like the legs of a stool in terms of building out the supply chain in the United States. We have always been clear even when we thought magnetics was a little bit further off that our goal is to bring all legs of the stool back to the United States so that we have a secure, sustainable, growing rare industry here. And I think we've also been clear, we don't need to be the only piece of the stool. I think what we hope to see is a growing magnetics business broadly in the United States. And so this is sort of our first step into that. And the way we've approached this initial investment at our facility in Dallas-Fort Worth is frankly similar to how we approached our Stage I and II strategy. We've got a lot of questions in the very early days of why make a mineral concentrate and sell it to China. Well, that's the only place you can sell it, and that's how you generate free cash flow. Learn dialing your processes, don't make that investments and methodically approach entering into the separated products business. We're doing the same thing here, where we're taking somewhat of a bite-sized approach, where this facility, the design capacity that we've talked about is 1,000 metric tons. That's a very small minority of our upstream capacity. And so we want to be able to take this facility, learn from it and be able to make investments in the future that are informed by our progress on this initial facility. And so with the team that we've built pretty methodically over the last 2 years, we feel very good about the progress that we've made to date and being able to execute on what we've laid out, the vision that we've laid out. And hopefully, that's just the beginning of a pretty exciting opportunity.

So are you seeing that plant like kind of a not a demo plant because it will be up and running, but as kind of trying plan?

It's certainly bigger than a trial. No, look, I think that there are opportunities for us within this existing plant to get to world-class operations and specific pieces of the magnetic supply chain. There are -- we talk about it in broad brush strokes. [ You've gotten ] okay, oxides, magnets. There's a lot of steps in between there. And so you need to take it, you need to go through electrowinning process to make an NdPr metal. You do strip casting to get to an alloy flakes. You need to take that, press, center, finish. There's a whole host of steps in between. And so I think the reality is it's not like doing the small solvent extraction plant and then scaling it up. It's -- there are a lot of different ways that you can approach those various process steps. And so I think that we will be very significant commercial scale. I mean thinking about it, yes, thousand tons in the context of nearly 200,000 tons of the industry, small potatoes. But in terms of what's present in the Western world, it's massive. And so from that perspective, it's in some ways a big bite, but it's a bite. And we will continue to learn from that facility and find ways to grow our footprint downstream. And our focus in everything that we do is risk-adjusted return on capital. And so in going into a new industry per se, higher risk. And so we are very focused on approaching the structure of our commercial arrangements, the way we do business to control those risks. And so from that perspective, I think the very exciting thing is even with that and also being very clear that we're not going out there and saying, in this facility that is subscale versus some of the Chinese plants out there, we're not trying to tell anybody we're going to beat China on pricing. That's not the goal. The goal is to get into this business and continue to find ways to scale just like in the upstream. Scale we get scale, and scale is the way that you unlock some of the economics of the business. And so that's one thing that we'll be focused on over time.

That's interesting. So you mentioned, obviously, growing the footprint like the downstream footprint. Can you expand at this facility? Or would you have to build other plants or look at further opportunities?

Given the fact that this is a greenfield site, we have been clear, the initial design capacity is 1,000 tons, but there's room to expand it. We haven't put color around that. And that's mostly just because there are a lot of different ways to expand. And so that is something that we look at quite a bit, given the fact that we've talked a little bit about this before, even in our current state of operations sort of before being in commercial production, we absolutely are supply-constrained, not demand-constrained. It's clear the demand is out there for our product, a fully domestic ability to trace source material all the way to the mine site through all the production steps in a rule of law jurisdiction. That has a lot of appeal to a whole host of industries. And so we absolutely see a very clear market opportunity. We want to, of course, not be shortsighted and assume that this exact market opportunity last forever. We want to be globally competitive. And so that's how we inform our capital allocation decisions on how, when, where to scale up or not.

Okay. That makes sense. I want to shift maybe a little bit the focus from the operation to go more into competition with China, maybe as well the industry. Obviously, you mentioned the pricing and the spot pricing that has fluctuated quite a lot. So let's start with the competition. China had mentioned a few months ago about potentially banning the export of knowledge, right? How do you view that? Do you already see that as a threat or no?

