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

Hi, everyone. Thanks for joining us. Very, very happy to have MP Materials here. We have the CFO, Ryan Corbett. We also have the Head of IR, Martin Sheehan. I'm Ben Kallo. I cover sustainable energy and mobility. I'm going to turn it over to you, Ryan. Ryan is going to run through a few slides, then we'll save time for Q&A. You could e-mail me at [email protected], or click at the upper right hand of the screen and I think you can send an e-mail as well. So Ryan, take it away, please. And thanks again.

Yes. Thank you, Ben, for having me. I appreciate it. We'll toss the slides up here. There we go. Thanks, Martin. So good afternoon, everybody. I'll breeze through these pretty quickly. As you'd expect, we'll do -- we'll say some non-GAAP financial measures and make forward-looking statements. So please look at our SEC filings for reconciliations and for relevant risk factors. So an overview on MP Materials. We are America's only scaled producer of rare earth materials. We own and operate the Mountain Pass rare earth mine and processing facility in Mountain Pass, California. And we are investing in a 3-stage strategy to restore the full rare earth supply chain to the United States and to support the development of a diverse ex-China supply chain for critical rare earth materials. We are a very scaled producer in our Stage I business, rare earth concentrate business, where we're in a low teens percentage of the total market. We are in the process of ramping our Stage II, which is refining separated rare earth oxides and metals. And we've made a tremendous amount of progress, and we're very excited about our Stage III business, which is North American production of NdPr metal as well as magnets. We have a foundational customer in General Motors, who is taking a significant portion of the production of our initial facility. And we continue to execute on that strategy to bring magnet making back to the U.S. Move to the next slide. As some of you are aware, maybe some are not. Rare earths are a critical piece of the industrial economy and really, in a lot of ways, represent a single point of failure in certain industries that really drive quite a bit of GDP and economic security. It's not just electric vehicles of all flavors, plug-ins, regular hybrids as well as battery electrics, but also robotics. We've seen a lot of growth in that space. Wind energy, general industrial, transportation, aerospace, you name it, rare earth magnets are what enable industrial motion and are critical pieces of technology where the ability for the U.S. and the Western world to rely on a single area, whether it's China or anywhere else, is untenable. And so from a supply chain security perspective, what we're doing is incredibly important, particularly as the world continues to electrify. Move to the next slide. This just gives you a sense of exactly how acute the problem is in the Western world. MP Materials stands as really the only scaled player in the Western world. And I'm sure we'll get into, particularly in the Q&A, some discussion around the pricing environment. But in today's world, the economic moat around our business, frankly, is growing by the day, given the difficulty of bringing new supply of our materials online. You can go to the next slide. This just gives a further sense of what I mentioned a moment ago about the -- some of the critical, very rapidly growing demand drivers for rare earths and rare earth magnets. Electrified vehicles and wind energy, in particular, are really a small portion of total demand today, something like 20%, 25%, while the rest is general industrial, consumer electronics, appliances, things like that, even with the reset, certainly in sentiment, recently and even with a bit slower growth than maybe some had expected in the very short and medium term on electric vehicle growth and penetration. You pick your penetration rate over the next 10 to 15 years, and what we're facing is a pretty dire supply/demand imbalance, no matter how you cut it. So we can go to the next slide, and this kind of gives you exactly that picture. Certainly, 2023, we've seen what pricing has done in a variety of critical minerals, including our own NdPr oxide, where I think growth, particularly the broader industrial economy that's levered to particularly the Chinese real estate market, underperformed versus expectations, while supply did continue to grow. That caused sort of this imbalance here. But again, even with updated assumptions, as it relates to electric vehicle penetration, we continue to see, over the medium to long term, a very bullish supply/demand outlook for our commodity. Move to the next slide. I mentioned a lot of this, and I'll breeze through this to leave time for Q&A. But we are operating and firing on all cylinders on all 3 stages of our strategy. Stage I is our primary revenue and earnings generator at this point. One major update to that business is what we call Upstream 60K. We've consistently produced about 40,000 tons of rare earth oxides and concentrate in our Upstream business. And we announced in Q3 of 2023 our strategy to grow that business by 50% over the next 4 years with a relatively modest capital investment. And so we think that that's absolutely the highest-return incremental supply that will come into this market. It's something that we're very excited about, given where we sit on the cost curve in rare earth concentrate production. We're also making some very significant strides in our rare earth separations. We produced over 200 tons of separated NdPr oxide last year. That is the first time in over a decade that rare earths have been separated at any scale in the United States. And so we continue to make great progress on commissioning the refining facility. And then finally, in Stage III, over the course of this year, we expect to continue to execute on some important milestones in building out the magnetics and precursor product business in Dallas-Fort Worth, where you can see we've completed construction of our initial facility, from a building shell and infrastructure perspective, and are working furiously to get all the equipment installed, optimized and ready for production. Move to the next slide. Oh, that's the end. Perfect. I kept my promise I think, Ben, hopefully. Awesome.

