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

Good morning. I'm Dan Rizzo with the Jefferies at chemicals research team in equities. Thanks for joining us today. Up next, we have MP Materials. And with us today is Ryan Corbett, who is the CFO. This is going to be a fireside chat. We're just going to have a nice conversation up here. But if there are questions from the audience, please raise your hand, and we'll definitely weave them into the conversation. For right now, we'll just kind of jump into it, Ryan. Thanks for coming .

Sure. Absolutely.

So what we wanted to do is to kind of start with recent milestones. MP is transforming itself from a concentrate producer to one that retains and ships NdPr. Now there was a lot of skepticism about how difficult it would be to kind of be on schedule. So can you just talk a little bit about the bottlenecks you encountered? And what you still need to do to fully ramp production by next spring?

Sure. Yes. Happy to be here. Thanks for having us. Certainly, we're very proud of the progress we've made about in the past. We obviously announced on our last earnings call, a pretty exciting milestone in having the full balance of plant commissioned and producing product. That's been something that's been in the works for a very, very long time, and our team has worked extremely hard to get this project in service with construction complete and commissioning ongoing. From a milestone perspective, I think, certainly, we're thrilled with the milestone we discussed on the last call. But certainly, that's not the end goal. Our hope is obviously to ramp as quickly as possible to reach our targeted run rate of 6,000 tons of NdPr oxide production annually. It's probably obvious, but commissioning is a pretty painstaking process of two steps forward, one step back and occasionally one step forward and two back. And so it's always difficult to put a perfect time frame to it. But what I would say is that throughout the commissioning process, and we've been commissioning in process order, what you see is there are certain parts of the process that reach targeted throughput really quickly, but we need to dial in the uptime. There are parts where reliability is not an issue, but we need to continue to optimize to get them the throughput we want to get to. And so there's that constant push and pull across the entirety of the plant that we'll need to get right over the course of the rest of this year and into next year. But we are still steadfast and working towards our goal of getting to that 6,000 as soon as possible and feel very good about the progress we've made.

And are there NdPr oxide shipments already underway?

So what we talked about on the call, and I'd refer you back to that, is we expect to be shipping within this quarter our [ NdPr ] oxide shipments.

Okay. So let's now talk about the Stage III investment cycle with the transition to magnet production. Can you just, I guess, first talk about the IP landscape? Do you already have access to everything you need to reach commercial production?

Sure. From a magnetics perspective, we've approached this pretty methodically in the same way that we targeted sort of a walk-before-you-run strategy on Stage I and II in order to get to oxide production, which I think has served us really well. That is the same framework that we are employing on Stage III, which is target metal and alloy production, sort of the first couple of process steps, get those dialed in to form the foundation of a strong magnetics business and taking that to the next process steps, [ power ] production entering and going further downstream. We've always been clear on the magnetic side that it is a strategy of buy, build and/or JV, right? So all options are on the table. But obviously, we have a lot of confidence that for the commitments that we've made to our customers and obviously to our broader stakeholders that we've got what we need for our initial Dallas-Fort Worth facility to produce what we're targeting to produce. I think that it's certainly an area where we get this question quite a bit. I think something that's, frankly, underappreciated about the progress we've made to date, there's a lot of focus on Stage II as there should be. That's a major change for us as we transition to shipping oxide products. But the team that we've built and the foundation that we've built for the magnetics business, I think, is extraordinary. And so I was just down at the plant last week and seeing the progress that they've made, really tangible progress. We try to give folks some sort of updates with tweeting pictures and things like that. But it's hard to really grasp it until you're there and see the physical progress that's being made, and this is something that hasn't been done at this scale in the Western world in decades. And so I think we've got a really unique opportunity, where we saw a clear market demand from OEMs for us to be in this business. And being able to execute on that and execute on that thoughtfully, I think, is extremely exciting. And I think that as that trajectory of the business becomes clear for investors, I think it's something that's incredibly exciting and that I spend a lot of time working on.

And how should we think about product qualifications and warranties? How long will the testing cycle be from getting from the mechanical completion to commercial sales in the magnet business?

