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

Good morning, and welcome to the first day of the Energy Power Renewables Conference. My name is Bill Peterson, U.S. Clean Tech and Metals and Mining analyst. Really pleased to have MP Materials here to kick us off this morning. Jim Litinsky is President and CEO of the company, and he's going to walk us through -- we're going to do a Q&A session, but I just would like -- Jim, for those who are less familiar with the story, maybe you can just start off and explain who you are and what you do with the firm and what MP Materials does. But yes, thanks and thanks for supporting the conference.

Sure. Thanks for having me. Thanks, Bill. So figured I'd stand up, so you all can see me entirely. So MP, let me set the stage because I know this is an Energy Power and Renewables Conference. We focus on the electrification revolution. So as we think about any kind of electrified motion in the world, whether it's an EV, a wind turbine, drones, robotics, Typically, you have energy gets to a motor that makes that motion happen. And there's a lot of discussion when you think about the mining space, there's battery chemistry and what materials will go into the battery. And very often, the motor gets confused with the battery. We are in the motor. And so regardless of the energy source, whether it's regardless of your battery chemistry, when that energy gets to a motor, the way that motion is provided is typically via a rare earth magnet. And the reason it's a rare with magnet is because rare earth and magnets have been proven to be much more efficient, high-powered, able to withstand higher temperatures. And so if you're thinking about any kind of electrified motion, the odds are very high. For example, in electric vehicles, it's a 90-plus percent chance that you have a rare earth magnet in that. The primary ingredient in a rare earth magnet is neodymium, praseodymium, NdPr, and that is the primary revenue driver out of our company. And so MP Materials the company, I founded the company in '17. We bought a set of assets that was mainly Mountain Pass California, which is arguably the premier rare earth mine and processing asset in the world. So we currently represent 15% of global rare earth content. The rest of the industry other than one player is domiciled in China. What's important about this supply chain is that if you can mine the material and refine it, but we're still sending it all to China to be made into magnets. And so the material gets mined refined, but then 90-plus percent of the magnetics are made in China. We produce that content today, and we send it to China, but we are in the process of moving downstream, what we call our Stage 3, where we're building a magnetics facility in Fort Worth, Texas. We have a foundational deal with General Motors, where we will take our mine-refined material from Mountain Pass, and we will send it to Fort Worth and make it into a magnet for the GM Ultium platform and then other industry use cases. The really important thing and then I guess we'll get to Q&A just by way of background is you'll hear a lot about rare earth. They are not rare. What is really rare is having an economic enough concentration to process them efficiently. So if you look at pictures of Mountain Pass, there are several billion dollars of capital assets on site. The best way to think about it is this is much closer to an oil refinery or a specialty chem. So you'll hear of a rare discovery, but getting these things online is incredibly difficult and requires a lot of capital. And so our site to have an operating site with several billion of invested capital takes years if you had a site that was economic, forget the financial capital, the human capital, the time, the permitting, all of that, you have to start with an economic site, and that's extremely rare. So we have the unique aspect of having the premier site in the world, and now we're moving downstream to get this supply chain to the USA. So with that, I will flip it for the first question.

Great. Thanks for the overview. I guess we'll get right into it, like with pricing, pricing has been quite volatile. So $175 per kilogram a little over a year ago, falling down closer to $70 more recently. Can you briefly discuss the overall market as well as your current view of the -- how does the backdrop look for rare earth currently?

Sure. So given the name of the conference, I'm sure we're all aware that over the last year, pretty much the entire commodities complex has gotten hit, whether it's oil or lithium or anything. Rare earth in particular, I think of any of those verticals, we have probably the most extraordinary growth outlook when you think about, again, EVs, wind turbines, drones, robotics, electrified motion is growing very quickly. And it currently only represents about a little over 20% of the industry demand today. And so in the very short term, we are typically impacted by standard supply/demand inventory draw as are commodities, in particular, because as we know in the commodity space, inventories really matter, long-term supply and demand trends, it do not necessarily get reflected in the near term, it's really a spot market. And so our commodity, like others, has gotten hit in the past year. But everything that we see in our space, we're seeing enormous growth behind the scenes, we see a remarkable amount of reach out from OEMs and other downstream producers looking to sign and procure materials for the long term. And so as we think about -- if you take just EVs, for example, and say that that's 20% of the current demand and then compound that at some of the estimates, say, around 30%. If you do that math and you look out a decade, that eats up more than the current supply of the world today, assuming the other 80% goes to 0. And of course, the other 80% is stable and growing itself. So the demand backdrop is extraordinary. And we think certainly that this is temporary, but of course, in a commodity, you never know. The other thing I should say, we have set up the company this way when we went public in 2020. I made very clear. I'm the largest shareholder here. We have an owner-operator culture. And I made clear that I'm a big fan of the milk and school capital structure really matters. And when you're in a commodity business, you need a capital structure that reflects the business that you're in. And so as I like to say, we like the leverage in our commodity price, not on the balance sheet. So we have a huge net cash position. We have a profitable business. And so I wouldn't say comfortable, but we are capable of making it through pretty much any kind of volatility in our underlying price.

