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

So we talked here and there about unique companies that we have at this conference. And I think no company may be as unique as MP Materials, which is truly one of its kind business as the owner and operator in the non-pass regular planning and processing facility, which is truly the only integrated site for rare materials in North America. These elements are critical in the manufacturing of magnets for motors, for vehicles. And I think as you'll hear from Ryan Corbett, the company's CFO, the opportunity here is tremendous as we move forward into the electrified world. The company has 177 million shares, about $3.1 billion equity cap. And there's about $500 million of net cash, and about $2.6 billion for enterprise value. So we're lucky to have Ryan Corbett, the company's CFO here, to help walk through, and the overview, and then we'll get to Q&A. So with that, Ryan, please the podium is all yours.

Thank you. Good morning. Brian, thanks for having us. I appreciate it. I've got to take off with the safe harbor. Obviously, we'll make certain forward-looking statements and certain non-GAAP measures, refer to our SEC filings for reconciliations. This always happens to be right before our Q3 earnings call. So I will be very careful. This is all referring to Q2 and backwards, we did Q&A, we stick to that. Maybe I'll start out on the last presentation, actually pretty interesting, but there was a comment about how not necessarily the topic of conversation at cocktail parties. Rare earths often are the topic of conversation at cocktail parties, but to give you a sense of who we are and what we do, MP Materials is the Western world's only scale producer of rare earth materials. Brian, as you mentioned, we're sort of a critical piece of the story of electrification, automation of our economy. We own and operate enough pass rare earth mining processing facility in California, it's about just a quick 50-minute drive from here. We're always happy to travel here from 20 minutes away at Summerlin, where our corporate headquarters is. So that makes it easy. Today, we're the second largest producer of rare earth content globally. This is from a standing start in 2017. We acquired the site with 8 employees. The site was in care and maintenance. We've grown the company to 650, roughly, employees today, about 550, which are gone past. It's a founder-led business. Our Founder, Chairman and CEO, is the largest individual shareholder of this company. And we have been on an ambition to support the development of a diverse and China supply chain for rare earth materials. I'll explain why that is so important, particularly to an audience focused on the automotive space at the moment. And I think the important thing that I would mention, a lot of times when we get into the topic of critical materials, there's a lot of confusion. Lithium, rare earths, graphite, all of these things get back to sort of in the same breadth. So for context on where we sit. Rare earths are the fundamental building block for the world's strongest magnets, rare recumbent magnets, NdFeB magnets. Right now, one of the most critical use cases applicable to this audience, in particular, is magnets and those to the motors, electric vehicles. However, earth magnets have been in ICE vehicles for many, many, many decades. Actuators, power steering, power mirrors, power seats, anything with motion generally is -- contain some sort of magnet. And generally, when you're looking for weights and power, and the right ratio of weight and power, oftentimes the only solution there is a rare earth recumbent magnet. And so what we produce amount pass are rare earth oxides and then what we're beginning to produce over time in our new facility that I'll talk about in a moment for Texas, are those magnets that go into EV motors, the powertrain, in addition to the actuators and smaller motors throughout the vehicle including within ICE centers. So the other thing that oftentimes is overlooked with so much airtime and focus on electric vehicles is generally the broad industrial applications for the magnets. Robotics, wind energy, other form of transformation, aerospace. All of these things generally require some type of magnet and that is the opportunity set that we are executing into. As Brian mentioned that you sort of standalone into western world as a scaled producer. Certainly, this is a pretty diverse market. It just happens to be located, for the most part, on the other end of the world, China has embarked on, frankly, quite thoughtful industrial policy in this space over the last several decades and has come to really dominate this space. The market share of the Chinese producers, rough numbers, 60% in mining, 80% in refining and over 90% magnet manufacturer. And so this certainly, rare earths really exemplifies the upstream supply chain risk that exists across our electrification economy. You've seen it. You've seen headlines on gallium and germanium, not actually rare earths, they get rare earths, but side point, graphite, other things like that. So having this single point failure is really an essential risk for our economic national security. And as you think about what's going on broadly in the world, true national securities. You think about robotics, you think about what other use cases magnets go into, having the single point of failure risk, no matter what country it is, is something really critical and really supports our mission to grow scale, to be able to -- with the Chinese producers. And specifically on the EV opportunity and some of the higher