I think, frankly, it speaks to the criticality of what we're doing. We -- the rare earth industry in a lot of ways started at Mountain Pass. The site was discovered in late '40s, started producing in the 50s and just been in production in some way, shape or form since then. And so a lot of what's done in rare earths originally was learned at Mountain Pass and like many of our industries sort of found its way over to China, and they've been perfecting it for the last several decades. And so the way I think about what's happening in our space, you have to put it in global and geopolitical context. China just became the largest exporter of vehicles. That is a huge sea change. If you told that to Japan a few years ago or the U.S., I mean, that's crazy. And so with the EV revolution coming fast and furious, this has been part of the central plan for the last 25 years plus. And so I think we're also just the tip of the spear for that. And so what I expect to happen is Chinese industry will focus on Chinese industry. And in order to ensure that BYD, Xiaopeng, Nio, their OEMs have the requisite amount of rare earth materials to continue to gain market share in electric vehicles, Chinese industry will focus on themselves and making sure that they've got that security of supply for themselves. I think overall, that's actually probably bullish for pricing because this stuff is not free. It doesn't grow on trees. The cost curve is sloping upward in China, certainly. And with -- and to their credit, more focus on environmental control and pollution control and things like that, that's certainly been the upward pressure that we've seen. And so if the overall goal is to ensure that Chinese -- the Chinese market is sort of protecting the much bigger dollars that are at stake downstream, that really means that the rare earth industry needs to focus on thoughtful, profitable growth. And again, I think that's -- to the extent we continue to be indexed to those prices given the preponderance of production and consumption occurring in that country, I think overall for the medium to long term, that actually bodes quite well. Certainly, commodities do a whole host of things in the short term. And with a very concentrated market and a spot market that is not financialized in any way and is relatively thin, small gyrations in supply and demand tend to have outsized impacts on pricing in the short term. And so we've certainly seen a little bit of that recently. But I think, obviously, the focus more on medium and long term, I think the incentives are clear.

Makes sense. And we'll come back to the pricing. I keep it, sorry to [indiscernible]. I know it's such a favorite question. Substitution risk, so 2 parts of the question, adoption of rare earth magnet. I mean, we saw Tesla mentioned it few months ago that they would move away. I think there was a little bit of a panic news, right, from investor on this. Do you believe that's a real risk? Or do you think it was just more like maybe a one-off in the industry?

Look, I think that if you, again, put that comment in context of what was said, what was said was demand for these materials is skyrocketing. Supply is limited. We're concerned. That was the real comment. The other comment was we haven't invented a new magnet. So if there's a permanent magnet that doesn't use rare earths, there's really one type I can think of. And I think what they can get back to is every OEM needs to be thinking about this. And there are sort of 2 ways to approach it: focus on ensuring you've got the supply or focus on insurance policies in case you can't get it. And so those are sort of the options that all OEMs are exploring, as they should. I think the other thing to think about is we've talked about on some of our prior calls is if you look at demand growth, and this demand growth has embedded in the calculations and assumption that there is some substitution. So to be clear, I don't think anyone is out there saying, every single electric vehicle out there is going to have permanent magnet on it, because it's not. And the point that I'm trying to make is it can't. If you look at the numbers that we had laid out, I think it's something like demand tripling through 2030, something like that. There is no chance supply is tripling through 2030. There's no chance. And so what does that mean? Supply and demand have to meet somewhere. Again, bodes well for medium- to long-term pricing, but it also means that there needs to be some substitution to pull demand back in, given the reality of adding supply in this business. You cover the lithium space. The supply-demand dynamic is a little bit different, particularly on the supply side. It is incredibly difficult, not saying it's easy to add lithium supply. But I think from the perspective of bringing a scaled source of rare earth materials online is outrageously difficult. And so I don't -- I see that this substitution is absolutely healthy if it comes to pass. I think the last comment I'd make on that is with those elements of potential substitution, there are always trade-offs that are being made as it relates to motor technology. That's always been the case. It will always be the case. And so a lot of them are economic. Some of them are supply-driven, some of them are geopolitical. But there are always going to be trade-offs in terms of what functionality can and can't I get, what are the levels of efficiency and things like that. For an electric vehicle that is basically sort of a big piece of industrial equipment, kind of big robot with a massive battery, you can make those trade-offs in certain instances. For drones, for robotics, certain other applications, where the space constraint is much more intense, there is not that opportunity. There is no way to achieve what needs to be achieved with a different magnet technology. And so I think that's important context to remember is, yes, a lot of the growth is coming from electric vehicles. But again, I think the most recent data I saw was still north of 90%, I think it was 91% or 94%, of kilowatt hours deployed in the last quarter of EV motors were rare earth permanent magnet motors. I mean that is exceptional, and that speaks to the obvious advantage of the technology. And so there are always going to be decisions on do I make trade-offs with that type of technology. But I don't expect it to be north of 90% forever. And again, I think that's the right healthy answer.