Great. You alluded to a 90%, I guess, you said in EVs. So that means 10% are now using NdPr. What is the substitution risk? Where would NdPr not be used? And how could that look like if it is substituted?

Sure. And one thing that was topical in our sector is Tesla recently came out and said that for their new factory in Mexico for their, what people are calling the Model 2, their intention is not to use rare earth magnetics that they're going to use another kind of magnet. This was not a shock to the people in the industry, but it generated a headline. And so the background there is you don't -- rare earth magnets are not required. They're much better. So if you have a rare earth magnet in an EV today and a Model S or a Lyriq, there's thousands of dollars of savings on your battery materials because you have much higher efficiency and smaller size. It can withstand a lot of other things better. But the original roadster, the Chevy Bolt did not have rare earth magnets. So there's always the capability to go to a non-rare earth magnet. The challenge is you lose a lot of money doing so. If you look at the math, if you want to produce 20 million electric vehicles by 2030, there aren't enough rare earths to do so. And so it's not necessarily a credible statement to say we're going to utilize rare earth magnets if we have this long-dated target. And so we were not surprised that, that is an aspiration. As part of that, though, they didn't say that they're changing any of their existing platforms because we know that it's highly unlikely because of the trade-offs, but something we'll give. And my guess is that over time, the share of rare earths in electrified motion will go down in a number of use cases because it must because getting the supply online is extraordinarily difficult. It takes a decade if you even have the site for all the reasons I discussed earlier. But by the way, on that same thing, that same investor call, they went on to talk about humanoid robotics and Musk stated that they expected the over time, the hematoid robot-human ratio to exceed 1, meaning 10 billion robots in the world. And actually, as a fun fact as we think about demand. And again, this is very long-dated and speculative, and I wouldn't underwrite this in the near term at all. But an EV is a robot on wheels. It has a huge battery and a small magnet essentially in the motor on a relative basis. Robotics, whether we think of a humanoid robot or a number of the other use cases that are currently in existence in the industrial landscape are typically very small batteries and lots of magnets. And so actually, the need for rare earth magnetics in robotics is even more acute. And so when you think of that math relative to the supply of our industry, it gets even crazier. And so we do not lose any sleep thinking about the demand outlook at all. And so the bigger question will be, what will be some of the trade-offs that people have to make. But anything and particularly in robotics, anything where there's real force required because you have such a small size, you need to have that rare earth magnet and it's really required in that case, unlike in a very low performance vehicle. And so I would have thought also, as the last thought on that, thinking about demand, since we're all in it is, if you think about the value of Tesla and NVIDIA is greater than this entire conference, if we look at the enterprise values of every company in this conference and the AI revolution. But the LLMs are now being applied to robotics. And so you can see these videos on YouTube where people will tell a robot, "Hey, pick up that box and bring it to me or whatever." And that's happening. So I actually do think that this is a more near-term thing than I might have thought if you asked me 6 months ago. So anyway, that's a long-winded way of saying that we expect over time, if you look at each of these electrified motion cases, there's going to be trade-offs, but all of the trends are for a parabolic growth in demand in our space.

Great. We'll move on to the different stages of the business. But before that, as you think about maybe a floor pricing, do you have a view or what is the view of -- and I know it's a black box, what are the view on marginal cost in China? How low can this get?