It's a good question. I think I remember right after we announced our deal with General Motors, a friend of mine called me, said "Congratulations, you're in the automotive business. That should be fun." And I think the reality is that one of the foundational aspects of how we approached going into this business is looking at it like a partnership. And so what we found in General Motors with this particular arrangement is a desire to work collaboratively with our engineering team and their engineering team, so there is no daylight between the two. And so this approach is very different than "Here's the spec, go build it for me, and make sure it's qualified." It's much more collaborative. But no doubt, the quality requirements, specifications, ability to audit, ISO, all of those things are extremely rigid and incredibly important in the automotive business. And it's something that we are well prepared for in terms of the team that we've built. We've got those folks -- a lot of them in place already. I spend a lot of time on the financial systems side, as you'd expect. And so as we're designing and building up our financial systems to accommodate the start of production, that is all being built in. And so I don't have a perfect timeline for you other than to say, certainly selling into the automotive supply chain is no walk in the park. But I think we set up the right relationship with the right partner, and we're well prepared for that type of sales cycle.

And I would imagine having such a collaborative approach has to shorten the sales cycle and shorten the timeline, if they are with you every step of the way?

I would certainly hope so. And look, I think the thing I'd note is the relationship with General Motors is not exclusive, right? There is other capacity at the facility, which I'm sure we'll talk about, and other types of customers that we will be bringing into the fold. And so it's not going to be very likely a purely automotive business. And so there'll be different requirements and tolerances and things like that for the different types of businesses that we're in and different verticals that we sell into. But I think the approach that we've employed is going to be consistent throughout, which is what we've said and remains absolutely true is we are supply constrained, not demand constrained. We are being extremely picky in who we bring into the fold for this initial facility. It's important to us that we get the right start and we are able to do this in a way where we can, like I said, with what we did in the upstream business, take the learnings from this initial facility and be able to deploy them as we add scale to that business over time, so that we can continue to gain scale and improve our return on capital in that business over time. And so we want to be methodical and are being methodical in how we approach bringing customers into the fold, so that we're earning the right risk-adjusted return on capital in this initial facility and setting ourselves up for success as we see a really, really healthy wave of demand behind us.

So you indicated that you're not -- you're supply constrained, not demand constrained. So just talk about the [ bandwidth ] you have to handle, all the additional offtake agreements outside of GM. I mean, how we should think about that?

Sure. Like I said, it's not an exclusive arrangement. I think to be clear, the reason we talk about it, that arrangement a lot is not just the alignment of values between the companies, but the fact that a very, very significant portion of the facility will be going to them over time. But that does not preclude us from other arrangements. And as we've talked about in the past, we have a lot of ongoing dialogue and frankly, are, like I said, being very selective in how we approach bringing other customers into the fold. I think the other thing that we are targeting is to ensure, for example, it's quite a bit different in looking at selling oxide, which is a commodity with a market spec, right? You hit the spec, you [ don't ] hit the spec. A magnet is a customized finished product. And so it's not a matter of -- while we sort of report our initial capacity is 1,000 tons, and we have room to grow that, measuring magnets purely in magnet tons doesn't give you the full story. So if those magnet tons are coming in tons of SKUs with very low volume, that's a different story than very few SKUs, each with lots of volume. And so there are a lot of considerations that we are focused on for this facility to maximize profitability and help us get down that cost curve as quickly as we can.

So just -- and just moving on, so the IRA is obviously something that a lot of people talk about, but a lot of customers are asking this for you guys at least, how the IRA has affected customer discussions and the level of interest in securing longer-term agreements?

