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

All righty. Thanks for having us here. Good morning. Obviously, you guys are used to these safe harbor. We may make certain forward-looking statements and use non-GAAP financial measures. Please take a look at our SEC filings for more information on that. So I'll give a quick background on MP for those of you that are newer to the story. MP is North America's only scaled producer of rare earth materials. We own and operate Mountain Pass mine and processing facility in California. We are the second largest producer of rare earth materials globally. We are a founder-led business with an owner-operator culture, and we've been focused on restoring the rare earth supply chain to the Western world. I mean we've done that in a 3-stage strategy. Starting with production of mixture of concentrate, which is what we call Stage 1 of our business. We've recently transitioned into Stage 2 of our business, which is refining that rare earth concentrate into separated rare earth oxides. Those rare earth oxides are the fundamental building blocks of magnetics, which I'll talk about in a moment. And Stage 3 is our vertical integration strategy to actually produce NdPr metal alloy and magnets in the United States where we've made some tremendous progress on that part of our strategy as well. Why should anyone care about this? Rare earths are synonymous with industrial motion. If you think about what powers the motor and electric vehicle, what allows the actuators on robots to create motion, what allows the transmission of wind power into energy, almost all of those things are generally done with a rare earth permanent magnet. And the way the market structure is set up today is with the dominance of Chinese producers, there is a single point of failure and a major threat to all of these industries that we're all well aware are so critical to the electrification of our global economy. This gives, I guess, a better graphical representation of exactly what I was talking about from a geographic perspective. The West generally has been quite challenged over the last decade plus. Really, the interesting thing is Mountain Pass, our main asset, is where the rare earth industry in many ways was born. We have been on this journey as MP Materials since 2017, restoring Mountain Pass to its rightful place in the rare earth space. And we've made tremendous progress, particularly recently. We announced on our last earnings call just last week that we have started production of refined rare earth materials at Mountain Pass which has not been done in over a decade in the Western world. That is a really major change and something that we're incredibly proud of, and we'll talk a bit more about that in a moment. For those of you that have sort of know the industry and have watched our industry and the stock, you've seen that over the course of 2022, pricing increased quite a bit. There was a lot of focus on growth in the EV space, in particular, wind energy, things of that sort. And recently, this year, we've had some very, very difficult compares as rare earth pricing has come down quite a bit last quarter on a year-over-year basis, down roughly 50%. We've got a lot of questions as to how that's possible, given how synonymous our commodity is with the transition to the electrified economy and electric vehicles and those items. And the reality is if you look at the market today, roughly 3/4 of the market is exposed still to sort of GDP-driven industries: general industrial, HVAC, appliances, consumer electronics, those sorts of items. And roughly about 25% is driven by the items that despite sort of recent market sentiment, undoubtedly are experiencing secular growth, and we can talk a little bit about our view on that. And so what we've seen this year is given how dominant the Chinese industry is here, north of 90% of magnets are made in China. When you have a bit of a hiccup on GDP-type growth products within our market, that really gets felt given 75% of the market is in those industries right now. The law of compounding would tell you though, and again, we can talk a bit about our view on the different forms of electrified transportation and sort of how we fit into that. But as you see that growth continue over the next several years into the next decade, the proportion of the market that is driven by these growth industries is going to increase. And so that's part of what we've experienced over the last year or so. But given the law of compounding, we continue to be extremely bullish the backdrop of our commodity, particularly given what's required to bring incremental supply into the market, which we can talk a little bit about here. We've spoken quite a bit in the past about what's required for supply and demand to meet. We have billions of dollars of invested capital at our Mountain Pass facility. This industry is one where it's -- yes, it's a commodity, but it's nothing like oil. There's not a supply response quickly. It's very different than lithium. The amount of investment and time required to stand up a scaled source of these materials is tremendous. And so it puts MP Materials in a very advantageous position to take advantage of the supply-demand imbalance. But the reality is that in order for supply to meet demand projections that were probably made at the beginning of this year, you'd need something like 3 Mountain Passes in the United States to come to pass over the next decade. That's not reasonable. And so what we've seen, I think, over time is a very healthy dynamic of maybe those demand projections in the next 2, 3 years are going to be a little bit lower than whatever one thought. But this is what you see with these secular trends all the time is maybe an over-appreciation for what happens right in front of you and an underappreciation of the long term. And so fundamentally, what we see here is this imbalance continues to get worse as we go further out. And I think MP is in an incredible position to capitalize on that. We talked a bit on our last earnings call about our strategy to grow our upstream Stage 1 production by 50% over the next 4 years. And that's something that obviously we think is going to be a major building block to driving us meeting some of this imbalance that we see here. Just to give a bit more detail on the 3 stages of the business plan and then pretty quickly, we can hop into questions. But the Stage 1 concentrate business, we have about a 15% global market share. We're the largest ex China producer of these materials. Going to Stage 2, the separation of that concentrate into separated rare earth oxides. We are targeting our run rate production levels of over 6,000 tonnes of NdPr oxide. We'll also produce lanthanum, cerium and SEG+ product. We're also investing in a heavy rare earth separation facility to power some of the downstream that I'll talk about in a moment, which is our Stage 3, our production of rare earth permanent magnets. There, we have a greenfield facility that we've built in Fort Worth, Texas. The original design basis is 1,000 metric tons of finished magnet. We had some pretty exciting progress over the last couple of weeks. We actually moved in on the office portion, you see in the very front there. We moved our team of about 50 into that facility. General Motors is our main foundational customer of this facility, and we're targeting delivering an intermediate product on our way to delivering magnets at the end of 2025. And I'll turn it over to you, Ben, for questions.