Yes. It's a great question. So on our last earnings call, I talked about -- so prices have come down 50% over the past year along with the commodity landscape. And what I noted was China is always very opaque. And again, this entire supply chain until we onshore is in China. So that really drives our industry. What I noted was from our discussions and analysis, we believe the Chinese industry is losing money at these prices. It's always difficult in China because different buckets of the supply chain can be moved around and numbers are not necessarily opaque, but we have pretty strong suspicion that that's the case. And ordinarily, in a commodity business, that's a very bullish indicator. So for the medium and long term, that's a very bullish indicator, obviously, in the short term, it's a wild base, who knows?

Yes, who knows. And again, I'm going to move to different stages. But if anyone has any questions, we can certainly incorporate them into the talk. Is there a microphone? Okay. I think this gentleman has to talk, has a question.

2 parts. The first one is, can you talk a little bit about the time frame for the startup of the factory in the U.S., number one. Number 2, can you speak a little bit about the nature of your relationship with your Chinese suppliers? I remember that at one point, one of the Chinese entities was an investor in your company. I'm not quite sure if it's -- or at least I think it was. And I'm wondering if they still are, number one. And number 2, what kind of protection, if any, you have in terms of supply from the people who are processing is your rare earths now?

Sure. So stepping back, the stages of our business. So when we think about the entire supply chain, you typically mine and concentrate the material. So you get what is approximately 6.5%, 7% rare earth out of the ground. We concentrated up to 60% to 65%. Just doing that is a very complex meticulous industrial process requires lots of capital. That is our Stage 1 business, rare concentrate. We currently sell that to China. So if you look at our business last year, we generated a little under $400 million of adjusted EBITDA. That was all from selling a concentrated product to China. As we move downstream, we have the capital assets now site. Our Stage 2 was adding some incremental assets, although most of those assets were on site, adding some incremental assets to refine all of that in the U.S.A., so we don't need to send it in a concentrated form to China. All those assets are built. We're commissioning that now. And so we've stated that we expect run rate of our full production by year-end. We've been going through that process now, and so that is mechanically all there, and that's happening so that we will be selling a refined product. And then the Stage 3 is Fort Worth, which if you look, you can actually follow us on Twitter, and we have treat where a few months back, where -- actually, by the way, we recently also posted a video that's 4 minutes that talks about this entire process, pretty entertaining 4-minute animated video, so you can watch that to see all of these steps. But we broke ground on our Fort Worth facility, which again has GM as a scaled foundational customer. And we literally was bare land in April of last year. That facility is now topped off and done. It will take us a year and change to get the inside all the equipment and get that process going. But we expect to be making magnets at scale in 2025 for GM for the LDM platform. And then that will complete the full onshoring of the supply chain. Until then, even with refined products, you still have to send it to Asia because that's where magnets are made today. As far as shareholders, we trade on the New York Stock Exchange. So you can look up our holders. And I'm the largest shareholder of the company. Our original distribution partner, we have to have access to the Chinese market. Our original distribution partners still as a shareholder, you can see that on Bloomberg or wherever you look.

Great. Okay. So you spoke to stage 2, but maybe some other agreements you also mentioned Asia. So you signed deals with Sumitomo in Japan and also Metal Maker in Vietnam. What's the importance of these agreements?

Sure. So Sumitomo Japanese industry, there are some Japanese magnetics makers. Unfortunately, a lot of their business is domiciled in China because they need to get the feedstock. We should be able to enable them getting feedstock to some of their Japanese assets and other assets in Asia. So Sumitomo will be a great partner on that front. And we announced on our last call that we also secured some metal-making capacity. And again, if you want more detail on this, I recommend you look at that video that we made because it will show you to the steps. But when you take the refined rare earths to make it into a magnet, there's more steps. So you actually have to turn it into a metal, then you alloy it, then you make in a new magnet. Those steps will all be done in our Fort Worth facility. But we also will be making metal in Vietnam. We've secured quite a bit of capacity there to turn our refinery into metal. So that will open up more markets in Asia where we can sell rare earth metal as opposed to just refined rare earth. So it's a further step down the value stream. So that was an exciting announcement for us last quarter as well.

Great. More on Stage 3. So you have a profitable Stage 1 business and obviously hoping to add to that with Stage 2. So why vertically integrated, why is it important to vertically integrate? What are the advantages? And I guess, in the other side, what are the risks?

