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

Good afternoon, and welcome to the first day of JPMorgan's Energy Power and Renewables Conference. My name is Bill Peterson, U.S. clean tech and metals and mining analyst. And we're pleased to have the team from MP Materials here, Jim Litinsky, the CEO. We're going to do a fireside chat. If there's any questions, this is being webcast, so I ask you to wait for the microphone, and we'll get your questions in. Jim, thanks for supporting the conference. This is my second time hosting you here.

Thanks. I think we're in the same room, right?

Same room, same spots I think. I guess for those new to the story, maybe you could start off with the overview of the business, how the assets have been transformed from when they were first purchased and expansions further downstream since starting?

Sure. So we make rare earth materials. The way -- the reason they're relevant is they're into high-powered magnets that feed into the electrified motion supply chain. We've really -- the business, you can think of it in 3 stages. We took over these assets I bought Mountain Pass out of bankruptcy in 2017. When I -- my team and I, my Co-Founder, Michael and I took over the site. It had 8 employees. It was in care and maintenance. The -- there were a lot of questions around the predecessor and whether it could be operated ever economically. We took over the site in '17, we relaunched it, built the company. We grew from 8 people to what we are 730 today. And in doing that, we took it public in '20. In doing that, we set about a three-stage plan. And I'll try to keep this quick because I know most of the people in the audience know this story, but Stage 1 is producing a rare concentrate product, stage 2 is a refined rare earth product, specifically NdPr oxide being the primary one; and then the third and final stage is magnetics. And the reason magnetics and the stages 2 and 3 are important is because as you may have heard me say, Bill, we could have all the rare earths in the world, in the U.S. or in the Western world or anywhere, but if you can't make the end product, the magnet that is for the use case, then ultimately, your supply chain reliant on a single source in China. And so we set about a multi-stage plan. We have been producing consistently north of 40,000 tons at Mountain Pass. That's our Stage 1 concentrated product. Last year, we started refining. And so now we're in the process of ramping up the refining capability at Mountain Pass. And then the third stage is Fort Worth. We're building -- we built a magnetic facility, we broke ground 2 years ago. We said on the last call that we'll be making metal in that facility this year. We expect, as we continue to execute that our magnetics business, will actually be EBITDA positive this year, which we're very proud of. And so once we are making magnets at scale, we'll have really completed the full supply chain and have restored that supply chain to the United States of America. So we're very proud of that.

Thanks for overview. I think a number of the questions that we get are about the end market, the health of the end markets in terms of near-term demand. So -- it's kind of a question we always try to ask even in the cohort of the call backs, but what are the -- how are the markets trending this year? What's strong? What's weak, I guess, especially as it relates to China. And then if we think about sort of legacy applications versus more energy transition, EVs, wind and so forth?

Yes. Certainly, rare earths are in the bucket of critical materials, which we've seen a pretty bear market in the last sort of 6 to 9 months out there. So we're certainly in that bucket of areas, whether it's lithium or nickel, copper, cobalt that have had substantial bear markets. Our market is a little bit unique relative to some of the other use cases in the sense that we really do have a variety. We are not just sort of a play on EVs. When we think about the rare earth space specifically, about 25% of the end demand is, think of it as EV mobility, electrified motion that way. The other 75% are sort of other use cases that are somewhat GDP. Some are faster growing, some are not such as HVAC, wind turbines, industrial motors, disk drives, a variety of other things. And so what we've seen in our space, there was obviously a lot of excitement a couple of years ago about the pace of EV penetration. And that, I think, earlier part of this year, we've seen obviously pull back around the market. And so -- but I think what we've seen is that, that other 75%, whether it's wind or some of the HVAC with some of the pullback in China, some of those use cases, small moves in demand there can trump dramatic growth in the short term against electrified motion, which is sort of 1/4 of it going to compounding at, say, 30%. What's interesting though, and one distinct thing that I want to distinguish is that, as we've seen this year, the challenge with electrification with EVs is that people have wanted -- people have a lot of range anxiety. So we've seen people are like, yes, I want an EV, but I still don't have -- there's not enough charging stations or -- and so we've really seen this year as EVs have pulled back at least relative to Street expectations is hybrids have gone gangbusters. Sales year-over-year up enormously. And actually, the thing about a hybrid is there's typically kind of roughly 90-plus percent market share for a rare earth magnet in EVs. Hybrids are the same, if not higher, because even though it is an internal combustion engine, it also has an electric motor in size, weight and efficiency are that much more important. And so -- the rough rule of thumb is that a hybrid will typically utilize 2/3 of the incremental rare earth content or NdPr content that an EV would use. And so to the extent that this were on sort of a new path as far as the transition to that involves much more hybrids, that should be still good for us. It's not as good as EVs, but it certainly is not as sort of existential as it might be for some of the other commodities.

