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

Well, thank you very much. Happy to be back here now with Jim Litinsky, Founder, CEO, major shareholder of MP Materials. Great to have you here again.

Thank you, Carlos. Good to be back. I think this is the fourth year in a row.

Yes, exactly. So looking better. The conference keeps on expanding. So really happy to have you here. So look, let's just set the stage. You guys -- I don't know how many people are truly familiar with the operation, but maybe a little bit of an oversight, an overview on your efforts to bring back the supply chain of rare earth and magnets in the U.S.?

Sure. In really simple terms, we are a rare earth mining and materials company. There are 3 stages to our business. There's rare earth concentrate. We then refine those rare earth and then we turn them into magnets. The magnets are for high-power -- high-power magnets for EVs, hybrids, wind turbines, drones, robotics, any kind of electrified motion. So if you go back historically, I founded the company. We bought the assets back in 2017, well, we took it public in 2020. And at the time, we were a Stage I business. We were mining and concentrating and selling all that material to China. We've since moved downstream. We have -- 2 major steps that we have done, our Stage II business, which is refining, and we are now ramping up that refining at scale. And then we also have a very substantial contract with General Motors to be the key supplier of magnetics for their Ultium Platform, and which is their electrification platform. And we built a magnetics facility in Fort Worth, which I'm sure we'll talk about. And that building is built, and we expect to be selling metal to them by year-end and making magnets for them by next year end.

Great. And so before we get into some of the details of the company's operations, let's talk about the market.

Yes.

NdPr prices, 70% down year-on-year, significant headwinds for all in the industry. But recently, it seems that...

Green shoot.

We saw the bottom and things are moving in the right direction. What do you think that is? Maybe a little bit of a recap, what brought the prices down and what are you seeing now? What are the green shoots, and do you expect this is just the beginning of a [ rally ]?

Sure. And just to provide context to the NdPr, which is the key magnetic commodity that we make. The prices are down about 70% from the peak in '22. And so believe it or not, there was a time 2 years ago when electrification was what AI is now sort of the excitement of the market. And so back then, obviously, there was -- the pendulum was totally the other side of where it is today, the belief of that electrification was growing extraordinarily fast. There was a huge bid for all of the EV commodities and prices had moved up with the expectation that a lot of supply needed to come online. Fast forward to today, we've seen significant economic challenge in China, which have brought the prices of commodities in general down, but specifically with demand issues around EVs has brought a lot of these commodities down. What separates our commodity is sort of unlike some of the other materials that feed into this sort of exciting growth supply chain. Historically, NdPr or as it stands today, is about 28% of demand is E-mobility. So think of it as sort of -- any kind of EVs, hybrids, et cetera. The other 70% though is sort of -- think of it as levered to Chinese manufacturing. It might be HVAC, disk drives, consumer electronics. And so over the last 18 months, as we've seen a lot of that stuff really get hit, the impact on 70% vastly trumps the growth on the 28%. Unlike the others, though, where they might be -- all focused on EVs or significantly focused on EVs. We have a couple of things that I think are causing demand green shoots or a few things really is, one, the dramatic move down in China has at least stabilized because it stabilized at a pretty terrible level, but it is -- the derivative has stopped moving worse. Additionally, hybrids are good for us. And so, what I mean by that is we're agnostic. If we were in 100% ICE world today, and we went to a 100% EV world tomorrow, we've historically said that, that 100% EV world tomorrow versus 100% hybrid world, hybrids would utilize 2/3 of the incremental rare content, magnetic content that an ICE vehicle would. But what we're actually finding in some -- in a lot of the demand in China is that the hybrids are bigger vehicles. They are SUVs that -- so we're actually seeing that it's actually somewhat agnostic between sort of a hybrid car versus an EV, as far as incremental demand of NdPr from our standpoint, coupled with the fact that we're seeing hybrids really grow. I think this past month, Ford said that their hybrids were up 50% year-over-year. And so we're actually that E piece is moving -- is actually growing nicely. And so that's a good thing. And so I think unlike some of the others, we're agnostic to hybrid, which is good. And then lastly, and again, I think this is -- and hopefully, we'll get to talk more about this later. We are seeing sort of some of this excitement around AI is around physical AI, robotics. And I do -- I want to caveat all of this. This is sort of a -- certainly a longer-term thing, but whether it was Elon Musk yesterday at the All-In Conference or in some other events or some of these other exciting robotics companies that we're seeing. Robotics is effectively sub-1% demand today in our space. But the magnetic content, if you think of a robot, it's really just the actuators are rare earth magnets. So a robot is a small battery and lots of magnets versus an EV, which is a big battery and a small bit of magnets. And so again, 5, 10 years out, the scale of demand in our space for robotics is going to vastly exceed what the size of the market is today. And so that is actually considering the fact that it's a multiyear process, 5, 10 years to bring a project online, that is another backdrop that is extraordinarily bullish for long-term demand. Again, that is not the next 3 or 6 months, but that's another thing. So add all that up, I think the demand feels good for the medium and long-term, very good. And then supply, the last thing I would say is a few weeks ago, there was an announcement that the Chinese quota was sort of lower than people expected, and there's a perspective that the Chinese are realizing they're losing money at current prices, in particular, given some of these demand items that I talked about that maybe they want to get some more supply online over time and so that prices have bottomed and have started moving higher. So we're excited about that. Again, I caveated with commodities, or commodities we never know what's going to happen next. But there is an old expression that prices in China are either they're either going up or they're going down, and now they seem to be going up. And so hopefully, this is the beginning of a long-term trend that's good for us.