growth, the drivers underpinning the growth in magnetics. I think the thing that's interesting here and I call out on this chart is we get a lot of questions that we just -- and if you look at broadly the critical mineral space, we get a lot of questions as to, hey, why our commodity is down as far as they are? I think there's a million different answers to that question. But I think that it's interesting to see, and you see it for this chart. And certainly, with all the headlines that I'm sure all of you guys are following very, very closely with, some questioning of the immediate term, near term, electric vehicle targets that have been set [indiscernible] things like that. I think the reality is, no matter what your forecast is for the next 1, 2, 3 years, the medium- and long-term secular trend is obvious and it depend. And I think the position that we sit in, powering the magnets in motors as opposed to being somewhere else within the powertrain, being in the battery, we really like where we sit because it's hard to change the laws of physics. Almost anything you can do without a rare earth or the magnet, you could do more efficiently with one. And so that puts us in a really unique position. And so what we've seen over the course of the last year ago with our commodity price being down 50-plus percent, you get a lot of questions, how is that possible when you see electric vehicles, even with these most recent headlines, I think units are up something like 40% in Europe this year. China, more than 1/3 of their new vehicle sales are electric vehicles. This is real significant growth despite some of the headlines. And the answer to that, at least in our view, is when you look at this chart and you see the orange portion versus the blue portion. Right now, the high-growth segments of the magnet market are less than 1/3 of the market. About 25% of the market is electric vehicles, wind and things that have a clear secular on the right. The rest are GDP-ish. And when I say GDP, given the fact I mentioned a moment ago about China having 90% magnet market, it's Chinese GDP. And I feel like you looked at our commodity price 6 months before all the headlines on the slowdown and in the Chinese economy and you probably predicted what was about to happen. So what we've seen -- our view is really a near-term pullback in -- if you have 75% of your market, that's flat to down and 25% that's for gangbusters, those can completely offset in today's market environment. I think the law of compounding will tell you if that 25% of the market continues to grow, and if it's not 50% next year, it's 40%, in terms of EV penetration growth, it's still the law of compounding will tell you that will start to make of a much larger portion of the market and some of these more GDP-oriented parts of the market will be less meaningful. But just to put in context what we've seen and sort of why we are, where we are and why you see some of the results that you're seeing in our space. What this all means though, when you put it all together is if you take the forecasts for deep penetration, take the forecast for manpower, you take the forecast for robotics, and look at the amount of NdPr, it is required to meet those needs. We're way off the mark. And what we've talked about many times in the past is that it is not likely that you will see 2, 3 more projects of the scale of Mountain Pass come online in this forecast period, but more likely is you need to see some supply growth and some adjustment to the demand for there to be a meaning of supply demand. What it does mean is we feel that the way we are positioned with the assets that we have, with the cost position that we have, with the balance sheet that we have, with the opportunities that we have, is a great company to be the CFO of. The list of very high-recurred organic opportunities is quite long. And so it puts us in a very unique position in this market. And again, you can even turn these bars in a couple of different ways. But I think the reality is that what we're seeing, no matter what the immediate headlines are, is that our materials are absolutely critical as we electrify and MP Materials is in a very unique position to capitalize on this trend. To give a bit more context on how exactly we're tackling the issue, we've broken up our business strategy into three stages. Stage 1 is production of a mixed rare concentrate, which we've been in production of since 2017, 2018 across scale. And we turned into the second largest producer of this product globally. We take a high single-digit -- we're great ahead of our Mountain Pass ore body. It's one of the ore's preeminent rare earth ore bodies, incredibly unique asset. And we take that, let's say, 7% or 8-ish percent gray and we upgrade that to 60% mix rare with concentrate that is sold overseas primarily into the Chinese markets to be refined into the separated rare earth oxides. As I mentioned, the ore strategy of this business is to create and see an edge-type market for these materials. And that's where stage 2 comes in. Over the last several years, we've been investing into a multibillion-dollar site at Mountain Pass to separate these individual rare earths that are retained in this rare earth concentrate. We have just really hit an incredible milestone for the company. It's a very, very exciting time for us, where we've done separation of individual rare earth oxides in Mountain Pass. It's the first time it's been done on U.S. soil in over a decade. And so our CEO was on. This is the one thing we have said about Q3, so I can talk about it. We said about that we have