Yes. So well, for starters, as an American, I think it's important that we have supply chain security. When we set out to build this company, one of the important things is that this is a key national security asset. It's a key capability. And our downstream can't rely forever on a 100% supply chain for this stuff in China, and so we want to be a Western champion. We want to be an alternative. I happen to think that the magnetic space, the downstream, this industry is growing enormously, the analogy I would give and again, it's certainly not of the scale, and I'm not trying to be grandiose, but the way to think about it is like semiconductors in 1970. You can see in 1970, you didn't know we would all have a computer in our house or an iPhone or maybe you did, but you could see that the semiconductor revolution and computers were changing the world, and we see electrification everywhere. We know it's obvious now. It was less obvious 5, 6 years ago. But it's obvious now. It's going to be everywhere. And I don't know what the killer use cases will be beyond EVs and could be more eVio, more robotics, all these things. And so being a picks and shovels provider, a feedstock to this space, particularly if we are the Western champion, is in a very exciting opportunity. So we want to be able to move the business downstream have more total dollars of profit, more higher value-add opportunity to grow the company. Now with that, though, and we're an owner-operator culture. Again, I'm the largest shareholder. So we are maniacal about how we make incremental investment. We made very clear that when we think about the stages of our business that we will not rob Peter to pay Paul. So if our Stage 2 business is selling a commodity, as we move downstream, we assume the contribution of that commodity is at market price. So we're not going to make incremental investment in downstream in growing the business if we're subsidizing that via lost capital in our other business. And so that's also what's extraordinary about our business, there's been no magnetic manufacturing of scale in the West ever. And it is such an important function that we were able to get what is an incredible partnership with GM that will effectively put us in this space at scale in a derisk way where we can invest the capital and know we're going to get -- assuming we execute and we must execute, we will earn an attractive return on our capital. Those are once-in-a-lifetime kinds of opportunities. And so we have the opportunity to build this champion. And as I like to say, talent begets talent, scale begets scale, as we move downstream and build this business in the same way that semiconductors, or at least in the old days, you can't just have 2 people in a garage. It requires a lot of scale, a lot of capital to make product. Magnetics is similar. You need to have a huge factor. You need to have the upstream commodity. And so we'll make those investments as well, and we're years and billions ahead of anybody else in this space.

Maybe speaking of funding and maybe even tie-in policy support, there has been a lot of government support in the last few years and most recently in the form of the IRA. It's pretty topical for a number of companies here at this conference. What are the potential benefits for you from that bill? And maybe similar to your question on scale, are there other sources of funding that could be available?

Sure. So certainly, the IRA has accelerated onshoring. And I think we all see the headlines and the many billions of investment and in particular, subsidies for EVs. So obviously, anything that drives electrification adoption is a net positive for us as a business because it means more demand. Specifically, within that build there are 2 provisions, there was 45X, which is essentially a tax credit for operating costs in the critical materials space. So when we think about our Mountain Pass operations, we will benefit from that, and that actually will be -- take whatever our operating costs are and multiply it by 10%, and that's a tax credit, not a deduction. So that is quite a bit of reward for us, if you will. And then lastly, there's 48C, which is an investment tax credit for incremental investment in production and certainly the rare earth magnetic supply chain qualifies for that. So we expect to -- as we look at any investment and that is tax credit for investment in that supply chain. So that is an opportunity for us to the extent that we do something further of scale, whether it's in our existing facility or another facility. So that will be an opportunity that's open to us as well. There's a lot of -- I think one thing about our space and I didn't really mention this earlier, but for those who are interested. When we think about rare earths, historically, there's been a tough environmental track record, particularly in China around the production of rare earths. China has cleaned up a lot of that. There's still quite a bit in Myanmar, where people will take acid next to a mountain and pour it on rock and they get the rare earths and the acid goes into the river. It's pretty terrible. So there's a tough tracker here. We operate proudly in the state of California. You can imagine the amount of regulatory oversight that we have. And we have something very unique in the mining material space, which is a dry tailings process, which means the materials, we take them out of the ground, we get the rare earths out and then they go back into the ground and drive form and aligned impoundment, which means there's essentially no risk to the water supply. So we were able to take the materials out and put it back into the ground, again, as it came out. And so that is a very attractive thing from an environmental standpoint. And the fact that we are feedstock to the electrification revolution and we're doing so in an environmentally friendly way. As you look across the political spectrum, whether you're on the ultra-left and you're only focused on the environment and you don't like any kind of mining or you're an ultra-right national security hawk and you're only focused on the China supply chain issue, everywhere on the spectrum, we are serving an important need. We're bringing this supply chain home, we're creating American jobs, we're doing so in an environmentally friendly way. And so there's hopefully pretty universal – and I experienced it when I go there, there's pretty universal support for what we're doing. And so that obviously feels good.

