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

Hi. Good afternoon. I'm pleased to introduce Jim Litinsky, CEO and Chairman of MP Materials. MP is a leading rare earths producer that is advancing a staged vertically integrated strategy to produce separated rare earths and permanent magnets within the United States. We'll start off the session with a short overview presentation from Jim to set the stage, and then we'll move to a fireside chat format to go through questions. And certainly, if the audience has any Q&A, please feel free to submit through our conference app. And with that, I'll turn it over to Jim.

Okay. Hello, everyone. So thanks. Happy. Thanks, Greg. It's great to be here. It's a really good crowd for the last one of the day, before pool time. So thanks all. So I'll just do a quick overview of MP for those who don't know, and then we'll go to the fun Q&A. So we own and operate Mountain Pass, which is the -- we are the second largest producer of rare earth content in the world, the largest in the Western Hemisphere. And we have a multistage strategic plan to move downstream and build our business out. For those of you who don't know the background, I originally led an effort with my co-founder, Michael Rosenthal, to acquire these assets out of a bankruptcy back in 2017. And we took Mountain Pass from what was 8 employees in care and maintenance to what it is today. So we're certainly familiar with the down cycle and the lean years and the hand-to-mouth times like the world feels like it is today in the commodity space. The good news is that, that opportunity was pretty much an enormous home run opportunity for those invested with us at the time. So the good news is that particularly this conference feels a lot quieter this year than last year, although I hear the attendance is record, it feels much quieter and less excited. And usually, that's a sign that the capital markets have priced in a lot of the scariness that it feels out there in electrification and commodities in general. But anyway, our business in simple terms. Rare earths are the feedstock into magnetics for electrification. And one important distinction with magnetics is we don't go into the battery. So magnetics, it goes into the motors in EVs. So regardless of how the energy gets to a motor, whatever the battery materials are, typically in an electric vehicle, you'll have a rare earth magnet. And importantly, for in an environment like now, hybrids also utilize typically at least half to 2/3 of the incremental rare earths that an EV would use from an ICE vehicle. So to the extent that the world is slowing down in the penetration of electric vehicle penetration and hybrids, which are going vertical in growth, that is actually bullish for demand for us. In the short term, it has been a tough cycle with Chinese industry, which makes up the majority of demand today, while electrification is growing, and those are the sort of the typical macro oriented industries like disk drives, HVAC, smartphones and all of those things. And so actually just moving on, I mentioned rare earths, I'll do this really quickly. The thing about our industry is it's dominated in China. There are 2 producers outside of China. 80% of the supply chain is in China. I covered magnets. And so what's also really important here is that when we think about magnets, I want to just open up one other door and it's sort of longer dated, but I think relevant to think about as we come through this reset around electrification penetration. But magnets, rare earth magnets, are really critical for any kind of electrified motion. And one other use case we're seeing with some headlines around Bezos and Altman investing in a humanoid robotics company or certainly the rise of Optimus, a number of what the Chinese are doing, I guess the -- a few years ago, we felt the glow here, being in the electrification industry that, that was sort of the hot thing. And now obviously, it's AI, and AI is its own thing. But one of the key use cases for AI, which I think will be -- or at least some of the smartest money is betting this, will be in humanoid robotics or in artificial intelligence around robotics. And what's great for us is that if you think about what a robot is, it's really -- an EV is a robot on wheels. A robot is just a robot on legs, right? But the magnet content is much higher. And so as we think about coming out of the cycle, and again, I don't know if this sort of global macro pause is a couple of months or a couple of years, not only will the electrification and hybrid cycles come back, but robotics as well, and we can talk about some of that. But you'll see that in the out years, there really is a major supply-demand imbalance that's looming. And then lastly, before I let Greg do some Q&A, this just sort of outlines our 3-stage plan. We've rebuilt the business. We mine and concentrate rare earth materials. We have the ability to sell a concentrated product. We now also refine so we can sell refined NdPr oxide. That opened up our market opportunity from outside of China to also across Asia. And then lastly, we have a very large contract with General Motors to be the key magnetics supplier to the Ultium platform. And so we're building a magnetics facility in Fort Worth, Texas. And that building, we broke ground in April of '22. That is now complete, and we said on our recent call that we have a lot of work to go on the inside, but we're going to be making metal there later this year and expect to be modestly EBITDA positive in that business. So it's very exciting for us to have been able to kind of move downstream and execute in these trying times. And so with that, I will go over to you to let you fire some questions at me.

Thanks very much, Jim. I thought maybe to set the stage for the conversation, just start out with some of the macro or bigger picture questions before drilling into the business. But one of the key focuses of Western world companies and governments has been the policy shift to build out domestic supply chains and so forth. You highlighted MP's staged approach towards developing the business. How do you see the ex-China market evolving over, say, the next 3 to 5 years? And what are maybe some of the dynamics or factors that maybe the market underappreciates in that build-out?