Perfect. Thank you, Ryan. Maybe you guys said in your call last week, anything you want to highlight from the call? And I have some questions that came out of that.

Sure. I think that we certainly talked quite a bit about the market, and I made reference to that. There's been a lot of focus on the pricing environment, which I think has been in focus for a lot of critical minerals. We talked about the fact that despite all of this, I think, very importantly, given some of the very exciting milestones we plan and hope to be executing on in our Stage III business. Despite the pricing environment, we expect to have and maintain a very, very strong balance sheet and capital position even in the down cycle. We've been consistently focused on being as thoughtful on that part of it as possible, obviously. In my seat, very near and dear to my core responsibilities. And so that's something that I think we want to continue to emphasize and that we'll be opportunistic and thoughtful there. And look, there are things in our business that we can control, and there are things that we can't control. And so we absolutely are doing our best on the things that we can control.

You talked about where prices are right now and likely, the capacity -- like new capacity can't come on because of that. Maybe could you expand on that? And then also, maybe tie in your capacity addition and how that works with your pricing right now.

Sure. It's a great question. Look, I think a lot of observers of the industry try to come up with an incentive price. And it's -- this was actually one thing, if you want to recap the earnings call, that I think a lot of people got confused on. I think they thought we're talking about our incentive price to continue to produce oxide. When I think of incentive price, I think it's generally cited as, where is the price where the swing producer is incentivized to go and invest in capacity to bring new supply online. There are a lot of numbers thrown out there, [ 70, 90, 100, 110 ]. What I will tell you is it's nowhere near [ 50 ], which is where we are right now. I think that the vast majority of even the lowest-cost producers, including in China, are not making money at these prices. That can only go on for so long. And so I think that what we see is, for example, there's really only one potential scale project of note that had been discussed of coming online in the next, let's call it, 3 to 5 years. And that had $1 billion of government support, and it still is not coming online, given the changes in the pricing dynamic and the fact that the view on the cost to actually bring a real scaled refining facility online, let alone find the raw material and the feedstock to feed that, generally, is wildly underestimated, including in a very widely followed project like that one. And so that is a trend that we don't expect will go away. And so that speaks to, I think, exactly what you're getting at, Ben, which is where we sit on the cost curve and how economically efficient it is for us to add incremental brownfield supply, given the invested capital that's in the ground. You think about the amount that's been invested at Mountain Pass over time and you try to inflation adjust it, many, many, many billions of dollars. And so you look at the value of our enterprise right now, and we're trading at a discount to replacement costs in an environment where clearly, sentiment and pricing is down. Clearly, the medium- to long-term demand profile remains extremely exciting. And the ability to add supply, this is not like drilling an oil well. This takes 10 years up in times to develop a mine and get something online. And so when you see reactions like this in our sort of markets, you often expect an equal and opposite, if not greater, reaction to the flip side. And that's the nature of our business. And so we've tried to always keep a cool head and plan for both the up cycle and down cycle.

You mentioned being the first -- doing the first separation in 20 years, I think, you said in the U.S. Could you just talk about that Stage II? Where it is versus where you guys thought it would be? And I guess, really from a cost perspective too because as you move forward, [ you're saying ] if you're on target for getting to the volume, but with the cost profile that you originally thought?