Yes. That's very interesting. And kind of bring me, I was going to try to find maybe the mix between you have the demand from EV for wind turbine, traditional market or application, your phone, your mic. And so how do you see that evolving by next, let's say, 2030 to kind of give back to the medium-term range?

Yes. There's, I mean, lots of data out there for folks that spend all of their time focused on just this. But if you think about the proportion of the market today that is not EV and wind, 80% of the market. And so a lot of people are -- which is in a lot of ways, good things, I think rare earths, they think electric vehicles. Great. And so they see the recent pricing dynamic and they say, wait a minute, rare earth -- or electric vehicle volumes are still up 70% year-over-year. Like what's going on? And the reality is we have the other 80% still. That proportion is going to rapidly shrink, not because this pie is shrinking, but because the EV and the wind side is growing so rapidly. And so that 80% goes to 50% very quickly. And I think then you start to sort of -- that you reach the tipping point probably around that point in time where then the majority of the demand is electric vehicles, wind turbines, things like that. And so that's not too far off, but it's not today. And so when you see some of these moves in prices and the seeming disconnect between what you're seeing on the electric vehicle uptake side, it actually makes some sense.

So let's talk about pricing now. I mean, as you mentioned, right, since 2020 that you're in operation, you have seen a few cycle, right? I know it came off on the call last quarter. How do you see the current environment? Or does that make you rethink maybe some of your opportunity or expansion plan going forward?

Well, I think the unique position that MP occupies is, we have the benefit of billions of dollars of invested capital in the site that were not our investors' dollars. And so I think most new projects out there need a certain incentive price, of course, to be able to justify the likely billions of dollars of investment that's required to get to separated oxides. We don't have that problem, and so we don't have to really rethink that much. I mean, of course, what we're always doing and looking at expansion opportunities is trying to understand the return on invested capital. But we're looking at that across a range of potential price scenarios to ensure that we're going to earn a fair return regardless of the commodity price. And are we going to look like geniuses when the commodity price is up? Sure and less so, when it's lower, sure. But we're always going to control for that when we make capital allocation decisions for sure. I think the other thing is that it's not just about the incentive price. I think this volatility, it has changed the cost of capital in the industry. I mean you've seen our stock prices change. Our cost of capital, it certainly changed the cost of capital for developers as well. And so from that perspective, you always have to take that into account. These markets are volatile. Maybe folks were boded to think that they weren't, but they are. I think the fact that we have set up our business from an operational perspective, importantly, from a balance sheet perspective, uniquely versus some other maybe mining businesses out there, is we've positioned the company to benefit from the upswing in prices, when that occurs and to be able to weather the storm when they go the other direction. And so that was incredibly important to us from the outset. We have nearly $1.2 billion of cash on our balance sheet. We raised a convertible note in March of 2021. And immediately following, a lot of people were asking us, what are you guys doing? And we said, "Look, this is part of a long-term strategy." We view that as significant optionality for us. And so we've always been very clear. Jim, our CEO, says this very eloquently, "The leverage belongs in the price, not on the balance sheet." And so this is sort of a feature, not a bug, if you will.