Sure. I think the IRA has had a broad-based impact in critical minerals, generally. There are portions of the IRA targeted specifically at our upstream production. And so there is a production tax credit 45x that we will qualify for the production of our oxides in Mountain Pass, which is obviously very exciting. And I think it's are certainly a step in the right direction as you think about incentivizing domestic production of critical minerals. There are portions of IRA that somewhat indirectly target our downstream business, so the 48C investment tax credit, that is something that we get asked about quite a bit. And that's a competitive process. There's been indications from Treasury and DOE that magnets are on a list of items that they consider important. But certainly, it's a highly competitive process. And so that's something that we think about quite a bit and intend to look to take advantage of over time. As it relates to some of the content requirements, which is where I think a lot of folks get a little confused, is the content requirements that were present in the IRA that were intended to sort of force OEMs broadly to look more domestically for sources of supply from the upstream and the midstream did not mention the word magnets anywhere in the IRA bill, all 500 pages, no mention of magnets, which I think was a real miss and a real mistake and hopefully, one that I think we've actually seen certain proposals and actions on a bipartisan basis out of different parts of Congress looking at how do we incentivize specifically the downstream, the magnet-making piece of this industry. And so there is a production tax credit proposal that's not part of the IRA, but that looked at giving a tax credit to magnets made domestically with a kicker for if the upstream product was also produced domestically. And it's things like that, that I think are still out there and I think deserve some real attention, given the competition that we face overseas, obviously. There was a Section 232, investigation into permanent magnet specifically, and so there's a lot of data in that. It's an interesting report. But I think undoubtedly, creating a mechanism that incentivizes scaled production of permanent magnet is something that I think would really benefit the domestic industry and OEMs broadly. I think -- lastly, I'd say, just the behavioral impact of seeing what IRA has done, while it doesn't specifically target magnets, it has really made -- as if it wasn't clear enough after COVID and all the supply chain issues for OEMs broadly to focus on providence and materials and security of supply, put a renewed focus on that. And so I think one of the unique advantages that MP has is having Mountain Pass with the vast insight, ore body we have, the way we operate in California, our dry stack tailings process, a lot of these things where you can see exactly how this material is mined, how it's refined, how it's turned into a finished product. And there's not that visibility into the supply chain for many other players in the space. And so that is something that I think customers and our customers' customers really value and are continuing to value more.

Is there any indication that some sort of new build that supports magnet production is anytime in the near future? Or is it more kind of wait until after the election-type thing [ happens ]?

Right. Yes. I guess does anything get done between now and the election? And is the government even funded? It's a big question that I'm probably not equipped to answer. But I think we're seeing the right attention, right? The proposals that have been out there are specific and thoughtful. And so it's just a matter of how we get them, likely brought into some broader package. So we'll have to see.

Okay. And then as you're scaling up magnet production, should we expect you to enter some sort of offtake agreement of your own with other U.S. rare earth suppliers -- sorry, producers? And to what extent is it contingent on you successfully ramping up your ability to process heavies?

Which other U.S. producers? It's a good question. Look, I think we have always said that the market opportunity, the size of the downstream business and the scale of demand that we see is many, many multiples of this initial facility. And so there is certainly the opportunity again, I want to emphasize the walk-before-we-run mentality. But there is the opportunity over time where perhaps our downstream business is bigger than our upstream business. That's not going to be the case for a while. There's a lot to do between here and there, but it's not out of the realm of possibility. . And I think the important thing also about the vertical integration strategy that we have is we are very focused on having a strong, diverse supply chain. And I think that, that, at the end of the day, benefits our customers and us. And so it's not like we're going into this business to dominate vertically. It's really showing that this can be done in the U.S. at scale. And I think that will attract more downstream investment, that will attract more upstream investment. I think it's just generally the right thing for the industry, given the scale of demand that we see. From a heavy rare earth production perspective, it's interesting, most folks don't know that Mountain Pass started as a heavy rare earth production facility. It was originally leveraged for production of europium that was used to make the red color in color televisions when those were first coming out on to the market. And so certainly, the market environment has changed a bit since then. The processing technology has changed a bit since then. But at the end of the day, the ore body has not changed very much since then. And so, we have certainly the historical knowledge, the process technology to scale that business. And to the extent we are growing that business, I think the view would be as we scale downstream magnetics, being able to be a refiner of choice for other very, very upstream projects that likely don't have the mine life or jurisdiction or what have you to justify the billions of dollars of investment that's required to bring a full refining facility online, having that ability to take in third-party feedstock, I think, is something that is obviously strategic, and that is part of the heavies plan.

Okay. And I'm going to just shift gears a little bit here. Let's just talk about NdPr market dynamics. First, just can you kind of go through near-term conditions? Is there any signs at all of demand improving in the consumer electronics supply chain or chain?