So then flipping to supply, you guys have obviously a unique foothold in the Western Hemisphere, but I guess there's a lot more concerns about the China sort of supply spigot, government quotas. And moreover, there's also, of course, mining and sort of less environmentally friendly sources. So I guess, first of all, what are your thoughts on this overall supply situation and then we can kind of go from there?

Yes. So there's really 4 major players in our space. 80% of the industry is China, a little over 80%. And that is essentially 2 Chinese super majors. There's China Northern and then China Rare Earth Group, which is China Southern. And then there's us and Lynas, which is a public company in Australia. And so those are the 4 major players. Any other supply is frankly, uneconomic at this. You're going to see -- you see some public -- there's some public companies out there, some penny stocks talking about incremental supply, that's very challenged at these prices. And so really, the supply is sort of what can China do? And we can certainly talk about incremental supply that we want to bring on. But what can China do? And in this year, at least, we're seeing kind of quotas are flat. We're not seeing much incremental supply. But I think there's sort of a bigger backdrop that I think can contextualize our view about sort of Chinese supply over the coming years. And it's always hard to read the tea leaves on China because to the extent that a government wants to increase supply in an economic way, they can certainly do that, right? A government can't lose money indefinitely. We are quite convinced and we've said this on our last couple of calls that at these prices, the Chinese are most certainly losing money. And what has happened in this space, though, and I think it combines with headlines around -- in recent months, we've seen the rise of BYD, Xiaopeng, Li, NIO, there's some incredible products coming around the world from the Chinese manufacturers. And so the Chinese are now the largest EV exporter in the world. The upstream historically was utilized by the Chinese in a variety of ways, but to sort of dominate that downstream as they become larger producers globally, the question is, to what extent do they want to increase supply to subsidize their competition around the world? It's one thing for the Chinese to subsidize, say, Tesla in Shanghai, it's another thing to subsidize Tesla making a product in the U.S. or in Europe. And so our view of it has always been that what we've seen over the last couple of years as the Chinese OEMs have risen to sort of displace some of the Western OEMs is that you will see the quota increases and the supply increases commensurate with their growth of their supply chain as well of their producers around the world and their supply chain within China, but that they're not going to subsidize the Western competition. And I'll add on one thing and actually touches on demand. And it's sort of longer dated. So I hesitate to mention but I think it's actually really relevant as we think about both supply and demand and this concept of sort of what China is going to do. Xi came out recently and said that China expects to dominate the humanoid robotics production, mass production by 2025. They expect to be mass-producing humanoid robotics. For those who are watching the Tesla annual, there were a lot of headlines last week about Tesla now expects to be a $25 trillion, $30 trillion company centered around robotics, and there was an estimate that there would be 10 billion to 20 billion humanoid robotics at some point over the next decade and maybe they could have 10% share or something like that. robot is essentially an EV, as we say, is a robot with wheels. It has a big battery and a small magnet. A robot -- a humanoid robot has a small battery and a lot of magnetic content. We estimate -- and obviously, this is unknown. There's a number of fascinating products in China. There's -- there's obviously Tesla and a few here, and this is sort of the cutting edge of AI right now. But typically, 2 to 3x the magnetic content. And so when we think about the growth of robotics if you were to completely eliminate just completely eliminate every demand case, so assume the rest of the world demand for EVs, hybrids, wind turbines, drones, HVAC, everything was 0, the entire NdPr market today could probably produce somewhere around 50 million robots, certainly not the 10 billion to 20 billion that are being talked about. So if you believe 1/10 of that market cap potential, then certainly, there's going to be an enormous new bull run around the need for incremental supply in NdPr. And so I think that actually my view of this is, obviously, that is a number of years down the line. But certainly, what we start to realize is as we think about this AI revolution, to some degree, obviously, it's much larger, more impactful and bigger in a much more pervasive way, but the frenzy around AI today is somewhat what we saw in 2021 around electrification. You're seeing parabolic stock charts. Now it's NVIDIA and Broadcom than it was Tesla and Rivian, et cetera. As we start to see those parabolas, if there's a trillion that's going to be spent on GPUs and data centers and all these use cases, there's going to need to be ROI right? We're going to need to see revenue outside of just some incremental spend on in Microsoft or subscription to OpenAI, there's going to need to be use cases. And so our belief, I believe, is that humanoid robotics, AI-driven robotics is going to be the key, one of those key exciting ROI use cases from AI. And I think it's actually going to happen a lot sooner than people think. And so even if that is 3 to 5 years out, I think that will start to -- the supply chains and the need will start to be recognized and developed. And so I think that, that is a huge source of incremental demand that is going to come -- that is going to be a step function change for us vis-a-vis the other materials, certainly. But it also relates to this idea of sort of Chinese supply. And as the Chinese see this, and Xi is out making these statements, it certainly makes a lot less sense to subsidize the Western competitors, particularly when you see an enormous need for upstream 3 to 5 years, and they are certainly longer-term planners than most of us here. And so I think you're going to see -- and I don't know if it's 2 days or 2 years, but I do think you're going to see another inflection point of perspective around demand in our space.