Yes. I know the recent -- I'm looking on my head trying to [indiscernible] commodity prices. But so all right. So now let's back...

No, most of it. Okay.

I haven't seen it from here. The -- if you -- now let's bring it back to the company, right? So you mine, you produce concentrate that has gone phenomenally well for the most part. You had a little bit of a hiccup last quarter, then refining right now and also magnetics and -- metal, magnetics later on. Give us an update on Stage II.

Sure.

Where are you at? Or when do you expect to hopefully get to the 60,000 tonnes per year run rate? I think you are forecasting around 400,000 for the next -- for the third quarter in terms of production. So -- just give us an update on that second step of the supply chain for you?

Sure. So, as a concentrate producer, we're really the low-cost producer of the world. We have an enormous amount of gross margin. If we just chose not to refine and do nothing, we can just mined and sold a concentrated product, we make a substantial gross margin. Then as you move downstream, there is quite a large amount of potential dollars of incremental contribution, but it obviously depends on where rare earth prices are. And so what we've said is as we begin this ramp that given the prices of the commodity have collapsed -- 70% from where they were before, that the vast majority of our profits earned in our Stage I, and we've got to get cost down in our Stage II to have that incremental profit. And so if you look, what we said, if you go back a few quarters ago, when we started commissioning that because prices were so low, and obviously, the vast majority of the margin is in the Stage I, we wanted to be really methodical about how we've ramped because it didn't make sense to just ramp maniacally for no reason and burn a bunch of cash. We wanted to -- there were a number of things that we identified that we thought would sort of bring costs down. And so we took that cautiously. If you go back to this last quarter, which you referenced, which I think it's fair to say, it's probably the only and we'll have them in the future, but it was really the only tough quarter we've had relative to the Street since public company for 4 years. And hopefully, you can verify that, right. But it was a tough quarter. We had an extra couple of weeks of shutdown because of a couple of rigs, it just unfortunately broken -- a big thickener and we had to clear it all out. And so it was sort of a top rash operational quarter. Again, 1 and 4 years may, hopefully, if we do 1 in these 4 years, that's great. Despite that quarter, we went from what was essentially a very low amount of refined rare earth -- refined NdPr produced to 272 tons. So to put that in context, that 272 tons. And then we also said on the call that we -- that when you look at this quarter, so the quarter we're in now, that we expected 50% sequential growth quarter-over-quarter. So do that math, 272 times 1.5, that puts us over 400 tons. That puts us close to a 2,000 tons run rate, which is on the way to 6,000 normalized. Going from sort of effectively 0 to 2,000 tons run rate in a few quarters is an extraordinary feat. I mean that is a -- in our space that's -- and you can speak to this certainly because you know how the scale of these assets. And so we feel really good at that ramp. I mean execution wise; it's going really well. And where each day, our confidence grows. It's a -- I always say it's a nice fight. There's two steps forward, one step back. We said on the last call that we were coming out of last quarter at record levels of production. Nothing has changed on that front. And so we feel really good about that execution. And obviously, our cost structure for the Stage II piece of the business is materially higher than where we believe it will end up, and that's because we're scaling that business up. In the meantime, though, and may -- this might not help those that are kind of thinking about doing the math this quarter or next quarter, but the really big inputs when you think about kind of what is the long-term enterprise value profitability, et cetera, are that upstream REO is how much REO are you feeding into that? And then how quickly are we getting that cost structure down. And so what our cost structure was on 270 tons versus what should be 1,500 tons is not -- that's just noise, right? What's really important is -- is are we getting that REO production, and we can kind of talk about our Upstream 60K, where we believe we're growing our REO production upstream. And so that is trending very well. And again, the cost structure is coming down, and so we feel really good about that.