Sure. It's a great question. I think one of the things as the headlines right now are that electrification is lower than certainly what we expected 3 to 6 months ago. And so -- and we're seeing this with projects, and that's a whole other track we can go down with Western world rare earth projects [ of just ] to the extent that there was capital raised, it's capital destroyed. To the extent that there was capital hoping to be raised, it's fearful of capital destroyed until it's gone. But one of the things that -- so we can put incremental supply aside, the Chinese downstream movement is not slowing down. And so alongside these headlines of -- particularly in this most recent quarter of seeing resets, particularly around CapEx and growth, you're seeing stories of BYD now building a plant in Mexico, and I think we should expect that there will be 2 or 3 Chinese OEMs that will be dominant global producers. We talked about this going back a number of years saying that they were moving downstream, they're moving downstream, and now it's here. And I think in the West, when it comes to the upstream and the supply chain, we shouldn't lose sight of the fact that although, in our capital markets, it feels like sort of depressing or -- panic's probably not the right word, but it sort of -- it doesn't feel as good. Certainly, there's a lot less excitement around the pace of electrification. We shouldn't forget that, that might be a challenge to some of the OEMs that need to raise capital and that have realized they're not getting the pricing power that they want, it's gotten more competitive, but the Chinese OEMs are coming, and they're investing and they're not stopping. And yes, hybrids are rising, and it's great for us, I don't mind. But alongside, I think we're going to wake up as we come out of this and realize that they're there. And what that means for the non-Chinese supply chain is that I think what you will see is the demand -- sort of the pendulum has swung one way, but the demand upstream is going to be there. It's just -- unfortunately, it's clouded right now by sort of what is happening with all these OEMs that might need to raise capital, sort of the newer upstart ones, and then what's happening with all of these -- I see these lithium projects. Lithium is down 90%. These guys need to raise capital. What's happening is sort of it feels very bloody, for lack of a better word. But while that's all happening, the demand is still developing. And so I think we'll wake up to see that because it won't just be -- right now, if you think, why are we experiencing this? I think there's some model disappointment. I think there's some range anxiety. And then the charging stations need to be built out. And then there's some realization that maybe hybrids are the right solution for others. But if we wake up in a year or 2 and you can -- the Chinese EV, which will go by the name Volvo, for example, is a much better product at a much lower price, that competition is still going to be there and that consumer will buy that product. And so I don't think that things are as dire as they seem. Certainly, they weren't as good as they might have seemed a year or 2 ago, but they're certainly not as dire. And so for the supply chain, I think that still means that there's going to be a lot of demand.

We heard from some of the other battery materials companies today about slowdowns in capital spending as they think through some of these dynamics that you just spoke about. But others have the perspective, keep investing in the business and if we're investing in high-quality projects that are low cost, they'll sustain themselves through the cycle. How do you think about your capital spending plans given some of the dynamics on the rare earth pricing side?

Yes. Well, that's the existential question right now. Because the reality is when the tide goes out, the cost of capital changes. And you can make a lot of mistakes when things are exciting and people are throwing money all over the place. We hope not to make those and we're thoughtful in all times of the cycle, but particularly now, and I actually think -- I think that there will be -- there's stress, they'll be stressed, there'll be distress. For example, in our space, there's a project in Australia. We mentioned this on our last earnings call. Just as an example, not to pick on them, but I just think it's a really good example where this is a project that was going to be, aside from us and the one other competitor to us outside of China, was going to be the next big source of incremental supply. Well, it turns out their costs just went up 70% and they haven't even finished their feed. They haven't put any steel or concrete in the ground. And the costs are going to go even higher from there when all is said and done. And so that project, if you believe any of the realities, well, that would cost a lot more than the enterprise value of our company today. So it's like if you're an investor, what are you going to do? Buy an existing world-class, best-of-breed asset that cash flows, that has more upside and liquidity? Or invest in something highly speculative? And so that kind of analysis, there's a disconnect there. There's -- clearly, you can understand the risk of wanting to put new money to work for a long-dated potential IRR or whatever, when you can just play for a cycle and something else. And so I think some of that will play out, but you have to be more careful. And we are thinking through this in every aspect of our business and projects. Certainly, the one main project that we have, we have 2 major projects going, our magnetics facility in Fort Worth, which we've said this year, we expect to be sources and uses neutral because we're going to be making metal later this year, and we expect to have deferred revenue come in as part of that, and then we have Upstream 60K, which we announced not this past call but a call ago, where we expect to increase our output by approximately 50% with around $200 million of spend. So when you think about the ability, whatever our enterprise value depressed is today, to grow that by 50% and then think, oh wow, actually, so it's [ 2.5 ] today. In the last -- when prices were higher 1.5 years ago, it was $10 billion, and if you can increase that by 50%, well, wow, that means that there's many multiples the next time people get excited again, whether that's 2 weeks or 2 years or 5 years. Wow. That's a very attractive return on capital opportunity irrespective of the environment. And so outside of that, we'll be more methodical about any project. There's lots of projects we always would do. And the last thing I would say is -- and I said it up there earlier, but I think it's really important to note. MP is a product of an environment like now. We bought these assets out of bankruptcy, incredible world-class assets, but that had encountered cost overruns and poor management and all of those things that happen that get exposed at times like now. We were hand-to-mouth turning these things around. The DNA of our company is surviving times like these, and that's actually when there are great opportunities to be had. And so I have no doubt that those kinds of opportunities are upon us again. And so we feel really good. Unfortunately, it doesn't feel -- the last thing I'd say is it doesn't feel great to see how well we've executed as a public company over the last nearly 4 years, and unfortunately, though, the pendulum swings, the price of the commodity is down 70% from its highs 1.5 years ago. Of course, that's not going to look good in the stock price, but when it comes to actually the fundamental value of the business, we -- I think we've grown tremendously.