I just want to check and see before moving on to see if there's any gentleman here.

Maybe a quick one being you the story. You talked about 20% of the market being the EV. Can you talk about the other 80? Is it permanent magnet motors and all kinds of versions? Is it just the motors? Is there other markets for it?

Sure. Well, the other...

Maybe I can add, if you can talk about the growth of those different segments too.

Yes. The other 80% are what I would call, think of them as GDP-oriented old school, everything from disk drives to HVAC to window control in an ICE vehicle. And so I would think of them as industrial robotics. There's a hodge podge of what I would consider a lower growth GDP-oriented type areas. And so certainly, though, there are some of those where the electrification is taking greater hold. HVAC would be an example. And you can look at each of these verticals and some disk drives are obviously declining significantly, but HVAC is growing. When I think about that 80%, I think it's fair to assume that over time, it's somewhat stable, maybe it grows a little bit, maybe it goes down a little bit, but it's probably GDPs. The big but the 20% or 25% is what is very high growth today, which is taking over the needs not to mention some of the other use cases, which aren't even in those numbers. The other thing I would say is, I think for people who aren't in the mining materials space, when we think about growth, it's very different than a software company. If you think of a software company, you think, "Oh, it should grow at 20% or 30%, SaaS multiple, all that kind of stuff." In a commodity, obviously, just supply growing 1% or 2% a year is enormously challenging. In the copper space, if you could grow supply 1% a year, that's enormous. So if the demand for rare earth is going to be 2x in 5 or 7 years, what it is today, that is like off the charts a big-time problem because we won't have the supply of it because it takes a decade to bring this stuff online, at least in the West.

Can you talk about a little bit of how you're trying to de-risk this plant that you're building? It seems like there's not a whole lot of plants in the Western Hemisphere that you can use as a template, must be complex.

Yes, you're talking about Fort Worth facility? Yes, it's a great question. So I think it's important when we went public in 2020, we talked about the magnetics business being a 20, 25-plus event. We didn't even have a single employee in our magnetics business. Our first hire was in January of 2021. As we think about -- it's now 2023, we've got a facility deal with GM. So I think we've been very measured in recognizing the scale and the timing of this challenge and have tried to be thoughtful about what and how we convey and what we need to execute. So if you think in about 2.5 years, we've gone from having not a single person on our team to a nearly built facility. We have our magnetic teams about 35 people of extraordinarily talented metallurgists and material scientists and magnetics experts. What I would say is magnetics are not landing rockets on platforms in the middle of the ocean. This is a pretty standard industrial process mechanically. And so it's very well understood. And so we have a very, I would say, humble but confident perspective on what we need to build and do, and it's really about cost. It's really about turning a rare earth into a metal and then the metal into an alloy and then alloy into a magnet. This is stuff that's been around for decades. It's really doing it at scale and making sure that we get the cost structure low because there will be a J-curve vis-a-vis China. And frankly, I think one way we've managed for that is if we look at Fort Worth, it's a 250,000-square-foot facility. That represents a little under 10% of our current expected output of Mountain Pass that we've stated that we would process there. If we had wanted to sign a deal and go out and do 10x out of the gate, we could have done it. We have wanted to execute by hitting singles, so to speak because we will miss some things up in this process vis-a-vis cost, we will figure out ways to dramatically lower the cost structure as we think about a few years from now. And so we want to make our mistakes on a 1x rather than a 10x, and so we'll make those. But that will position us to get the next piece of the business done better. But from an execution standpoint, it's really the blocking and tackling of bringing a plant online as opposed to, "Oh, we need a technological breakthrough of X to even do this."

Well, great. Unfortunately, we're out of time, but I appreciate the presentation. That was terrific. Thanks.

Great. Thanks, everyone.