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

Thank you very much. I think it's time for us to start. It's great to have MP Materials and Ryan Corbett, the CFO with us today. The first time I think you're in the conference.

Yes.

The third time or fourth that the company has been with us. So welcome back.

Thank you.

Thank you. Great to have you here. So why don't we just kick it off? I think most -- at this point in time, most folks know the company quite well and the story. You do have a very straightforward mission. But maybe why don't we start quick very, very quickly, recap of Stage 1, all the success that you have there before we go to Stage 2?

Sure. Absolutely. Thanks for having me. Happy to be here. Good choice of location for a conference. So recapping Stage 1, MP Materials owns and operates the Mountain Pass mine and processing facility. We've relaunched that facility in multiple stages. Our Stage 1 is production of a mineral concentrate. We have been focused over the last several years in optimizing the flotation and beneficiation process and tailings management processes at Mountain Pass. And we've been able to achieve really tremendous success. We are operating at north of 3.5x the TREO volumes coming out of Mountain Pass versus the best quarter annualized ever of the prior operator. We've continued to find ways to optimize that process. And what I think is often underappreciated about our industry, given the level of focus further downstream is how critical to unlocking both the right economics and a sustainable midstream and downstream business is a strong upstream. I sort of joke that the upstream is a little bit more of a dark art. It's not perfect chemistry. It's dealing with the various minerologies and getting the recovery dialed in, throughput uptime recovery. We have an amazing team on site that's continued to find ways to optimize that. And so we're producing today north of 42,000 tons of REO in concentrate. And the plan is to continue to execute on our downstream strategy of bringing that through our refinery at Mountain Pass and then moving further downstream.

And how's Stage 2 is going? I mean, you provided a good outlook and some guidance in your conference for the second quarter earnings. What else can you tell us or maybe a recap of that guidance? Definitely a very big step for you guys. The market has been quite excited about it. So yes, we're all interested in knowing how things are going.

Yes. I think certainly, given the scale of the investment, and frankly, just the scale of the chemical plant that we're dealing with, there was a lot of focus on when are we going to execute? When are we making separated products? And the thing that we were really excited to announce on our Q2 call was we made on-spec separated products in Mountain Pass, first time in really over a decade that, that's been done. When we bought the site, there was already $1.7 billion of invested capital in that site, all 2010 and forward. So relatively recent capital invested. We invested several hundred million more dollars to optimize the flow sheet to really leverage the inherent benefits of the ore Mountain Pass and then also to build the capacity to do waste treatment, and importantly, product finishing for the scale of volume that we've been able to achieve in stage 1. Obviously, the goal is to be fully vertically integrated there and refine all of our upstream production. So Q2, on the call, we talked about the beginning of admittedly a long process, but a major, major milestone for us in making separated products. What we mentioned as well on that call is that we anticipate shipping later this quarter, our first separated NdPr oxide products. Given the uniqueness of the transition we're going through, that has its puts and takes as you think about the financial model that we've talked about. But I think the major message is that we've begun production. We're really pleased with a lot of the results that we see. There's no doubt commissioning is -- it's a battle. It's 2 steps forward, 1 step back. But the way I think about it from my perspective is breaking up the commissioning process sort of into what are you seeing on the chemistry side? And then what are you seeing on the mechanical side of the commissioning of the plant? The chemistry side, I think, really speaks to do we -- will we be able to achieve the results we expected over time once we're stabilized once we're at run rate? And the early data that we see there is really positive. And so from that perspective, we get a lot -- asked a lot about what your constructs are going to look like, what are you going to be here and there? And really, mineral recoveries, how we're rejecting cerium, how we're recovering NdPr through the process is the fundamental building block of the cost structure of the asset. And so the early data there has been very encouraging. Then you look at the mechanical side, we've made a lot of progress but within commissioning the plant in process order. And so you dial in 1 process and you go to the next, and you get this 1 dialed in and then long to hold, you got to go back and fix something on the other one. So that is a content process that will keep us busy undoubtedly to the end of the year and beyond. Our target remains -- we are working as hard as we can to get to run rate by the end of this year. And so we're going to keep executing to try and get as close as we can.