Sure. Yes, I think the good thing about where we sit with Stage II at this point is we have run every circuit at commercial scale and have been able to observe exactly how the chemistry is working. And we absolutely, having produced 200 tons of NdPr oxide over the course of the last 2 quarters of last year, and that's on-spec material that's been qualified into the broader magnetic supply chain, we have a great sense of what our run rate cost structure should look like. You can see it. The proof is in the pudding. But also, with a facility like this that is starting effectively from a standstill, a lot of brand-new equipment. That's got its benefits and drawbacks, brand-new equipment. A lot of existing equipment absolutely has its benefits and drawbacks as well. So you've got a mix of it, and you need to integrate all of them. And I think our team on the ground has done an absolutely phenomenal job getting that done. The reality of scaling that up is such that right now, we are incurring incremental variable costs to go from mixed rare earth products to separated rare earth products that we do not expect to see as we continue to optimize the facility. Certainly, obviously, with volumes, there's a fixed cost absorption, and that pushes you to want to push volumes. But when you see what we're seeing where a lot of folks, okay, you had 150 tons last quarter. That's 50 tons a month, so you're at 10% of your throughput. Well, maybe we're at 70% of our throughput but 15% of the time. There are many different pieces that go into the equation of getting this thing ramped. And the reality is that with the flexibility we have in our business model of having a very profitable Stage I mixed earth concentrate business, in addition to the ability to separate that into refined products, we can make the choice where we can sit here and say, I've got an REO ton. I know for sure what it's going to cost me to turn it into a mixed rare earth concentrate and sell that into the refining complex. While we're still optimizing our circuits, I can't tell you that I'm going to be exactly on target for my cost structure for separations at this moment. We continue to have a very significant amount of confidence that we will get to our targeted cost structure. We've seen the data. It just behooves us at this point with pricing as low as it is. The incremental profit [ tool ] that's available in separations is much, much, much smaller than it is when prices are higher. I mean it's a perfect curve, and so what we're really focused on is ensuring that we are being smart, maximizing cash flow and profitability in the immediate term, and not hitting production milestones for headline's sake. That doesn't do anybody any favors.

If we just -- thank you for that explanation. If we just take you a step to the step 3, how does that change what you do there in kind of the same way? And then maybe you could just like remind us all about when the [ tactics seems aligned ], you have alloys [ first ], what that means. Sorry, there's a lot in there, so thank you.

A lot of moving parts, undoubtedly. Yes, look, I think from a pricing perspective, there's really no change to our plans. The interesting thing, obviously, about the Stage III business is it's very unique. We're going from producing commodity products in our upstream and midstream business to highly engineered finished products in our Stage III business. And so the way -- the levers for profit and return are different certainly in that business. What we've talked about in terms of milestones there is originally, we were targeting producing an alloy flake product ahead of being in service with finished magnets at the end of 2025, which has been our target for some time now. And we continue to execute towards that. Just given the state of the remainder of the magnetic supply chain in the United States, what is most prudent for us at this point and for our customers is to focus on production of domestic metal as opposed to the customized alloy product. NdPr metal, obviously, we make NdPr metal [ rare earth ] oxide at our toll processors in Southeast Asia. Being able to make that in the United States is a huge part of the value add of what we are doing in Stage III. I can't tell you how many times I've talked to OEMs that are just getting smart about this, and they're thinking about magnetics. And there's just an incomplete picture of where the bottlenecks are to get domestic production. And a lot of times, there's not an understanding that you can make all the oxide you want. You got to turn it into a metal before you can turn it into a precursor product and into a finished magnet. And so our target here is to be in service with metal production in Stage III later in the year, which for us will unlock certain milestones that will support, from a progress payment perspective, the continued investment in that facility and will get us to continue on our way towards the ultimate goal there of being in service with commercial-scale magnet production at the end of 2025. So that remains the primary focus there, and we are well on our way. A lot of execution ahead of us, undoubtedly. But we feel good about the progress we've made so far.

What are the customer -- how do the customers change from -- like you're selling -- you're separating NdPr to metals at the Texas facility. Is it a different customer base?