reproduced 50 tons separated NdPr oxide last quarter. So there's been a ton of focus, I think, and rightly so several years on our progress to production at scale of separated rare earth oxides. And the dedication of our operations team and all of the team behind that to get this construction project done, get the facilities commissioned in our ramp has been absolutely incredible. And so this is a really exciting base to build a pipe. We'll talk a lot more about that after, say, on our call. But the last stage of the strategy that we've laid out is forming a real beachhead, a center of excellence in magnetics in the Western world. With Stage 2, we've been producing separated oxides. That solves a lot of the problem, but not all of the problem, given what I mentioned about the dominance of the Chinese in the magnetic space. And so what we really hope to see is not just us going from making an upstream product to making a midstream product and seeing all of that exporting is to have a real domestic, vibrant domestic business in magnetics in the Western world. And so we have embarked on the construction and build-out of a magnetics business. We have a facility in Fort Worth, Texas, in Alliance, Texas, 240,000 square foot facility. Construction has just been completed. Our team is moving in to the office spaces as we speak. Our foundational customer for this magnetics facility is General Motors, and we'll talk a bit more about the specifics of this facility in a moment. But it's something that we're very, very excited about it's a perfect piece of strategy. In doing all of this, certainly, with the transition to electric vehicles, we don't want to do this in a way that it's two steps forward, one step back in terms of our impact on the environment. And so I think the very unique thing is, we get asked quite a bit about, how does it -- what is it like running a mining chemical plant technically in the state of California. We sort of wear the California regulations as a badge of honor. We feel strongly that we are, in our view, the world's most sustainable rare earth producer. We have addressed that counting process, so what's typical with most mining operations with rare earth [indiscernible]. We don't produce that and in fact, take that water that's contained in our upstream production and recycle that for 95% of our water needs. We're developing a really interesting multipronged approach to material recycling, which bringing the Stage 3 business into the fold and having capabilities across all of those different disciplines really allows us to be deeply positioned to execute on that. And then we've had a real commitment in terms of how we operate to biodiversity and respecting the ramp-up which we operate. And so I think that's a really unique element of the MP Materials story. It's something we're very, very proud of. To give you a little more context on our upstream business, which is powered a significant amount of free cash flow for the business, very high-margin products. We've -- since starting this facility, as I mentioned, from a standing start, we have an incredible operations team and leadership team that's focused on after the basics operating approach. We operate our upstream facilities with north of 95% uptime. It's including our planned downtime. We have 9 consecutive quarters of producing over 10,000 metric tons contained rare earth oxide and concentrating that through Q2. We're producing a high leading demand product. And I think the thing that's often underappreciated, even by those that are more deeply involved in the mining space is just how critical producing a high-quality, low-cost upstream mixed concentrate is to enable a low-cost structure in the downstream. And so we're starting our ramp of our midstream facilities or mining facilities with a tremendous base under us with many years of experience in producing a very, very high quality upstream product. To give some context on what we've invested in over the last several years to enable the ramp-up of our separations capacity, we've done sort of, what I'd call it back to the future. Mountain Pass has been in existence and has operated in some way, shape or form. They're in the business since the '50s. There have been different elements that have been targeted from production in Mountain Pass. So it's incredible, the rich history of this asset. And much of the IP for separating and leveraging work materials was created and started in Mountain Pass. What we've done since we acquired the facility is reintroduced a process flow that it did in operation for many, many decades before the last operator of the site. It's a proven process. It's one that we are proving out ourselves yet again at a much larger scale, given the higher scale of the upstream production that we've been able to bring to bear. But we've reintroduced a refining process flow that allows us to leverage the inherent benefits of the ore at Mountain Pass line. And so you see here a picture of our grinding roasting circuit. That's one of the investments that we made in addition to self-crystallizer on the right-hand side. That allows a certain redundancy for discharge of waste brand recycled water. What we've laid out is, from a turbine production perspective, about 6,000 tons of NdPr oxide. And I think we've also begun what I think is very exciting journey and transition to being able to produce both oxide products as well as metal products, which opens up the market for our materials to areas other than purely China, certainly, Japan, Korea, Vietnam, broader Southeast Asia has significant demand for these types of