Perfect. Something that is going to change and is making our lives difficult in terms of modeling is the revenue recognition as you produce more oxide and then you ship it out for processing in Southeast Asia. Can you maybe talk a little bit in summary as to how do you see that -- how should investors and the market expect the impact in your numbers as clearly is going to be some volatility, this is a new phase of the company?

Absolutely. Yes. And there's 2 major impacts to think about to the financial model as we go through this transition. The first is obviously, in our Stage 1 business, all of our revenue is generated from our concentrate product that is delivered with revenue recognized at the port of Long Beach, not particularly far from the plant. So our sales cycle from a concentrate perspective is quite short. Then when you transition into Stage 2, what we're used to seeing in Stage 1 is we produce REO, we sell the same amount of REO effectively. Here, what's going to happen is we're going to produce the REO and a significant portion of that REO will not be sold and will be consumed downstream. That will get come first, and we talked about the fact that we think the number is approximately 2,000 tons of REO to charge the circuits all the way through the process for Stage 2. We had reported as of Q2, we had put about 1/3 of that into the circuits already. And so you can expect that the remainder of that 2/3 will come predominantly in this upcoming quarter and maybe a little bit of a tail into the next and that effectively becomes WIP. And so from a rev/rec perspective, you got to take that out of the revenue equation for these upcoming quarters. Then there's -- okay. The circuits charged. Now we're actually refining the product and selling the product. Obviously, we're not going to have the same sales cycle there. We'll pull that product through where we will refine it. And what I talked about on the last call was that for a significant proportion of the revenue that would be attached to the shipments of products coming at the end of this quarter, we likely won't see the revenue until Q1. That's for a couple of reasons. First off, what we need to do is get that product and a significant portion of it will end up getting tolled into metal. The ability to toll into metal, I think, is a great thing for us, a great advantage where it opens up incremental geographies and markets that otherwise are more difficult to tap into purely with an oxide product. And so what we need to do is get the product made, get it shipped overseas to Vietnam, which is our primary tolling area and have that converted to metal there. As first begin production, we also need to build a little bit of inventory in that channel at our tolling partner in order for them to have a consistent supply of product to run the electrowinning process. So there are a lot of one-timers in there that are part of this transition. And once we get through this ramp-up and have filled that channel, this will no longer be an issue that we have to talk about, but it's inevitable as we transition the business. We do have these impacts that everyone should be well aware of and be thinking about over the next couple of quarters. If you step back though and think about what that means, it means that we are ramping production of separated products. It means that we've established a real base in Southeast Asia to be able to broaden our market opportunity to sell both oxide and metal overseas to predominantly can go some non-Chinese customers. And so I think that is the major success and accomplishment that we're working towards.

So you have an agreement to address and supply the Japanese market. What other geographies, what other markets would you be able to tab now that you're doing installing for metal?

Sure. There -- we've actually been pleasantly surprised at the scale of demand that we're seeing outside of the primary market. I mean it's unavoidable, 90% of magnets are made in China, right? And so that is a market that we sell into. It is a market that we're going to need to sell into for a significant period of time. But what we've seen is real demand for our product in Japan. And as you talked about, we do have a relationship with Sumitomo to help sell our products into that geography. But we see it broadly in Asia. There are a lot of opportunities other than the tolling arrangements and things like that, that we've talked about in Southeast Asia, you see some real interest from the Koreans. And so I think that the recognition of the importance of permanent magnets to the electric vehicle supply chain, it's becoming very, very front and center for a lot of OEMs. And so using Korea as an example, you see market share from an EV perspective for Hyundai Kia and the like, growing really significantly. And so I think they see the same thing that the U.S. automotive OEMs like GMC and that the Japanese see as well that this is going to be a critical differentiator for them is access to critical materials to grow that business. So I think really, anywhere there's auto production, you're going to see demand.

All right. And now I think you just came back from Dallas, right? When a Stage 3 plant is being built. What can you share with the audience on that next step, which is also ramping up later this year?