Sure. In some instances, yes, and in some instances, no. I mean the interesting thing is the reason we're in the magnetics business today is because of the customer conversations we were having with automotive OEMs about NdPr oxide to begin with in our initial Stage II business. That was really the impetus for the push to really complete the supply chain in the Western world because you have companies that even with, again, sort of the pendulum swinging on sentiment in electric vehicles, this is a major retooling of the supply chain that is going to happen and is continuing to happen. And you have leaders in the space like GM that recognize, great, we can have a huge producer of rare earth products in the Western world. But if we have to send that product overseas to get our magnets, what good is it for us? And so partnering with those that are forward thinking on our particular supply chain is something that we had in the back of our mind for many, many years. And given how quickly the market has started to pivot towards electrified transportation and now robotics and some of these other things that are real consumers of magnets made our mission much more time-sensitive and critical. And so that's what brought us to this point. And so to answer your question more directly, we have automotive OEMs buying from us in both businesses. However, where an automotive OEM may take separated rare earth oxide, they need to get to a magnet maker in order to get the product that they need. And then think about the full suite of supply chain. Maybe it goes to a Tier 1, maybe not. So there are a lot of steps between where we are and getting into a car unless, of course, we're providing the magnet. In which case, we've got a full suite of solutions. So we sell to a pretty wide range of customers from all the way downstream into the automobile or the Tier 1 or upstream in the magnet making and distributors and everything in between.

You have -- you never explicitly said that you have multiple magnet facilities. But does the current sentiment or OEM kind of pullback -- that some OEMs pull back in their EV time lines change your thought process around investment in magnets -- additional investment in magnet facilities, timing of that facility? Or does it not change at all?

Well, in a lot of ways, we've always been of the opinion that we need to walk before we run, particularly in magnetics. When we approach the Stage I and II businesses, we had teams in place with many decades of operating experience at Mountain Pass on our ore body with our equipment, et cetera. Stage III, we're starting this from scratch. There is no Western champion in magnetics yet until we're in service. And so we've always thought that we would focus on optimizing our existing -- our initial facility before we went out and blew a bunch of capital on doing something bigger. And so we -- it's funny. Obviously, when sentiment was very different, we get pushed all the time about why don't we see more OEM deals? And our answer is always, we are not demand constrained. We are supply constrained. And that's on purpose because we are being really thoughtful about how we allocate our precious capital that our shareholders entrust us with. And we don't intend to go too far out on the risk curve just to get a headline. The same way we're thinking about things in the Stage II business. And so I think long story short, I don't think it's meaningfully changed anything because I think we'd be focused on execution in DFW in our initial facility anyway with, of course, a couple of years of progress under our belt and still a couple of years left to go until we're actually in commercial-scale production of magnets. Do we know a whole lot more now than we did 2 years ago? Absolutely. Does it give us more confidence that there's ways to very efficiently expand capacity at our initial facility or otherwise? Certainly. But we're going to be, again, thoughtful and opportunistic and sort of follow the market there and not be in any rush.

In the past, you talked about kind of reducing volatility by vertically integrating -- just increasing margin dollars. What have you seen in the magnets because we don't have this kind of -- the look that you guys do, I'm sure, on the magnet pricing as NdPr has gone down?

Sure. Well, if you just think about the bill of materials for a magnet, a very significant portion is the rare earth raw materials, but you've got a big slug of conversion costs and other raw materials that are not moving with the same level of volatility certainly that the rare earth raw materials have. And so with that, our view is if you're in a manufacturing -- a discrete manufacturing business like that, you should be earning a return on your entire cost base. And so generally, in the magnetic space, you're seeing less volatility overall than you are in the commodity space. But certainly, since it's such a big portion of the bill of materials, you do see -- certainly, it goes in the same direction, that [ TAM ].

We have time for one more question. Again, thank you guys. Thank you, Ryan. Thank you, Martin. It gets left out a lot, but the [ heavies ] in DoD, could you just talk about that? I know it's not a big part of the story, but I think it's probably important.

Sure. Yes. From our perspective, we continue to move that project forward. Certainly, if you think about magnetics, that is a part of the capability set that is, I think, attractive for our customers is the ability to produce all the raw materials for them. And so we continue to look at ways -- it's frankly the perfect example of the type of project in this pricing environment, where we are looking at the best possible technology to be as capital-efficient and cost-efficient as we absolutely can. And so that's our focus at the moment.

Great. Thank you for taking time with us. If any of the audience members want to be connected with MP, just reach out to me, [email protected]. Again, Ryan, Martin, thank you guys so much.

Thanks, Ben. And thanks, Martin. Thanks, guys.