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

Thanks. Good morning, everyone. I'm Matt Summerville with D.A. Davidson hosting a fireside chat discussion with Jim Litinsky, the Chairman and CEO for MP Materials. We're just going to kick it off and go right into Q&A this morning. So one of the things I wanted to kind of do to level set everything for folks in the room and investors online, can you spend a few minutes talking about the uniqueness of the Mountain Pass asset base? Can you compare and contrast your asset with other major producers of rare earth material? And at a high level, what differentiates MP from your competition?

Sure. And thanks for having me, Matt. It's great to be here. I think this is the kickoff session of the conference, right? It's a pleasure to be here. And hopefully, everyone's coffee is kicking in now. So Mountain Pass is a world class asset. It's actually been around 70 years, they found the ore body in the 50s and production on the site has been around for a long time. So it's a well-known orebody or rare earth-grade. When you look at a rare earth asset, the key thing that you really need to understand and every ore body is different. And every ore body is there's different types. The key ones are bastnaesite and monazite. But the key thing to really understand is the grade, the percentage of rare earths because as I jokingly say, if you have a backyard, you have a rare earth mine. There are rare earths in every kind of rock. And so the key thing is, can you process them economically. And so at Mountain Pass, we have a 6.5% grade. If you think about the industry outside of China, there's really just us and one other public competitor in Australia who have, what I would call, world-class ore bodies. Everything else, if you hear of projects around the world, ours are around and 6-and-change percent. Those are typically 1% to 2% ore less. And so there's a material difference in the economics. With respect to Mountain Pass, we also typically say we operate in California, so we wear that with a badge of honor. We have a dry tailings process, low single-digit percentage of sites in the world in mining and refining, have a dry tailings process. And in fact, in rare earths, we're the only one. And so when you add up the fact that we're able to have a -- we have a very economic ore body because of the high concentration. We process it very environmentally friendly. That also adds up to us being able to be a low-cost producer to the world in this space. And then, by the way, I guess I lastly hadn't cover for China, which obviously dominates the industry. The ore bodies are typically 1% to 2% as well. So really Mountain Pass of an asset with respect to rare earths.

Understood. Maybe kind of dovetail into an operational update for the Mountain Pass asset base and the longer-term views. Can you sort of provide a state of the union as to where MP is at with respect to Stage 1, Stage 2 and Stage 3? And to find along the way, what each stage is responsible for to kind of, again, level set the playing field for folks.

Sure. And for those new to the business, there's really -- there are 3 key stages. So when we refer to 1, 2 and 3. The first one is concentrate. So when you think about MP, but this really would go for any rare earth operation kind of for the full stream. Ultimately, these materials go into high-strength, highly efficient magnetics. And so to get from sort of the ground to a magnet, you have to, first, you have to take the ore, what we refer to in the previous question about kind of a 6%, 6.5% ore body. You take that ore, you concentrate that down. And so you mine it, and I think a lot of people have an impression of a mine as you sort of take rocks out of the ground and put them in a bag and ship them. And that's really not what this is. It's much closer to kind of think of it as almost looks more of like an oil refinery. I encourage people to check it out on our website. So you mine the material. You concentrate that 6% to 60% to 65%. And you'll see we have in our Stage 1, we have a typical 1.5 tonne tote. We'll have -- you can see them on our website, they look like that. Those will be, call it, a 60% grade or 60% rare earth -- REO content, and that's our Stage 1 business. And so the key to be successful in this business, you must, must have a successful Stage 1 business because that is the feedstock to each of the downstream pieces of the process. And so what we've demonstrated, and I think it's 9 quarters in a row of north of 10,000 tonnes of REO, where the production on the site, it's been really extraordinary what our team has been able to accomplish in the last few years since we've been a public company. But getting that right, getting that REO production in the Stage 1, again, it's critical because that drives your cost structure, right? If you can't be in that first stage in a low cost effective way, then it doesn't matter how good you are at the next pieces of the puzzle. So that gets you in the game. Historically, we have shipped that concentrated product to China where it gets refined and then made into a magnet and those magnets are sold to -- depending on the use case for an EV, for Tesla or GM or an iPhone or a wind turbine, all the use cases, and we can kind of talk about those. Stage 2, which we said on the last call, we are now refining the material, and we had quite an extensive optimization project on site to get those refining assets online, is where we'll take that concentrate of Stage 1 and turn it into a separated rare earth product. And so that is the refining process. Then we'll move on from there, and we have in Stage 3 in our business in Fort Worth, we have an initial magnetics facility under construction where we'll take the refined product. And by the way, once you make that refined product, it really opens up the market for China and then elsewhere in Asia to sell that product, it really -- by not having a concentrate, typically -- the only other rest of world refiners are in China. So if you have a concentrated product, you have to sell into China. If you have a refined product, it really opens up the market. There are a variety of places to sell. So now our ability to sell to a lot more customers is opened up because we're now refining. The refined product then gets -- and I'm simplifying in the stage 3 to be magnetics. The refined product has to be metallized, alloyed and then turn into a magnet. So it's really sort of a handful of stages in one, that's really going from a refined REO to a magnet. We announced since going back to last year, we have a deal with GM that will be the foundational customer of the facility that we're building in Fort Worth, Texas. That facility, by the way, we broke ground on that last year. It's topped off. We're working on the inside. So that building structure is done. It's enormous. There's nothing like it in the Western world. It's the first of its kind because this industry is 90-plus percent controlled in China. That facility, as I said, it's done, it will take us a while. We have to get all the equipment in. And we've got a lot of equipment we've ordered. We have a lot more that we have to finalize. Once we get all of that in, we'll be making magnets and those magnets will go, again, initially GM Ultium platform will be the key magnetic supplier to that platform. And then we'll have other customers across the use cases as well as other OEMs as we're not exclusive. And so the point is that we will complete -- once we are shipping magnets out of Fort Worth, we will complete that whole supply chain from the rock at the mine, all the way through to the magnet that will go to the end customer. So those are the 3 stages of the business.