Yes. So for context on Stage 3, we have talked about a 1,000 metric ton Magneton facility in DFW that we've made tremendous progress on building and beginning to equip. We've built a tremendous team down there, almost 40 people. And obviously, that's before we're staffing up operators in the plant. And so a lot of folks focused on building out our technical capabilities to execute on this. And what we expect to be able to do there is we had talked about when we announced our agreement with General Motors, that in the interim before we're building Magnets, which is targeted for 2025, that will have an interim product, which is an alloy flake. And so our target remains to produce an Alloy flake product admittedly small scale at the end of this year. That the real prize is being able to make finished magnets and that will scale over time beginning in '25. That facility, as we were talking about earlier, the initial target is 1,000 metric tons. There is room to expand. But to put it in the context of the broader magnet market, the magnet market is nearly 200,000 tons. So we're a mino. But it's -- you sometimes lose how important this is when you put it in that context, this hasn't been done in the Western world and certainly in the United States for many, many decades. And so the thing that encourages us is that a lot of the processes or processes that are done with other minerals and other raw materials. And so we can take learnings from that for things that are done at scale in the United States, still making aluminum, et cetera. And then there are other pieces that have been done, more of the downstream piece, the coating, slicing, grinding, those sorts of things are done at scale here already. And so we've assembled a team of experts in the various different disciplines to get from an oxide to a magnet and are really building that capability and are very excited about what that will look like.

And when are you going to start bringing people like workers engineers inside the plant?

Very soon. We actually -- we have limited occupancy of the facility already, and we've begun installation of a certain amount of the equipment. We are hiring, actually, that was 1 of the major topics we were talking about when I was down there. We're hiring our first operating shift for electrowinning and strip casting as we speak. So we are moving quickly to get that equipped. Our -- we have -- we've envisioned this facility as very much the magnetic headquarters. And so we have a significant office presence there as well. And so our folks are moving in there pretty soon. And so everyone is getting very, very excited.

And what can you tell us in terms of the technology and the patents, licenses that you may need to require in order to actually make magnet?

Sure. We get asked about this a lot. Our view is that we absolutely have a path of -- we talk about our strategy being buy, build and/or JV. Clearly, by doing this facility, we're telling you we have a path to build. And so we absolutely believe that and are executing on that. That doesn't foreclose any other opportunities, of course. We're always looking to be thoughtful and best approach time to market and be really focused on execution. But absolutely, we see a real path forward in building this capability. And I've been tremendously impressed at our team's ability to really move the ball forward in a variety of disciplines. You hear -- you go from an outside and engometaline into magnet, there are a lot of steps between here and there. But I think we're moving the ball forward on all of them.

And on the commercial aspect, once you become a magnet producer, the Texas plant will only take a small fraction of your upstream production. And I think GM doesn't have 100% of the 1,000 metric tons. Are you negotiating actively with other OEMs? What is your plan on the commercial front?

Yes. For sure. For context, 1,000 tons of magnets would be high single-digit percentages of our NdPr oxide from upstream and Mountain Pass. So unless and until we're significantly expanding downstream, there will be a very, very large business upstream of us selling into the market, not to ourselves. We've been very clear in our commercial approach for Stage 3 that this is a 1,000 ton facility competing against a 200,000-tonne behemoth in China. And so to think that we will, out of the gate, be competitive with them is crazy. And so we've been very thoughtful and methodical in bringing customers into the fall that understand what this takes and are on the mission with us because the reality is that given what I just explained about the difference in size between our upstream and downstream business, inevitably, we'll be building more downstream to the extent we're proving the returns to our shareholders. And with that, I think the smarter OEMs who get their foot in the door first are going to be the ones that are first in line. And so that's how we've approached this. And so we've been very, very focused on risk-adjusted returns on capital in this downstream strategy where we have confidence that we'll earn a return even with the amount of uncertainty that comes with building a new process that hasn't been done in the western world in many decades. And so we're continuing to build confidence there. The way I'd characterize discussions with customers for the remainder of the facility is absolutely, we are supply constrained, not demand constrained. And so it's a matter of picking the right partners. We talk about this a lot. If we wanted to go out and pepper everybody with press releases, which, unfortunately, is sometimes the norm in this industry, we can do it, but that's not the right answer for our shareholders, for our team, it's picking the right customers that share the vision that I just laid out. And we have a lot of confidence that there's a lot of demand like that out there.