Great. But maybe why don't you talk a little bit about this brownfield expansion to 60,000. And it is obviously very potentially attractive in terms of returns before we talk about Stage III, why don't you talk a little bit of that?

Yes. So just to provide context for those who don't know, when we went public back in 2020, we said our expectation is we can be doing north of 40,000 tons of REO over time annually. That was sort of where we were kind of run rating or hoping to get to. We've sort of since blown past that -- but we came out and said, we said back then was, when you look around the world, we expect a lot of demand growth. We want to create value, obviously. The nearest term, lowest risk, highest return on capital source of incremental supply would be brownfield expansion in Mountain Pass. And there were a number of projects that we're working on. Upstream 60K is really a name that is applied to a number of projects at Mountain Pass. It's not just like one thing where we're building this one thing, and then it's a number of things. And we did quite a bit of work on that prior to sort of announcing this Upstream 60K clip last year. And what it was is that we would be able to grow REO, upstream REO from 40,000 to 60,000 over the next 3, 4 years with a couple of hundred million dollars of capital spend back -- sort of backloaded towards the latter part of that. And so we've seen real progress on that front. We feel really good about that. And if you think about that math, even at today's very depressed prices and even where we're just ramping -- our enterprise value is called a little over $2 billion. And so if we can grow that by $1 billion at troughs and our enterprise value a couple of years ago was $10 billion. So if you say the range of 50% increase is $1 billion to $5 billion of enterprise value creation and you can do that with a couple of hundred million bucks, you don't need a spreadsheet for that kind of math. And so that's great. And that is trending really well. And hopefully, we'll continue to talk about that in the coming quarters.

All right. And Stage III, you have been hiring a lot of people in that -- for that facility. You're getting some prepayments from the government and customers. So everything seems to be moving along quite well. But any other details that you want to share with us?

I'm glad, because I'd really like to talk about this business because I think there's a bit of a misunderstanding on our Stage III business. When you think about magnetics, we take our refined rare earth and then we send it downstream to -- it has to be metalized and then turned into a magnet. And we think about our Stage III business totally separately from the business return on capital standpoint. And before we did anything before, we even hired an employee into that business in early '21, we said, we're not going to rob Peter to pay Paul, that this business -- if we're going to go into this business, it needs to have attractive returns on capital. And so fast forward to today, we hired our first person in early '21. We now have 90 people in that business. We signed an excellent contract with GM, and we have a contract. We have contracted cash flows. And so we've invested, and you can reduce this from what our historical capital spend is and what we've said, but I'll summarize, we have hundreds of millions of dollars invested in that business that will be coming back to us plus a return on capital if we do nothing. If we get no more customers, if we don't grow that business. And so -- what I think the market is misunderstanding is that we're not going to incrementally -- we're not going to continue to allocate new capital and new -- and do new things in that business if we're getting extremely negative value for it. So today, if we wanted to, and we do nothing. We have, on an undiscounted basis, hundreds of millions of dollar, we've got to execute, right? We can't just -- we've got to execute for it to come to us, but these are contracted cash flows that return on capital with a return on it. And so if you look at our enterprise value today and think, well, on an undiscounted basis, there are hundreds of millions of dollars coming to us and then you look at our balance sheet, it doesn't fit. And so I think we're -- obviously, the market you guys are telling us that there's significant negative value to that business, and I'm sitting here looking at it and given what I see, I think you're wrong.

And when do you expect -- any comments you can make on when do you expect to get to a run rate steady-state Stage III?

Yes. And so -- and I didn't answer the other part of your question and -- which is about milestone payments. We've already collected $50 million. And so we've been really thoughtful about sources and uses in that business. We said on the last call, we expect to collect another $100 million of milestone payments, call it, we said, we have 100 million of sources of those payments plus some tax credits by year-end next year. So call it in the coming couple of quarters or more -- or so, we expect to collect $100 million to that business for milestones. And we've said, we expect to be selling metal by year-end and making magnets by next year-end. And so we feel really good about that business. And obviously, once we're selling metal, we expect to be EBITDA positive in that facility quite soon. And when you think about that, it is a really extraordinary achievement. This was a business that didn't exist. We didn't have a single employee in it a few years ago. It was a -- the site was an empty field 2 years ago. Now we have a very attractive contract and foundational customer and one of the best possible customers you could have. And we've got a built facility, and we are bringing it online. And so despite all the chaos of the pendulum, that has swung in the market, the execution there by our team in that business is been just extraordinary.