materials. So further information on the downstream strategy. We broke ground on this facility in April of 2022. We built an incredible team of nearly 50 folks across engineering, R&D, operations, leadership, EHS, et cetera. And so we built from scratch in the last several years, a really exciting team in the net headspace. This Fort Worth facility is what we consider our magnetics engineer headquarters. Eventually, as we scale production, this will represent about 150 jobs. And as I mentioned, we're underway and move into this facility. To provide some context, though, on the size of the downstream business versus the upstream midstream business. This initial facility in Fort Worth has a targeted initial capacity of 1,000 metric tons of finished magnets. What that represents is less than 10% of the NdPr oxide that we come out of Mountain Pass when operating at run rate throughput. And so the opportunity set on the downstream side is very, very significant. We've approached this, however, with a really disciplined mindset, not very different than how we approached the upstream and midstream transition, where we fundamentally believe, in order to remain low cost and remain competitive and build scale in order to compete with the generation competitors, we needed to walk before we run. So with the upstream and midstream business, we started with concentrate production, and we really looked after that. Now that there's not more room to run there, we really got a great operating cadence there before turning to and tackling the midstream opportunity set. Similarly, with the magnetics strategy, we're starting with a relatively, let's call it, bite-size opportunity, at least as it relates to not only the production of our upstream business, but putting 1,000 tons in context. The NdFeB magnet market is nearly 200,000 tons. So this is a relatively small facility as it relates to the broader magnetics market. However, it's many, many, many multiples of what has been done in the Western world for many decades. So this is the approach that we're taking, very disciplined approach. We've found a great foundational customer and partner in General Motors in having them really be a critical partner as we build out the supply chain in the rest of the world and in the United States. So with that, I don't know if I have too much time.

Enough to ask a couple of good ones. And again, I would just want to say that the questions are clearly available to the audience, if you'd like to ask. There have been some headlines about suppliers developing motors or magnets that do not need rare earth, [indiscernible] being one of them. Can you talk about that as a potential threat, if it is at all? And -- well, we can kind of take it from there.

Sure. Yes, it's something that frankly does not give us much pause. It's something that's expected. The reality is that every use case, there are puts and takes with motor design. And right now, when you look at the market share of NdFeB permanent magnet motors versus all the other motor technologies out there, it's mid-90s percent market share. That's for a reason. There is an inherent trade-off with weight, size and efficiency that dictates that, in most use cases, you will be more efficient by a pretty significant margin with a rare earth permanent magnet motor that would allow you to have a smaller battery for the same given range. In addition to that, there are certain applications, you take a, let's say, a Rivian for motors much closer to the wheels on the edges of the application there. From a size and packaging perspective, there is no way to use a different type of motor technology, given how much smaller motor can be when you use the rare earth permanent magnet technology. And so I'd point you back to that chart of the NdPr supply-demand deficit and I'd say, there are a lot of ways that we will get supply and demand to meet. Again, I think given that chart, it feels like a very bullish indicator for pricing over time. Certainly, we've -- I talked a little bit about the short-term impacts. And I think those short-term impacts are exacerbated by headlines like this. But the reality is that I sort of said the additive, any rare earth permanent magnet, you can do more officially with one. And I think the really important thing as well is being able to show the market, show partners and buyers, like in General Motors, that we can do this at scale, we can do this in a way that has a low environmental footprint. At rare earths, before MP really grows to prominence, the understanding was the environmental disruption that occurs in China from some of this rare earth mining impact. We're just so different from that. And so when you have a solution like MP is providing, it makes the trade-offs really point in the direction of rare earths. But again, there will always be trade-offs on motor design. I think the funny thing there was an anecdote on. There was a large U.S. OEM that made a bunch of mistake about maybe moving away from rare earths in their motors. It sounds like maybe that factory that would have produced that is not necessarily on track from a timing perspective. But in the midst of all that discussion, there was an article that was published recently about in the redesign model 3. There's a new permanent magnet in there, which is something as small and trivial as the center of console used to be sort of a plastic piece and now it's magnets. I mean -- so, the applications here are at us and I think the reality is that the secular tailwinds are quite obvious, but there's always going to be a place for competing motor technologies.