Understood. One of the things I'm sure is pretty topical on people's minds is NdPr pricing. Pricing has moved from a high of around [ $175 ] a kilogram. I want to say, in February of '22, down to 60, recovered a bit, I think, into the 70s as of a few days ago, I haven't been able to check it the last couple of days. But talk about what kind of dynamics are influencing that kind of pricing behavior? Is it economical for new resources to come online at these pricing levels? And then just kind of talk through the supply side and the demand side of things as part of the question.

Yes, good question. So yes, it's certainly been a surprising year from an NdPr price perspective. And I think particularly given the enormous secular change happening in our space, there are -- I think there's a lot more investor attention on the commodities that are driving electrification than typical commodities investors around the world or even if you think about oil or any other commodities. You have a lot of people who are looking at this space and are sort of somewhat confused. And there's a key concept that I think will help people and I want to give this background and then I'll get into the dynamics of NdPr, but we shouldn't forget that commodities are spot markets, right? There's supply and demand on spot. And so typically, you can have -- and something is mature as oil, you can certainly have a long-dated forward curve that can reflect some aspects of longer-dated supply and demand, although there are a lot of moving parts to that. In our space, which, of course, there's no sort of real forward curve that marks, the fact that you have enormous compounding demand where you can sort of see in all obviousness that 3 to 5 years from now, the amount of demand for our materials is really is spiking. That really doesn't get reflected well in the markets today because today, it's a spot supply-demand market. So I think a lot of times, people do get confused by the short-term volatility because they say, wait a second, electric vehicles are growing, why wouldn't the price of NdPr today discount everything it knows through 2032? And that's just not typically how commodities markets work. That said, it also makes it an incredible opportunity as an investor because if you have a time horizon that goes beyond sort of the near-term supply and demand, there's opportunity and a lot of financial leverage to kind of -- to understand that dynamic. When we look at our space today, as you said, Matt, NdPr last year was around $175 at the peak. And then now -- earlier this year, we pulled all the way into the 60s and now we're in the low 70s. And it's for most of this year, it's been somewhat stable. And hopefully, who knows, but that feels like some kind of bottom before sort of the next significant up cycle. But I think the drivers the we see, and again, with commodities, as I always say, in the short term, very hard to predict prices. I have no clue what they're going to do tomorrow, over the next couple of months. Longer term, I have views and we can -- I think you -- but I think in the short term, the key driver that we see, the drivers are, there's really actually both supply drivers and demand drivers. So on the demand side, what I think some people got to do the math here, about 75% of NdPr demand are -- is still sort of legacy industry stuff. So we're talking about disk drives, HVAC equipment, GDP grower kind of stuff or even there's stuff that controls the windows in ICE vehicles. So there's historical GDP stuff, that's 75% of it. 25% of it is electric mobility transport, electrification, the EVs that we're talking about. That piece is growing 30% sort of as far as the eye can see. And we expect that to continue. But if you think about it, 30% growth, 20%, 30% growth, pick your number, if it's on 25%, coupled with a 5% to 10% pullback on 75% is going to lead to sort of actually a decline or no -- and so China has been significantly challenged all year. I mean, I think that's apparent across the commodity landscape in many other areas. And so I think we've actually seen those impacts in our space. We're just the challenge that has happened macroeconomically in China, nothing related to rare earth has pulled back demand a bit on an industrial standpoint. And I think that's been some impact. Additionally, the border between China and Myanmar had been closed for a couple of years during COVID. Myanmar, unfortunately, is controlled by a military junta that does allow a lot of what I would call illegal extremely environmentally destructive production, where they literally will take rare earth material on the side of a mountain. I'm simplifying, but pour acid, they'll get a -- pour acid on it, they'll get something they can send into China and then the asset just kind of goes down, unfortunately, into a river and there's been just disaster. There's been lots of articles about this, but disasters, consequences. Almost equivalent to like a Blood Diamond's concept where it's just I think more attention needs to be on that. But that will always be sort of a -- I wish it weren't the case, but that appears to always be sort of some element of supply that comes into the market in China. And that supply had built up, on pipe and is now came back in this year -- sorry.