[Operator Instructions] But just to get started, maybe just because of the announcement last week on the upstream strategy, could you just discuss it? Could you discuss kind of the time line around it? And then I think that there were some kind of misconception that has shortened the mine life. But could you just talk through how it does...

Sure. Yes, I think the very exciting thing about the strategy is while our focus is and remains ramping the separation facility and getting to targeted throughput levels, we've been working behind the scenes for the last several years, and we're sort of now at the point where we've got, frankly, multiple different pathways to achieve what we laid out as our target of 50% growth on the upstream side on REO and concentrate. We announced that, that would take place over 4 years. I do not expect it to be linear to my point where there are a lot of different smaller projects underpinning this growth and maybe 1 or 2 medium sized. But we laid out a very modest amount of capital required to get there, about $200 million of total spend across all these initiatives to get to that 50% growth. And I think the important thing in this strategy is hopefully, it underscores the incredible built-in platform and asset value at Mountain Pass. And to your point on mine life, this is one of those things where we are one of the largest scale producers. If you think about what comes out in our tailings stream, we've always sort of joked, well, that's -- our tailings impoundment is probably the second best rare earth mine in the Western world. And I think it is, and we're about to take advantage of that. And so the way I'd explain how I expect Upstream 60k to come to pass over the next couple of years is, there are existing investments that we're making in our existing milling and flotation circuits that are pretty modest capital investments and quicker time to achievement, where we're focused on a screening process and improving our grinding circuit. Where if you think about when we take the materials and grind it to the proper size to go through froth flotation, there are different recovery percentages across different sizes of particles. And so what we're really trying to do is force more of our product into the sweet spot of recovery and drive some incremental recovery out of our existing assets. And so I would hope that, that would come to pass in the nearer term. Some of the longer-term opportunities -- and mind you just to put a pin in that, recovery is pure drop-through to earnings and EBITDA. And so that is always something that we're very, very focused on and something that we're very excited about. In terms of looking at other ways to grow and reach that 50% growth target, one of the big pieces of this strategy is using, to your point, it's called alternative sources of feedstock, not just run-of-mine sources of feedstock. So we can incorporate reprocessing of tailings. We believe it's going to be part of the strategy. Something is seemingly simple as, as we mine, given the richness of our ore body and the way we've modeled this, our technical cutoff rate is 2.5%. If you think about the typical rare earth mine in China and almost any of the growth projects that you hear out there, they're sub-2% as their life of mine head grade. So undoubtedly, within even our overburdened stockpile, we've got significant amounts of REO within that stockpile. And so that's something else that we're looking at targeting as well as bringing in, are there simple technologies that we can bring to bear and we feel confident that we can or sorting things of that sort where we can take the overburden, get the highest grade portions of it, do a preprocessing stage. And our goal is to build really almost a dedicated low-grade processing facility and be able to leverage those types of feedstocks as well. And so there are a lot of different moving parts here. But I think the really exciting thing is this is not just a pull forward of production, to your point. There is going to be some of that, but we also have not found the extent of the ore body, but layering in these other sources of feed, I think over time, we expect there to be many, many, many incremental decades on the Mountain Pass ore body and be able to bring to bear significant growth in production in sort of the short, medium term, which we're very excited about.