All right. So let me scroll something on the magnet side. A few months ago, 1 of the big EV producers put out a comment saying that they may have a non-rare magnet. And obviously, that was a big concern. So what's your take there? What has been the development lately?

I didn't hear about this. Yes, look, we get asked often. I think the reality of motor design is that there are always trade-offs. There has and have always been decisions that OEMs need to make on what path to go down. What we heard from that 1 particular large EV OEM was a real concern about security of supply. If you're going to go make 20 million EVs, you better have another solution in addition to rare permanent magnets to be able to hit those volumes. And importantly, this was discussed in the context of the very low end of their product portfolio. Our view remains whatever you can do without a rare permanent magnet, you can do more efficiently and better with rare permanent magnet. I think they would admit that despite being an incredibly talented engineering organization, they have not been to the laws of physics. And so that remains true. So I think really what that is about is the fact that there will be a diversity of motor technologies, and that is healthy. Right now, rare permanent magnet motors represent 94% of EV motor power deployed into the market. Does that go to 85, 80. You name it. It's anyone's guess, but I think that, that transition where you have a bifurcation in the market to the low end to the medium and high end is absolutely rational, and I think necessary. You look at the go-forward supply and demand estimates out there from third parties. And you'll see something like, okay, demand is going to triple and supply is going to double, okay? That doesn't work. And I'd probably take the under on supply doubling. So that demand curve is going to have to meet somewhere. So that's generally how we think about it, but we certainly -- we answer that question quite often.

And then another aspect is the clearly Mountain Pass is a great mine, but it's geared towards light red. And in order to make alloys to make magnets in big scale, certainly, you need to increase your environment of your supply, your resources of these rare. What is the strategy there?

Sure. Yes. I think that certainly, Mountain Pass is a predominant worth ore body. The great thing about the scale of the operation at Mountain Pass is even with the 1.7% of heavy distribution that we have, a small percent of a large number, it could be a large number. So we do -- we will make a fairly significant amount of dysprosium and terbium to be able to satisfy some of our internal demand for magnet making. And we've laid out that, that is our expectation for our initial Fort Worth plant. In order to continue to scale undoubtedly, there is a lot of on finding incremental sources of heavies our plan for the heavy worth separation facility that we have laid out is that it will be designed to take third-party feedstock. And so when you think about the industry, and we talked a minute ago about how I'd take the under on supply doubling, often what you see out there is smaller scale types of potential projects, anything that realistically may get off the ground. We're not talking about 35-year mine life, things that can support a $2 billion plant that's required to go all the way to oxide. And so I think we will play an interesting role in the development of the market where there are certain upstream projects that maybe only can get from an economics perspective to a mixed carbonate or a concentrate or something like that, which is a product that we could then take and separate into heavies. And so I think you've actually seen that on some of the projects that have been out there. A real admission that, hey, the economics aren't there, particularly at today's prices to get all the way to justifying the capital investment required in solvent extraction or other separation facility. And so that puts us in a good position to play a real role in broader development of the market.

Okay. I have a few more, but let me see if there is anyone in the audience wants to ask a question to Ryan directly.

Thanks for being here. Quick question just on mirroring, right? You heard a lot from these companies here, and obviously, you're well positioned. You've got the GM partnership. Can you just unpack that a little bit of the impact that has on your business and how you're well positioned to capture those trends?