Okay. Go ahead. Take your time. So I just want to put a finer point on supply side risk as you look out over the next few years? Are there new resources, newer resources that could potentially come online? Where do you see incremental sources of supply, if any? Again, I'm just trying to put a finer point on the supply side risk here.

Yes, at these prices, it's really challenging. We're talking about at $70 NdPr, my estimate for breakeven NdPr incentivization of production is around $120. So I think there certainly will come a point where it's economic, but we are so far away from that. So you really -- when you think about if you had all of the human capital, all of the financial capital and the ore body, you're talking about billions of dollars, years to get online. Even at these prices, we believe the Chinese industry loses money. So really, I don't know what the exact breakeven number is, but it's certainly significantly higher than it is today.

Okay. I want to spend a couple of minutes just talking a little bit more about Stage 2. With respect to Stage 2, you have quite a bit of optionality in terms of what you do with the material, consume it internally and your Stage 3 as you touched on, which is small at first, provided to a tolling partner in Vietnam, sell it via Sumitomo, sell it to magnet makers directly or sell it into China. It's kind of all the different things I think about. What informs your decision as to the past paths chosen for that Stage 2 material and how you best optimize the economics for shareholders on that?

Sure. Well, ultimately, it's optimization of economics. Going into China, historically, we're at a significant disadvantage because there's a VAT on the product. But once -- now that we have a Stage 2 product, that's opened up the market to Japanese producers, Vietnamese producers. And so ultimately, you saw -- you referred to, we have a deal with Sumitomo, so we'll be able -- that will help us sell into Japanese industry. The good news is that there's -- this is not a huge industry of players where there's thousands of customers to get to know. There are a handful of producers. And so we'll work amongst those to figure out the value maximizing position for us. We expect to supply all of them or many of them and we'll just make the economic decision to do so. We also announced -- if you go back a number of months, we have a deal now for metal capacity in Vietnam. So we will be able to take refined material for Mountain Pass, metallize that and that will open up us to be able to sell to additional customers. So now that we're refining material, there's really -- there's a broader array of customers that we'll be able to go to.

Will this eventually lead to virtually none of your Stage 2 output going into China? Is that sort of an end goal of the company?

Well, I think today -- yes.

Goal might be the wrong word.

No, what, say it again?

I said goal might be the wrong word but...

Well, we've made clear from the beginning that our goal was to restore the full rare supply chain to the U.S.A. That's been our goal. I think we've -- there were a lot of people who doubted that we would get to the refining step, let alone magnetics. We're now refining. So we've brought that to the U.S.A. We -- the Fort Worth facility will show that we can complete that supply chain. But then again, I think it is a global market, we'll want to sell it at all and maximize value.

Maybe just a quick update on where you are with respect to the Stage 2 ramp, how close you are to hitting...

Can I get a second? My throat is -- excuse me one second.

Sure. No problem.