Makes sense. I'm going to pivot over to the various operations and how you're going to address what looks like maybe supply challenges in the future. So I guess, first off, given the current price environment and the stage to operation still working through improvement efficiencies and so forth, how should we think about the margin benefit of staying focused on REO concentrate sales near term, this is Stage 1 versus pursuing larger outputs of Stage 2?

Sure. And I think you're referencing as we think about our ramp.

Yes.

So I think it's really important to just stepping back for those who are a little less familiar, going back to that sort of Stage 1 and 2. So the thing about rare earth is unlike sort of a typical mining operation, you don't just sort of mine it and kind of do a little quick process and sell it. You mine it and then the process down the way is extensive. It really is closer to think of it as like, I guess, a friendlier version of oil refining, right? At Mountain Pass, we have a north of a 6% rare earth ore body. In China, they're typically 1% to 2%. That concentration makes it so that when you concentrate, it's actually much more economic to concentrate something that's 6% than 1%. So in that first stage, we actually generate an enormous amount of gross profit in that first stage just by concentrating and that's a pretty extensive process. But because we're a co-located site where we're concentrating right at the mine, there's a big amount of profit. As we move to the next stage, where you're taking a concentrated product into a refined product, the key inputs there are to go from that step to the next step are mainly energy, reagent and labor. Those are steps where vis-a-vis China were certainly less competitive than we are in that first step. But there's enough of -- because we are so economic at scale in that first step and because there's -- because we can move downstream and do this at our site, there's enough of a total dollar uplift for that to be an economically exciting opportunity for us in a normalized pricing environment. And so what we said was that in this environment where you see the whole industry basically breaking even or losing money, that obviously, adding cost to go from 1% to 2%, there's not a lot of uplift, right? But as we -- so going from 1% to 2%, what we want to do is be very thoughtful. We're not going to just ramp to the extreme. If prices were at $150 we'd want to just ramp to the extreme because even if we are off by half, it's still -- there's so much dollars to do that refining step that you just kind of do it as quickly as you can. In a tighter environment, we want to maximize the benefit that we have of that extremely profitable first step so that we can kind of get our cost structure down and ramp up methodically. Now this is sort of at the margin in the practical scheme of things. We want to get that cost structure down as quickly as we possibly can. And from what we've seen from last year as we've started refining, we feel very good about the business. We feel very good about what we've built and our ability to get normalize and get our cost structure to where we expected it to be adjusted for -- since we -- if we go back to when we went public, certainly, labor costs are higher energy costs are higher and et cetera. There's been inflation. But other than sort of standard inflation, we feel very good about the model that we've laid out. But we want to be methodical because we are in this tough pricing environment. And certainly, we're not getting credit for any of that. And I think that to the extent that NdPr prices remain here, everything is pretty much noise other than sort of the pricing phenomenon because there is so much leverage to the up when prices go back up. And so our goal is to obviously just position ourselves for the maximum of upside leverage when that comes. I'm going to pause here. I'm going to -- before moving on to the various other stages, I just want to see if anybody has any questions. Just wait for the microphone, please.