And given the timetable that you just described and the confidence which you are talking, is it fair to say that the concerns that have been out there on the IP and the technology -- those should be put to rest, and you have what you need, you're ready to go?

Sure. So -- and to be clear on the confidence, I want to caveat everything we must execute. So we take -- we approach this in a very humble manner. We need to execute. So hopefully, you can -- hopefully, what you're seeing is passion, not necessarily extreme confidence. It's a lot of passion, because we feel like what we're building out there is really incredible. But the IP issue, we've been focused on this from the beginning, from the first hire. And when you think about the IP in the magnetic space, whether it's patents that have expired, patents that are soon expiring, white space. This has been a focus for 3 years, and that is an area where I will say we feel very confident. We have everything we need from an IP standpoint to produce magnets for obviously our big foundational customer GM, and to do -- to achieve everything that I've just said with what we have today.

All right. And then talking about the OEMs and your customers from that metallic -- metals magnets, magnetics business. What can you tell us in terms of the conversations that you may be having with other OEMs? Clearly, there is a geopolitical aspect also to it and supply chain security that is quite relevant. We haven't seen any other projects or contracts, let's say. So any conversations? Anything that you can share with us? As to like that how much -- how successful or have you been in attracting other potential customers?

Sure. So a really important point that maybe wasn't highlighted enough on the last quarter. I mean, I think you made this point, but that -- upstream from the magnetics business first, feeding into that is that we said on the last call -- and by the way, I think we even tweet this. So you should all follow us on X because we do tweet fun things. So we want to continue to send stuff on that. So you should look out for that because we do make some interesting points on there. But -- we said, we now today have 3 of the 5 largest OEM automakers in the world as customers. And if you go back to a couple of years ago at the peak of the boom, there was this belief that maybe there up -- the downstream OEMs would sort of look up the supply chain. So there's a question like will they care, what will they do? Blah, blah, blah because they didn't even know where their material came from, right? They were all buying magnets in China. And now fast forward, now that we're refining, we're making metal in Vietnam, we haven't talked about that. But we have 3 of the 5 largest automakers in the world. So actually, we've shown that the OEMs downstream are actually very concerned. They're looking upstream and securing supply. And so I think that, that is actually a really interesting thing that has happened that has shown that some of the psychology -- it's there, right? They are very focused on this, and I think that's a really interesting thing that maybe went a little unnoticed. But then as we move downstream, what I would say, and I do think this is going to change. So I want to caveat that this will change. But right now, the market is telling me, I have significant negative value for this business, even though the President put a 25% tariff on Chinese magnets, even though there is a -- clearly a supply chain issue with this stuff, even though demand for electrification is still and hybrids still going great, and robotics is out there as a potential game changer. Despite all of those things, the market is saying, you guys have significant negative value for this business, where you have contracted cash flows. So my immediate response is, well, I'm not investing incremental capital in that business. That's what the market is telling me. And so right now, despite a lot of customer interest downstream, unless we're doing it in a capital-light, no capital way, which you could certainly see happen. We're not going to make incremental investment in that business, I'd rather just buy back my stock, right? Because if my assets are trading at pennies on the dollar and I've got contracted cash flows here on the one hand, and I look at the replacement cost of Mountain Pass, even though this business is extraordinarily bright, the markets are telling me, don't invest in this business. So we won't. Now that all said, I think that that's going to change in a dramatic fashion. I don't know when, where or how, and it's certainly possible that conversations that we have could result in something that is so financially attractive to us that it's no-brainer of any of this. And so we'll do those kinds of things. But as it stands today, we just won't invest incremental capital, we'd rather buy back what we have.

I want to come back later to the capital allocation theme. But before we go there, you touched upon the robotics...

Yes.

Angle. Can you maybe share a little bit more details, and as to like the magnitude of the potential opportunity there, the market and how does it compare to the current existing EVs opportunity?