Sure. Undoubtedly, that trend plays a big role in why we've approached the magnet opportunity as quickly as we have. When we went public in 2020, and we probably talked about this at the time, we said magnetics is a 2025-plus event. We've got a lot on our plate to execute on. And it's an exciting opportunity, but it's a longer-term opportunity. The reason we're sitting here now about to move into this facility, was real demand pull from customers like GM and others where there's a real acknowledgment post-COVID of the vulnerability of supply chains. And so I know it's interesting being a lot of times in the critical material space, there's a lot of confusion of are we in the battery, where are you lithium? What do you mine? There's a lot of confusion. We really like our position because a magnet is an enabler for reducing the size of the battery, for reducing other components. Yes is a North American produced magnet in the early days when we're talking about 1,000 tons of North American capacity. Is it going to be more expensive than a Chinese magnet day 1? Sure. And we've been very upfront about that with our customers. But I do think that the recognition from -- and it's not just automotive OEMs, the recognition of the importance of having some level of domestic supply of these materials is what's going to allow us to scale and come down the cost curve and become really globally competitive. It will take time, but that's absolutely the goal. We're not going into this business to be the high-cost producer, obviously. I think the other exciting thing that we see, and we referred to it a little bit jokingly in the last call, but it's real and it's coming pretty quickly is the advent of robotics. With all we see with LLM and the progress that's being made there, and we talked a minute ago about motor design and the inherent trade-offs one way or another. When you look at certain robotics applications, you call it industrial automation, if you wanted to be less s***, but in a lot of those applications, there is no alternative. If you need the actuator to lift a certain amount of weight, you need to wear a permanent magnet, period, full stop. And so when that set of applications really starts to grow. And again, maybe that's 2050, instead of 2030, who knows? I think regardless, we get a lot of focus on the automotive supply chain, which makes sense given that is 1 of the major second growers in our space. But it's not like it's, okay, let's get to whatever the penetration is, and then was it. I think there's a lot of room behind that for really, really critical applications. And think about the kind of deglobalization theme as it relates to EVs and securing supply chains, when it's robotics, I mean that's got military applications and things like that. So you bet that the focus on the issues between the Western world in China and things like that, when you have 90% of your magnets being made in China, that gets even scarier.

Another question? Well, if not, let me ask, how should we think about the returns and maybe the margins, as you guys integrate into Stage 2 oxide and then eventually alloys magnet in Stage 3?

Sure. Obviously, going from an intermediate product to a separated product allows us to unlock a lot of margin embedded in the product that we sell today. Having a refinery that is tailored to our elemental distribution, our minerology, obviously, allows us to extract likely the best recovery of the things that we want and the rejection of the things that we don't want within our own concentrate. And so when you sell that into the broad market, you have to give that up. And so that is part of the major uplift in earnings that we'll see. When you go from our upstream business, and you see this across the board, high quality, low point on the cost curve upstream businesses can earn 70%, 80% EBITDA margins. And when prices were high. Last year, you saw a sorting 70%, 80% EBITDA margins. When you move forward into refining into the midstream, the margin percentage points will decline, but the dollars expand significantly. And so to the point of getting that uplift and being able to recognize the full value of the embedded NdPr as much as possible. That obviously has a pretty significant earnings uplift for us. And given the fact that we started life with very significant capital already invested and the scale of capital that was required to get Stage 2 into service, the return on capital, you pick your NdPr price is great. When you move into the downstream, and this gets back to kind of what I was talking about in terms of how we approach. Yes, the commercial structure is for this first facility, you can make anything look great on a spreadsheet, but we have to go execute on it. And as we've talked about before, we are extremely execution focused. This management team are large shareholders of the business. Our Chairman and CEO is our largest individual shareholder. He is focused on return on capital and risk-adjusted return on capital in every decision we make every single day. And so when we approached taking capital that otherwise could be invested upstream at very high returns or return to shareholders or whatever it may be, when we evaluated the strategic nature of what Stage 3 gives us and then evaluated our ability to execute on an attractive risk-adjusted return in this facility that is what led us to make this investment. And we've been clear also our mission, what we started talking about is to complete the full year of supply chain. We think it's important for the development of all stages of our business for the marketplace to see that this can be done and this could be done at scale and this can be done well and it can be done here.

All right. Well, thank you very much. Thank you. Great to have you again here with us. Good luck as you continue to ramp up Stage 2 next year.

Thanks. Appreciate it. Thanks, Carlos.