So lots of politics going on. Without getting too political, do you feel that Trump administration or Biden administration would see -- you're hearing more and more about these humanoids, who has a better view of do you want to hold some of this market and keep it in your own structure in the United States, what do you think? And how might they help you to offset some of the costs that we're finding here?

So great question. I think the -- I love answering this one because the good thing is our industry is probably as about as bipartisan as it gets, right? There's -- when we think about the handful of things that there are at a minimum, strategic competition globally, if not worse. You often hear of things like semiconductors, AI and on that list of 5 things or rare earths because of the fact that what we do is so critical for downstream military applications to as well as commercial national security around our major industries. The -- both administrations, we have -- we have had programs where we've had benefit from DoD under both the first Trump administration and now the Biden administration. In fact, we had a $35 million award from DoD that the President of the United States himself announced. You can find that on YouTube from a couple of years ago. We will certainly benefit from provisions of the IRA, whether it's 45x. We just won $58.5 million from 48C, which is a tax credit for our facility in Fort Worth. I think the -- I think both administrations whoever wins will want to support our industry and maybe for different reasons. And certainly, I think on the left, there's probably a bit more appreciation for the environmental attributes. And on the right, there's more appreciation for the national security attributes and supply chain. But both, I think, agree on all -- and I do also think -- and I go back to this concept around robotics because I think it's one of those themes that will happen much sooner than people think and take people by enormous surprise. And we're seeing it all over the place in company formation and because, again, this -- for this AI boom to take on more significance, there needs to be some evolution. And EV is one thing, but when we start thinking about robots in our homes, our restaurants, our factories, the national security aspects of that are that much more powerful. And so the practical reality is we have lost a lot of the word with respect to EVs, like the Chinese make great products. They're there. They'll be competing globally and they'll win a lot and they'll lead in many respects, in some areas. Humanoid robotics is extraordinarily impactful more impactful from a military and national security standpoint and the playbook is still completely unwritten, right? Will it be Chinese lead? Will it be U.S. led? And so we got to get that one right. And so I think, yes, certainly in this election season and as we come out of it, I hope, just I say this as an American, not the CEO of MP, but I hope that we get smart real fast and start to long-term plan because that is certainly an industry that we can not only lead from a technology software standpoint, but from a manufacturing standpoint all the way up the supply chain. But the clock is ticking. And so I think we're a critical component to that. Hopefully, there'll be other companies, a lot of other companies and more -- bigger ones downstream, et cetera. But Xi has already come out and said that the Chinese expect to leading this. And so we better lead on that really quickly. I don't think though, to answer your question directly, this election either outcome will be will be great for MP. You can -- whatever political badge you have, then you can pick whether there's a good outcome or not.

Any other questions? Okay. Maybe moving on to -- you've spoken in the past of the Upstream 60K initiative, which I think it's going to be more of a longer dated over the next 4 years, which may be fine under the current pricing regime. But I guess what are the key milestones to look out for? What's the appetite to convert this to oxide? And I guess, what would be the implications for the -- in terms of Mountain Pass' reserves?