You highlighted the volatility of pricing recently. Could you just talk to how you guys are deciding whether or not to your offtake strategy, if that has changed at all? Maybe if you can just tell us kind of historically your viewpoint and if that's changed?

Sure. Look, generally, the way we think about this is we expect the volatility and the leverage to be in the commodity price and not on our balance sheet. And we set up our balance sheet specifically the way that it is for that reason. We've got $1.1 billion of cash on the balance sheet. And our view is that it would be kind of crazy for us to sit here and tell you how bullish we are on our market and our commodity and then go and sign a bunch of fixed price deals at lower prices. Certainly, when prices go up, you look a lot smarter. And when prices come down, it's the opposite. But I think fundamentally, this is exactly what we were prepared for and exactly what we were positioned for. Certainly, we don't like it, but that is the nature of being in a commodity business. And so I think generally, the way we think about our portfolio is it will be a portfolio. There will be certain customers where there may be portions that are either on lags or other forms of different contractual mechanisms. But in general, given that chart we showed on the supply-demand imbalance, we continue to be very bullish, the medium, long term of our commodities. Certainly, in the short term, commodities can do all sorts of things. And it'd be a fool's errand to try to predict that. But I think that certainly, there's incremental focus on this given it feels like in this moment in the market, some of the air has come out of the excitement for the electric vehicle transition and wind power and things like that. And I think, as I mentioned in my comments a minute ago, that's sort of perfectly predictable, right, in terms of how these transitions tend to go with estimates of the short term versus estimates of the long term. But I think the important thing to keep in mind is if you look at what's going on in the U.S., take -- I think Toyota just announced another $8 billion investment into their facilities here to be able to do plug-in hybrid, conventional hybrid, EV and be able to switch between all three. All of that is bullish for us. If you think about plug-in hybrids have 2/3 of the uplift if you think about going from an ICE vehicle to a BEV, plug-in hybrids are 2/3 of that uplift. And so again, getting back to supply and demand need to meet somewhere, I'm not necessarily confident that we're getting 3 Mountain Passes that are going to come to pass. And so there's going to be sort of a healthy balance there of what happens to the demand projections. And then certainly, we expect to play a role in helping those supply projections. But this whole to us seems like a pretty healthy market, all things considered. And the one last comment I'll make on that is given what I mentioned on a significant portion of the market today being levered to the general industrial economy, given where we are and where the data you're seeing out of China, particularly a few months ago, I feel like you could have looked at our commodity 6 months ago and we could have told you what was going on in China very clearly. And so given the fact that we've sort of bounced off of these levels from a pricing perspective now a couple of times, I think it's actually quite bullish given how bad things really are in the industrial economy over there. And so that's sort of our overall view.

Can you talk a little bit more just about Stage 2, how you took it over and built it out, where you are at in the ramp of it? And then I think the expectation is that you use all of your own capacity for it, but can you talk about if there's additional capacity that you can use from outside to run through Stage 2?