Okay. And then for some of rough commodities, you mentioned [indiscernible] on final part. I think they're in the feel that we might see shorter cycle maybe going forward, and that's really related to the EV demand actually in [ Pari macro. ] Do you explain that as well, like explain more like, up and down movements, like maybe not 12 months or 18 months cycle, but 1 or 2 quarter?

It's really hard to know. I think if I was able to predict that, I'd probably be on the banking side, yes. But I think, certainly, as we talked about in terms of the mix of demand and how that's changing, that will change how the cycles play out, right? I mean, I think what we're seeing right now is certainly -- I talked about 80% of end use right now is non-EV wind. There's certainly a lot of growing things in there and there are a lot of things in there that are not growing so fast. Hard disk drives, not doing great right now, things like that, that are part of that overall mix. And so I think it's just a matter of -- the exciting thing for us is the demand growth in electric vehicles, drones, robots. Wind is secular. It's not cyclical. There are cyclical elements to it in an overall secular trend. And so I think that that's very exciting. And look, I think that we're very focused on that, and that's going to become a much bigger piece of the pie going forward. But if we're sitting here in 5 years, you ask me, okay, what are you excited about next? Again, there's this whole next leg of incremental growth, I think, as well that are beyond just EVs and wind. Magnetics is really the key to industrial motion. And as the world electrifies and automates, there are so many new application areas that are coming out that I think folks really just are not paying attention to. And so this is not purely an EV play, if you will. We are a picks-and-shovels provider to that EV revolution, but it's to the overall electrification and automation revolution and all of those end-use cases that are growing because of that.

Yes. It has a very good point, because definitely, I think, investor focus mainly on EVs, similar to lithium. I think that's kind of your major bucket market for growth, right? But there is some ones where that could not take over, but significantly improving there?

Yes. And that's why I think we've been -- certainly, we get -- shown opportunities to look at other spaces all the time and that are related to EVs. Oh, this is related to EVs. Why don't you guys get into this business? And the reality is that the magnetics business is incredibly unique. The supply-demand forecast and sort of the -- how essential this is to sort of some of these forward-looking technologies is, again, I think not super well understood. And I think it's -- again, cars are big driving batteries and absolutely essential. But we get bucketed, which sometimes is a good thing, sometimes it's a bad thing. But it is different. It's very unique. And I think that we, as a management team, have been so focused on this opportunity in ensuring that we execute it thoughtfully to be prepared for these next levels of growth that we see coming, not just 5 years, not just 10 years. We're here for the long term, and we think it's an incredibly exciting opportunity.

Great. And we have just a couple of minutes left, but maybe the capital deployment and strategy. It seems like you're more looking into like organic growth or like further growth. What about share buyback or -- like I'm just trying to understand.

Sure. Yes. I think we touched on this a bit in our last earnings call, and I think Jim did a nice job kind of giving his psychology and our psychology on this. But as I mentioned before, we view our balance sheet as a major source of optionality for us through the cycle. And so we absolutely believe, sitting here today, the opportunities I just talked about, everything that I just said, if I believe it, then our company is going to be worth a whole lot more in the future than it is right now. And we absolutely believe that. The reality is we live in a world of probabilities, not certainties. And so we need to make sure that we're positioning the business for being able to say when prices are 60 or 50 or whatever they are that we've got this fortress balance sheet to withstand it. Obviously, the business is changing over time. We're moving downstream. We're bringing in other streams of earnings that are less commodity-sensitive potentially. And so that obviously will factor into our calculus. But I think the other important thing I'd add on this is we don't want to do something just to do a token this, that or the other thing to say, we've checked this capital allocation box. We are, as a management team -- Jim is the largest individual owner of this company, owns almost 11% of the company. Michael and myself, we're large owners. And so we live, eat and sleep, breathe capital allocation and ensuring that we're driving value for shareholders. And so if we do something, we're going to do it for real. We're not going to do a token. And so everything is always on the table for us. We are completely opportunistic. And so we'll continue to use that framework to decide how to allocate capital.

Great. Thank you. That's very helpful. I think that's concluded our time. So I appreciate you being here with me.

Thanks.