So quick background, Upstream 60K, consistently over the last 4 years since we've been public, we've said to people like we have sort of a niche industry here. And so I think that people -- they see a lot of headlines around rare earth projects and like, oh, there's a discovery here. We discovered $10 billion of rare earths and you kind of look a little bit deeper, and it's actually it's like 0.1%. So the $10 billion would cost you like $50 billion to produce if you ever could. And so there's a lot of headlines about supply, but then actually getting that supply, getting it to be either concentrated or refined economically is extraordinarily hard, time consuming, capital intensive, human capital intensive. And so what we've consistently said is the nearest term, highest return on capital, lowest risk source of incremental supply in the western world would be expansion in Mountain Pass. And so we've been driving that since inception. And we obviously got pushed repeatedly to quantify that. And we've been very thoughtful, I think, and hopefully, conservative in sort of how we conveyed that. And we recently came out a few quarters ago and said, as a result of all of the work that we've been working on, and this is a variety of projects, this is not one project, but this is a variety of projects, we believe that we have the potential to expand output at Mountain Pass from roughly 40,000 ton REO run rate to 60,000. So a 50% increase with somewhere in the order of $200 million of capital. This is a variety of projects. And what I would tell you is we're already seeing significant progress. We have physical items that have been built in place that are underway. I think you should expect to see some incremental gain over the next year or 2, but the vast majority will be back-weighted, both as far as incremental output from that 40,000 on the way to the 60,000, you will see much more towards year 3 and 4 and the capital spend will be much more towards the end. But it's not like it's one project where it's sort of binary and it kind of starts now and finish 4 years later, spend x or did you get that wrong. It's -- and there's a number of projects. So given the diversity aspect of it, we feel good that even if we're wrong about some parts, maybe some parts will be a little better. And at a minimum, we should make material progress towards that, but hopefully, we can hit or exceed that. And that, if you think about it, I mean, just to put the perspective on it, I just -- let's put some hard numbers on this, just we're all investors in this room. I guess I'm one as a CEO, I used to be one full time. But a couple of years ago, when we were sort of in the prior excitement over the fact that the world could electrify and NdPr prices were more normalized, we did approximately $400 million of adjusted EBITDA. In that sort of excitement, we had a $10 billion enterprise value with the expectation we'd move downstream into magnetics and we'd refine, move downstream into magnetics and prices would go up, commensurate with the demand that people see. Fast forward a couple of years, prices have collapsed. Obviously, our profitability has collapsed. But what we've now come out and told you is we believe -- again, we have to execute this, but over the next 3 to 4 years, we can increase our potential output by 50%. We've been refining for a year now. And obviously, our ramp is imperfect, but very good, and we feel very good that we'll execute on what we said that we would execute on. We've got a magnetics facility that is built, it will be EBITDA positive this year. And we can talk more about all of the good things that we've set as far as source and uses. And we have a little over $2 billion market cap, and we have basically no net debt, we have $1 billion of cash, $1 billion debt. And so when we think about that $10 billion of enterprise value on the expectation, but then increase the potential output by 50% and then realize that, that can then be downstream refined and inflation adjust all that, you can see that the pendulum has just really swung to the extreme in the negative and really just doesn't give us credit for the refining and the magnetics that we've done, and those are not cash burns. Those are eventually in the short-term benefits plus. So anyway, that's a long-winded way of saying that we think that we can bring on incremental supply, it can create a lot of value and who knows when this cycle sort of the pendulum goes the other way. But I do think the pendulum will go the other way very quickly. Hopefully, it will be around robotics or something great we're doing in the U.S. with respect to that. But that's the dynamic around Upstream 60K.

I want to pause again and see if there's any last questions before asking my sort of set of last questions. All right. We'd like to get to capital allocation. We don't have a lot of time. But I guess, can you update us where we are at Stage 3 equipment setup, offtake, how the economics look? Just any key takeaways. It's something we don't get as many questions on, but it's going to become more relevant in the not-too-distant future.

Yes. And maybe we'll have to we'll have to have some kind of visit to show off a little bit in Fort Worth. You can kind of see in our decks or on X, we'll put out a picture occasionally. But that facility is built. We broke ground. We're really proud of it. We built an incredible team in Fort Worth. We broke ground on it 2 years ago. We're in the building now. It's a 250,000 square foot facility. We've got an R&D center where we're -- we've got an incredible team. And we've said -- we said in the last call, we'd be making metal there this year, and we'd be EBITDA positive there. So to think about 2 years after breaking ground and being EBITDA positive, again, we've got to execute. So I want to caveat that. But it's an incredible achievement. And there's currently no debt on that facility. We equitized it all. We said -- we talked about sources and uses over the remainder of the year a call ago, so I'll reference you all to that. But we -- on the last call, we said that this quarter, we'd be -- we expected to get a customer advance of $50 million customer advance this quarter. So on the next call, you should assume that we will follow through on all the details around that. And so we feel very good about the sources and uses with respect to that facility and our ability to continue to maintain and grow our fortress balance sheet. And so we essentially get no credit for that business, and I think it is certainly politically and militarily strategic for the country. And given the structure of the business, we've said historically that we would view that business as an independent business that any material that went into it, we would consider the cost of that ad market. We wouldn't rob Peter to pay Paul. And so the economics of that business need to make sense. And so we've invested quite a bit of capital in that business. And now I think we will start to see us reap the benefits of that. And at some point, we'll get some credit for it.

Well, I'm sure we can discuss for 30 more minutes, but unfortunately, we have run out of time, Jim, but thanks for sharing your insights, and we'll look forward to following the progress.

Thank you so much.