Excuse me. But really sore throat. I do not have COVID though so don't worry, everyone.

No worries.

Thank you. Lost my voice last night.

No worries. Just to refresh, I just want to talk about where you're at with the Stage 2 ramp, when you expect to hit kind of run rate production and how the Stage 3 is set to capacity.

So well, yes, the great news when we talked about this on the call, is that all of the circuits that are required for Stage 2 run rate production are now operating Mountain Pass. To go from sort of refining to run rate, the key thing is you want to do it economically, and you want to do it consistently. At any one point in time, you can have different flow-throughs of different circuits. And so the key in the ramp-up is to get all of that operating smoothly. And we're working through, obviously, the kinks in a variety of the circuits to kind of get that process going. And so that will take some time. But we -- I think the key news that we broke on the last call, which is a remarkable thing is that as we look at everything that's been built, we feel very good about the chemistry. There's nothing we see that -- we didn't screw anything up from that standpoint. So that's good to go. For a run rate basis and then for the circuits that we built also, everything that we have is capable of going run rate. And so now it's a question of fixing the challenges to get that ramp in any kind of industrial process get that up and going. And there's a number of issues always that you're working through, you kind of fix one thing here and another thing breaks here and all that, and we're talking about a multibillion dollar refining facility. And so but things are looking really good. And the last thing I would say on that, I do not expect -- and I think because we get a lot of questions from people, from a modeling standpoint, I do not expect this to be a linear process. You'll see improvement, but you may see step function changes. So it will not be a curve where it's sort of like you do 10 this month, 20, then 30 than 40. You could see certain amounts and then all of a sudden, a step function jump up, and that's a function of, at any one point, you could be working on the flow-through of a specific circuit and then that comes online and then boom, you know you have a step function change. And then also the other key, the last thing, again, I want to stress enough as people think about this, is that the key is to get it all done economically, right? Because if you we have such an advantage with our Stage 1 business where we -- you look and we are a low-cost producer of concentrate to the world that we want to maintain that through the stages of the process. And so the tinkering that we do now is not just sort of get there as quickly as you can. It's really just getting there, but also doing it thoughtfully so that we can -- obviously, the name of the game is to produce at the lowest cost we can.

Understood. Maybe spend a minute talking about go-forward customer arrangements. I would imagine auto OEMs, wind turbine OEMs, the U.S. Department of Defense, potentially others would like to effectively tie down their respective rare earth supply chains. We see more of that activity with lithium and EV battery. Why aren't we seeing more of that activity in the rare earth supply chain today? Because that's seemingly to me, is going to be a bigger, more problematic choke point for them?

Certainly. Well, with respect to the lithium and other space, remember that, that is a -- if you take a typical EV, you may have $10,000 to $15,000 of battery materials and cost versus a couple of hundred bucks per rare earth magnet. So the reality is in the scheme of cost impact, it's not as high. Although if you mess up the magnet part, it can be as high. So it's critical, but it's not as high from a, "Hey, let's get this production online." And in the rare earth space, unfortunately, for most, I think, fortunately for us, there's also just not as many options, right? It's not as diverse, lithium is somewhat ubiquitous, copper, cobalt, some of these others, there are other sources. And so there's a lot more positioning, structuring things that people can do. With respect to the rare earth space, you really have an industry that is completely dominated in China. And then you have us and then Lynas, the Australian company. And so there's really just 2 companies outside of China. And so even if -- and I really stress this point because I think it sometimes gets lost. Even if we had all the rare earth in the world in the U.S., we'd still be sending it to China to be made into magnets. And so I think the challenge is until we can really demonstrate that we can have the full supply chain on an economic basis, it's hard to plan around anything because you know you're ultimately going through China anyway. And so that, I think, is what's so exciting for us as a company is that because we can show that this can be done, we've obviously shown refining to date. It allows us to really open up and broaden the supply chain. And I do think as the rest of world sort of the non-China supply chain matures, you will see more of that. You will see a lot more of that. And -- but certainly, for us, we have that deal with GM, and it's -- this is not just a small deal. This is a large foundational deal. It's the vast majority of the output of that facility -- of the Fort Worth facility. And so this is an enormous deal. And one of the things that I've said to investors since we've been public, if you go back to when we went public in 2020, we referred to magnetics as sort of a 2025-plus event. There's a lot that needs to be done to execute. Fast forward to today, it's now 2023. We've got a facility built, a deal with GM. The amount of progress that we've made in a short time is extraordinary. If I had wanted to go out and announced, "Hey, we're going to do 10x the size of what we chose to build," in the environment that we're in, we probably could have done that. The reality is, is that when you build and especially when you go into a new space, you're going to make mistakes, you're going to not do things as efficiently as you'd like. And so it's very important to us to execute and as I -- execution, execution, execution. And so we wanted to sort of hit base hits before we just go for a home run. And so -- for us, it's a function of just sort of making sure -- and I think we're moving, again, extraordinarily fast. But we want to make sure we can execute. So rather than kind of reaching for all that could be out there, we've chosen to just kind of stay more conservative on that front because ultimately, by the way, we're focused on return on capital, right? I'm the largest shareholder of the company and we want to make sure that if we're going to make mistakes early in the process, we'll do it on an initial facility not on 10x the amount.