Sure. So one of the major changes that we made when we purchased these assets and embarked on our investment plan was to reintroduce a part of the process flow that had been in place at Mountain Pass for many, many decades before the last operator, which is an oxidizing roast. It's -- we joke in the call that it's a big element. It's a little more complicated than that, but no chemicals, true oxidizing roast of our existing concentrate product, which goes through that process. We made several other upgrades to the facilities as well. But what that allows us to do is reject as much of the lower value rare earths upfront as possible, namely in this instant cerium. It changes the state of cerium when you go through the roasting process and go into leach, where we can physically separate off a majority of the cerium that otherwise would get carried through the rest of the separations processes, which are much more variable cost intensive, energy, chemical reagents, et cetera. And so that change has allowed us to take our very, very strong cost position that we've built in Stage 1 and maintain that low-cost position as we go through separation and produce separated rare earth oxides, namely NdPr oxide. And so that is one of the critical investments that we made. Some of the other things that were part of the Stage 2 investment process -- an investment plan were investments in our finishing circuits. Given the scale of production that we brought to bear out of these assets, we're producing nearly 4x the amount of upstream product that has ever been produced out of these assets or at Mountain Pass. We needed incremental finishing capacity to be able to support that volume of finished product. And in addition, when we made those investments, we tried to be very, very thoughtful about how we spend capital to ensure lower operating costs over time. So ensuring that we have the right infrastructure and technology in place for sort of inline testing to be able to know exactly the NdPr ratio before we go through the finishing process, X-ray biz, things like that. We've implemented other technologies in the finishing circuits to ensure greater first pass on spec production. So we don't need to send product back through the finishing circuits multiple times, which again adds significant variable costs. And so these are some of the things that we've brought to bear to take what is fundamentally one of the best rare earth assets in the world and build modern technologies on top of it to be able to continue to leverage that cost advantage that we start with the ore body. And so that's been a very, very exciting part of the Stage 2 story. And we're seeing those investments really pay off and really being brought to bear most recently. So in terms of your question on where we are, we announced on our call last week that we had produced 50 tonnes of NdPr oxide last quarter. That's obviously just as we've started production, we've talked about producing multiples of that this quarter. And over the next several quarters, really beginning to hit our stride and move towards our targeted throughput capacities. One of the questions I get a lot in -- circling back to the Upstream 60k topic, the incremental upstream production is are you sized to then separate that incremental 20,000 tonnes of REO into more separated products. And our answer to that is we want to deliver to you the 6,000 tonnes we've talked about first. Certainly, the capital intensity in terms of investing in upstream first, downstream is -- or midstream is different. But our view on that is certainly when we designed our upgrades to the Stage 2 circuits and process flow, there's significant engineering factor, there are significant assumptions around uptime. A lot of things that hopefully make our throughput assumptions prove conservative over time. But our goal is let's get there first and deliver on that, but deliver on the upstream piece, and then we'll talk about exactly how we marry those together.

Got it. Can you talk about your Fort Worth and then how that improves volatility in your earnings and your revenue? And then also, I think on the call, you kind of alluded to expansion there in the past. How are you thinking about that?