Sure. Certainly, we always caveat our ability to predict the short term of commodity prices, which certainly can do anything over a shorter period of time. What we've seen over the course of this year is a pretty material pullback in pricing, which it's interesting to think about the focus that has been given more recently, let's say, the last 2 or 3 months on the weakening of the Chinese economy. And it sort of feels like we could have told you that 3 months earlier, just based on how commodities have been reacting. And when we spoke to customers and participants in the supply chain, certainly, even early in the year, there were indications that demand was quite weak for, let's call it, legacy applications. And so it's one of those things where, certainly, the applications that a lot of investors are focused on rightly so, electric vehicles, wind turbines, robotics, are exciting and are secularly growing and growing really quickly, right? But that is today, if you take a snapshot in time, 25% of the market, let's say, and so if 25% of the market is compounding at 25%, if you have that other 75% have a cyclical blip, which is what we're seeing, that can pretty quickly eat away in a period of time at the growth in the industry and send you the other direction. The power of compounding means the secular stuff will certainly outweigh and end up taking up the entirety of the market size, of today's market size in the relatively near future. But when you're looking at what's going on today, having that cyclical downturn in consumer electronics, HVAC, industrial-levered items and considering 90% of the magnet market is in China, the Chinese economy has a very strong influence on how those pockets of demand are performing. And so I think that's what you saw and have been seeing over the course of the year from a demand perspective. From a supply perspective, we talked a little bit on our last call about what we see as a relatively short-term phenomenon of some illegal mining, generally, for Myanmar making its way into China after the border between the two countries have been closed for a period of time. And so it was sort of a [ wish ] of supply all at once into the market that even if that production continues, the scale of supply coming all at once is sort of a unique situation that occurred over the last 6 months or so. And so you had some not-so-great dynamics, both on the demand side and the supply side. But our feeling is that both of those are transitory and frankly, do not change our view on the medium- to long-term prospects of our market and therefore, of pricing for our commodity. Lots of crazy stuff happens in the short term on commodities, but that's generally how we think about it. I think in the most immediate term over the last couple of weeks, you've seen a little bit of strengthening and hopefully bottoming of pricing of NdPr oxide in the high 60s, low 70s. Just given our view of how the cost structure shakes out for certain of the Chinese producers, certainly those that are importing feedstock from overseas, I think that, that makes a lot of sense.

So you mentioned robotics, and I think there's probably -- we have really time for this one last question, but I think it's important because on the conference call last time, we kind of had like a teaser discussion about how robotics are going to be bigger than EV or even in windmills. But to what degree is NdPr supply constraints even on the agenda for robot producers or intermediates in the value chain?

It's a good question. Look, I think for any producer that is looking at security of supply as they build out new products, magnets have to be on the agenda. And I think that, that's been made really clear, given the focus on the industry, the push from the U.S. government to really recognize and allies to really recognize the single point of failure risk that we have in our industrial economy. When you think about national security, it's also economic national security that's really important. I think that push has made most producers really understand that. But I think you're absolutely right that robotics is something that is extremely exciting. It's interesting. If you look at what Elon Musk said about the robotics business at Tesla, he says it's going to be bigger than the automotive business. And some of the considerations that you have from a technology perspective and do I have a -- we're a permanent [ magnet motor ] in an EV, or do I have some other solution, a lot of those trade-offs are such in a robot that you really don't have an alternative. The only solution, oftentimes, for certain actuators for a lot of use cases that are very exciting on the robotics side and industrial automation side will require a rare-earth permanent magnet for an actuator. And so I think this is a scenario where in the same vein, Jim, our CEO, has sort of made his prediction of -- on the automotive side, we may wake up one day where an OEM has an existential crisis from lack of access to raw material. I think that if you take that analogy and fast forward to the robotics space, it's going to be the same issue, access to the raw materials to build these future technologies is absolutely critical. And so to the extent it's not on some of their agendas, it absolutely should be.

Okay, great. I think we just ran out of time and begin playing us off soon. But I do want to thank you for coming here. I think this is pretty informative. So thanks, everyone, for listening in.

Thanks. Appreciate it.