Got it. I think we just have about 2 or 3 more minutes, but I wanted to touch on U.S. government legislative mandates, Inflation Reduction Act, tax incentives. Can you just provide a bit of a legislative overview in terms of what requirements will be born by OEMs in terms of sourced materials for drivetrains, et cetera, and the kind of positioning of the company?

Yes, so there are 2 major things with respect to that. There's 45x, which is a 10% tax credit for and Mountain Pass will be getting that. So whatever the cost structure is to produce material at Mountain Pass, just pick a number running through your model, if it's $100 million, $10 million as a credit back. That, obviously, we'll enjoy. 48 C is a 30% of cost -- CapEx coming back to you. That is, there's a minimum amount set for that or I think it's around $10 billion and a certain amount of that is allocated for certain areas, we'll say, and there'll be a lot of competition for that. Certainly, the rare earth magnetic space is one of the designated areas that is eligible for that. And so we think that's an exciting opportunity. We know that that's a competitive area, but that could be a big amount of capital to the extent that we are able to get that as well.

Okay. And then I wanted to at least spend a minute to acknowledge the balance sheet. The company has very strong balance sheet with net cash. How do you think about the near-term and longer-term optimal capital structure for the company? And how capital may be deployed looking out over the next few years outside of growth-related CapEx?

Yes. Well, as -- If you go back to sort of the beginning of the public life of the company, I've always said that I want the leverage in the commodity, not on the balance sheet. And we recognize we're -- capital structure really matters. You need to have a capital structure commensurate for the business that you're in. We -- I think for all the reasons we've discussed on the stage here today, going from -- with the volatility and the price of the commodity, you can have huge swings in the cash flow of the business. The good news is even at these prices, we're pretty sure a significant chunk of Chinese industry is losing money, we're making money. We're not making as much as we'd like, but we're making money. That is incredible, right? And that is a great thing for sort of the long-term value of the business to show that at these very stressed levels in pricing, we can be successful. That said, it is still a volatile business. We're aware of that. And I think sometimes, there's a tendency to signal what stock buybacks as to rather than just create value. And so you have people who will be like, yes, we'll go buy back X and maybe it makes -- it's a rounding error of difference on the value. We really think about the world in an expected value way. And so it's -- if there's an 8% chance a buyback could create some value, but there's a 3% chance that prices are going to stay low for a couple of years, and it's not the right thing to do in the short term, that you have to consider those realities. And we have an owner-operator culture. I'm the largest shareholder, as I said previously. And so what we really think about when it comes to capital allocation is where we can really move the needle, right? It's not sort of little small singles. So when it comes to that kind of stuff, we -- as I like to say, we're not going to -- we won't do something small to just sort of feed a signal or something like that, to the extent that we do something we want to make sure that it is the right long-term thing to do for long-term shareholders of the business. But to your point, we are -- we do, we see, we look at the value of the company today. And if you just look at the replacement cost of the assets and the scale of the opportunity, it doesn't foot, right? And -- but it's a very volatile space, as we said, and the volatility that we've seen downwards, I think, can just as easily snap back upwards. So it's frustrating out there in the short term, but we just want to make sure that we can continue to execute, have the balance sheet to make it through any volatility that we see and then the scale of snapbacks in this space are pretty extraordinary.

Perfect. I think that's a good spot to wrap up. I really appreciate it, Jim. Thank you for your time.

Thank you. Appreciate, thanks.