You briefly touched on the history of MP in your opening remarks. As a brownfields operation that you've been working through advancing, it's benefited obviously from the historic investment that the prior owners put in. How does that help create barriers to entry for other new entrants to the industry?

Yes. Well, the predecessor is many years ago at this point, and so I think we've, over the years, put quite a bit of investment and now we're refining at Mountain Pass, which I think -- first, when we -- we now have over 6 years, I think. Many doubted we could even get it going. We got it going. Many doubted we could refine, many doubted we could do magnetics. We -- obviously, we'd like to have naysayers. It drives us. But I think at this point, we've really -- there's been a lot of our own investments that we've made that I think we have the benefit of today that aren't necessarily fully reflected and appreciated. And so I think the takeaway from that, that answers your question is, in this space in particular, it is really hard. I see tons of projects. Everyone and their sister and their cousin has a rare earth mine. If you have a backyard, you have a rare earth mine. But these are hard projects to execute. There's cost overruns. It's really like a specialty chemical. Separating this stuff is challenging. And so a lot of times, you see a promoter or someone -- [ give ] me, with good intention, comes and says, a project costs X and the discount rate is Y and therefore, it's worth Z. And then inevitably, it's -- it costs 3x. The discount rate should be Y plus something, and so the value is a lot less than Z. And so that's also what I think gives us a lot of confidence is when we see sort of what we think is still incredible medium- and long-term demand in our space, lots of use cases that aren't necessarily around the EV, but -- we're still excited about that, but lots of further growth use cases where we think the strategic value of what we have remains. And when we know how challenging it is, it just makes for extremely volatile cycles to the upside. And we got that a couple of years ago. I expected it to go longer. Fortunately, we made sure that our balance sheet was not matching those expectations. We maintained a conservative balance sheet, because you just never know when it comes to commodities. But I have no doubt we'll get the next one, and then I think people will be surprised. Because a lot of these projects they expected to come online, they just aren't.

Maybe shifting to some more company-specific questions. 2023 was a pretty transformative year for the company. You've advanced the work on Stage II. We'll touch on Stage III in a moment. Stage II is the rare earths separation component, and you're looking at ramping that up to 6,000 ton a day of production. Can you discuss some of the modification and optimization work that the team has undertaken to get to the point now and what some of the next building blocks will be for Stage II?

Sure. So with our Stage II, obviously, to go from a concentrated product to a refined product, the real challenge to get that right, one of the many challenges, is really around efficiency. There's a lot of energy and reagent usage throughout each of the solvent extraction processes going from leaching all the way down. When we think about what we did differently, the assets that we inherited from the -- inherited, fought tooth and nail for, for years and suffered a lot of pain. So I think we earned them, to some extent. There wasn't -- and this is getting sort of really specific in rare earths, but there wasn't the roasting step. And the roasting step allows you to handle the cerium much earlier, which is obviously in big abundance. It's a low-value item earth in big abundance in any light or medium ore body, where we're able to then reject that upfront so that we have a lot less material going through the process down the way. And so we're working towards rejecting, and we have now 85%, approximately, 85% of the cerium upfront. That reduces the energy and reagent usage every step of the way. Making sure that you -- another thing we added was a crystallizer to process water. There are a number of these process steps that we did. We could go on and on and about them, but every single one of them boils down to, you obviously want to get as much as you can going through the process, have as much uptime and recovery. But while you're doing that, making sure that you're keeping your cost structure down. Because I think -- and by that, I mean maximizing recovery, not just sort of at the end game, but at each step of the way so that energy and reagents are not hurting you sort of each step of the way. And so that's kind of the key things that we're focused on. And then product finishing, just getting product on spec is not easy, right? We've made a tremendous amount of investment in building out finishing circuits to make sure that we could be meticulous about on-spec product and packaging and all of the things that make for a salable product. Those assets previously didn't exist. And so there's been a lot of historical investment now. That's all past us, and now it's a question of just optimizing all of those in place. And we said -- we've been refining now going back into last year, and we've -- you've seen us scale last quarter. We did 3x the amount we did the prior quarter, and so we've now been operating at scale for a good 6, 7, 8 months now, admittedly significantly subscale to where we'll ultimately be. And so we want to make sure though that as we scale, particularly in a low pricing environment where there's not a lot of uplift, and we can kind of talk about that from the next stage, that we're really optimizing those costs. And so we feel very confident that all of the assets that we have can operate and do operate at scale. And the name of the game right now is getting the cost down.