Yes. So if we look around the world today, obviously, the game-changing technology is AI. That's the excitement in the markets, and I think everyone here is obviously fully aware of that. Like the Internet boom 25 years ago, when you have these excitement phases, there's all these possibilities, there's an enormous amount of capital that goes and then it takes somewhere in the order of 3, 5, 10 years for the game-changing use cases that come out of it. And in that process, there's great fortunes made, there's great fortunes lost and et cetera. And we're somewhere along that trajectory with respect to AI and certainly, other people can speak to a lot of areas of that better than me. But one of the game-changing aspects that we've seen, and this is a function of investment that's occurring from NVIDIA, or Open AI or Tesla or Jeff Bezos, et cetera, is physical AI. That is one of the key disruptive cases that we're seeing and specifically around robotics. And we're seeing just incredible stuff. And by the way, we're seeing really incredible stuff from China as well. And so when we think about -- it is one thing for the Chinese to completely win the EV market. It is another thing when we think about robotics pervasive around our homes, our factories, our economy, you got to think that there's going to be American champions that want to control that supply chain all the way through, particularly given the military aspects of it. And so what I would say is -- and sorry, Carlos, I'm going to plug a competitor, but I think you referenced is Adamas, which is one of the focused parties in the rare earth space, does a really good supply-demand report. They just put out their report last week and showed supply demand going out to 2040 and all of these verticals, and there was some discussion in the beginning of that report about the perspective in China is that robotics is such a game changer for demand that maybe that's a driver of them wanting to start taking up prices. And so my expectation is -- and again, this is not going to move the stock in the next 6 months or something like that. But I do think that we will inevitably see a re-appreciation for what we're doing in MP, the assets that we've built and what we're doing in our business, as it becomes more apparent that this is one of those games changer things that's happening around us, robotics. And just in case I didn't make this clear like a robot, again, it's lots of magnets. The actuator -- every time you hear the word actuator, that's a rare earth magnet. And if you think we're going to have more robots than humans, there are only 1.5 billion cars on the road, there's 90 million made a year. And so think about what you -- think about billions of robots and then multiples per unit of content, and what you find is that's a bigger opportunity than EVs and EVs alone when that gets back on track is a huge game changer for us. And so I'm really excited about it and we're having conversations and seeing some of these companies. It's still so early. But I do think that, that is going to create -- that will be the driver of the next big upcycle in our space. And obviously, Tesla talks a lot about this. But if you think about public companies very focused in this space that are very levered to how AI is going to impact the physical world. I mean I think we're right there. I mean, we're -- and so it doesn't take a lot to move commodities prices. And so hopefully, we see that sooner than later. But again, it's longer dated.

Definitely fascinating topic. But let's close out the conversation maybe talking about capital allocation. Your balance sheet is in good shape. You are going to have $190 million in payments coming in the next several quarters. Your CapEx is coming down, or rule coming down in also like, say, in middle of next year or end of next year. How are you going to deploy the cash that you have right now? And the cash that is coming in?

Yes. And this is -- I think this is hopefully a really unique thing about us versus your typical commodity company in -- certainly in the commodity space. But if you think about the last few years, typically, you have companies in the boom cycle, they're making lots of cash. They buy back stock, they do M&A. And then in the down cycle, they're scrambling, selling off assets, raising capital, looking to do, et cetera. We came to market with a fortress balance sheet. We've been consistent that we must have a fortress balance sheet in a variable cyclical business. And that allows us to take advantage of when the pendulum has swang strongly the other way. And so year-to-date, I just think this is -- I don't think I've ever seen this before. I'm sure there's cases out there, but we have 2 enormous value creation projects underway projects, right? Spends -- got to J -- get through the J curve, ramp up, et cetera, but create value of your business. And the price of our commodities has collapsed 70%. And year-to-date, we bought back 8.4% of our company, 8.4%. That is really remarkable. And obviously, we still have, as of the last quarter, north of $900 million of cash on our balance sheet. And so, we have positioned the company to be opportunistic on the offense at all times. Obviously, given where the commodity is. We want to be thoughtful about what we do, how we spend. But when you think about the verticals of our business, again, with our Magnetics business, assuming we execute, there's an enormous amount of capital coming to us on an undiscounted basis over the coming years. And so certainly, where we're trading today, we're not going to make incremental investments, we're going to look to either buy back stock, distribute that -- distribute in dividends or do something thoughtful with that cash. And -- and again, as a reminder, I'm the founder and largest shareholder of the company. And so we have an owner-operator culture. We try to make sure that everybody is a shareholder. And so we have that mindset. And so we are maniacally focused. And again, we'll adapt. I mean if you asked me 2 years ago, I thought that we would be building a lot more because the world was changing so much, and then -- but you look at the world today, and obviously, the playbook is totally different. And so we'll be flexible and opportunistic, but one thing that won't change is that we're going to make sure that, first and foremost, we have the balance sheet to be able to take advantage of opportunities. We don't want to be scrambling in the down cycle.

Yes. On that great note, thank you very much.

Thank you.

Good to having you here.

I appreciate it. Yes. Okay.