Sure. Yes. I mean the fundamental difference, obviously, it's doing vertical integration and moving into magnetics. It's different business, it's not a commodity, right? And magnet is a highly engineered customized product, and that's a whole different ball game. The reason we entered the magnetics business is because we had significant demand from customers asking us to be in this business. I think the interesting thing that we've seen is if you rewind 4, 5 years ago, automotive OEMs, wind OEMs, robotics OEMs, you name it, were not thinking about where their magnets came from, let alone what was in the magnets. And so that whole paradigm has completely shifted where as we were preparing for Stage 2 production, we started having significant conversations with the OEMs where otherwise we might just be talking to magnet makers. Those OEMs then sort of really indicated, hey, it's great you're going to be producing this really critical commodity in the Western world. We still have to send it to Asia. And so we haven't solved the single point of failure problem. And we haven't really localized supply of the critical piece of the supply chain. And that is where sort of the Stage 3 concept was born. The commercial structure that we've embarked on in Stage 3 is one where we -- like we understand that we are standing up a business from scratch. We have no illusions about that. And so from a commercial perspective, we've been focused on risk-adjusted returns on invested capital and moving into this business. And so what we've been focused on there is partnering with customers that value what we bring to the table. And so since we started on this, we've got a team of almost 50 people, primarily engineering staff that's been focused on the design engineering and implementation of the strategy. As I mentioned, we're pretty excited to have moved them into the beginnings of the facility. We built a 240,000-square-foot plant, state-of-the-art plant. And our goal is to bring to bear the capability in the Western world. Again, we've been very clear about this is not us trying to compete on price with China. What we're trying to bring to bear is see the capability and then add scale and come down the cost curve over time. And so how are we doing that to begin with? Well, firstly, as I mentioned, magnets are highly engineered custom products, a focus on the right mix, number of SKUs, number of pieces, the type of microstructure, et cetera, et cetera. We're being very, very thoughtful and focused on what types of customers do we take on in order to ensure our success. And so that has been part of the strategy as well is thinking through how we set up the business in the short and medium term to ensure we execute on our promises to our customers.

One of the things that at least I don't ask often or maybe never is on the heavy and the work with the DoD. So maybe could you talk a little bit about that because NdPr gets all the attention.

Sure. Yes, certainly, depending on the magnet grade, heavies can be a big part of the story or they can be a smaller part of the story depending on the use case of the magnet. But in terms of our capabilities at Mountain Pass, I think, first and foremost, with our Stage 2 coming online, we've begun production of on-spec scaled SEG+ production, SEG, samarium, europium, gadolinium plus. So dysprosium, terbium, don't make me name all of them, but they're all contained within that product, which is obviously the fundamental building block to getting towards heavy production. We've talked about our heavy facility coming online, hopefully in line with our downstream strategy as well to support that and also that we'd be designing that facility to accept third-party feedstock. And so that is something that also can grow the addressable market for us. And if you think about the position that many players are in where maybe it makes sense to economically have an upstream product, a concentrate product or a carbonate product, but they don't have the scale of an operation to justify the investment in separation, we can play a role and be the separator of choice. As it relates to your question on the Department of Defense, obviously, they're a stakeholder here. Our CEO, Jim, made comments, I think, on the last call or call before that, that we've seen incremental dollars available in this space. And certainly, our expectation is that over time, we avail ourselves of further opportunities with the Department of Defense to have a level playing field with our heavies project.

And one question that I'm asking all of our companies is just ability to retain talent, attract talent, especially when you're moving into Stage 3, which as you said, building from ground up. So could you just walk us through that?

Sure. We've done a lot of hiring over the last year, getting ready for Stage 2 production at Mountain Pass. And I think the thing that's been great is our story and our mission really resonates. And so we found a lot of talented folks that are very mission oriented. We're a very mission-oriented business. That's helped. If you think about also the reality of where we sit, 45-minute drive from Las Vegas. When you look at other mining and processing operations, it's actually we're not very remote. So from that perspective, being able to attract talent, it's a whole lot easier than being in the middle of nowhere. So that's been a big plus. Certainly, I think we go through stages of needing to focus our talent acquisition in different parts of our operation. We've invested significantly in process and product engineering. As we brought Stage 2 online, we've had a lot of success there. Then it becomes, okay, we need to invest more maintenance, and we've done that. And then similarly, in Stage 3, part of the reason we're located where we are is the university system that's closed by allows us to attract the highly skilled and trained talent. And then frankly, the community college system is incredible in Texas. And so as we bring more operators and things like that to bear in the facility, we've got a real pool and source of talent. I'd say that the other thing is we are, as a management team, completely aligned with our shareholders and completely aligned with our employees. Our CEO and Founder is the largest individual shareholder of this business. Almost every single one of our employees is a shareholder in this company. And so we are all focused on creating sustainable value and alignment of interest. And so that's helped quite a bit in terms of retention, et cetera.

Great. We're going to leave it there. Thank you very much, Ryan.

Thanks. Appreciate it.

Take care.