I thought there was some good discussion on your earnings call the other day about the fine balance between optimizing yields of Stage II versus concentrate that could be sold to the market versus that being used for Stage II processing. How are you thinking about striking the right balance and that mix that will drive the right amount of investment and profitability for the business?

Yes. That's a great question. And we spent some time on this, and the purpose of it was to just highlight how unique of a business benefit we have that we have this upstream salable product. And it allows us to generate profits. Obviously, we generated profits for years, very attractive profits, just in that business. What it means is that as we move downstream, and this goes for every aspect of our business from Stage II to Stage III to whatever else we do in the future, is we think about the incremental business opportunity as an incremental business opportunity. And so -- this is just a really rough example we gave. It's not guidance, but it's just sort of like an example to conceptualize. If you have a $35 cost per kilo of NdPr and the market price is $50. You don't get $50, you lose a little -- sales have a cost and VAT and other things if you're selling to certain markets and what -- taxes and whatnot. If you look at that spread, the majority of the profit is captured upstream, Stage I, by going from mining to a concentrated product. There's then a huge opportunity to go -- to refine, but that's very levered to price. And so in a time of very low prices, that incremental opportunity is very small. And so if your cost structure is $2 or $5 a kilo higher, it might not make sense to fully ramp if you want to be partially ramped and you save many millions of dollars, for example. And so the point was just -- and in particular, when you think of flow-through effects, it wasn't to in any way guide one direction or other. It was just we have a very unique business model that way where we think we can survive a lot of environments, and we are structurally thinking about these things always, and we think about it with our magnetics business as well where we obviously have a great foundational customer in GM. And as we think about all customers, we contribute the product to Stage III at market or -- and if it's not at market, whatever cost that was is a cost to that business. So every business, every stage of the business has to be thought of that way. And so that was sort of the point of that. And I think what it allows -- and we're unique in that way. We have an integrated mine refinery at Mountain Pass. And then -- and so -- even in China, the mines and the refineries are separate. And so -- and then our other competitor in Australia is separate. And so our integrated business model allows for us to actually survive really lean times hopefully better than others. It doesn't mean that we're not hurt by low prices like we are today. You're seeing it in the numbers, but it just means that we think -- we know -- we have some better downside protection in the business that we appreciate and try to take advantage of when we can, but we hope that, that's a very short period of time. And obviously, when prices recover, we want to be positioned to maximize benefit.

Stage III of the business is an evolution towards more of a highly engineered, customized magnetics product. Can you touch on some of the in-house capabilities and expertise that you've built out over the last couple of years to reach this point and how you see that developing?

Yes. And so great question, because when we went public in the fall of '20, we actually didn't have a single employee in our magnetics business. And we said it was aspirational. We said, this is aspirational. Think 2025 plus. But one day, we think we can move downstream into this business, and here's why. Fast forward to today, we have 70 employees in that business and we have a world-class team, metallurgists, material science experts. This business that we've built, really an incredible group of people. And we've gone from -- we broke ground in April '22 of this facility, and now we have it built and our team is in there. And obviously, we said the business is going to be sources and uses neutral. We're really proud of that. This year, that's an enormous achievement. And so we have a ways to go before we're making qualified magnets for GM and other customers, but we're being very thoughtful about the cash. And I think it's one of the things -- I think you look for babies with the bathwater in this kind of environment, but we've invested a lot of capital and effort in that business. We've generated some interesting intellectual property, in our view. And that business is sort of fully equitized with customer contract that, in theory, should have contracted cash flows. And so there's real value there. And if you look at our business today, we don't get credit for that value. In fact, we get significant negative credit that value. And so that's obviously something that we think about constantly. But however we choose to handle that, we choose to handle that. But the point is that there's been actually some remarkable value creation in that business with respect to the team that we've built, the assets that we've put in the ground and we've capitalized it with just capital on our balance sheet. And so there's a lot of hidden value there.

Great. Thanks very much, Jim. I think that concludes our time, but I appreciate the discussion. Thank you.

Thank you. Thanks so much.