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

Okay. Moving along, we have via Zoom, MP Materials and their CFO, Ryan Corbett; and Martin Sheehan, who is heads of Investor Relations for the company. As I mentioned before, MP is the largest owner and operator of mining rare earth elements within North America. And we're a little bit behind schedule here. It's about a $3 billion equity cap company. I'm going to hand it to Martin and let him go through their prepared remarks, and then we'll get into some Q&A. But thank you very much for being here virtually, Martin, and look forward to hearing about some of the developments taking place with MP.

Yes, thanks for having us. I think Ryan should be joining any second now. So I apologize if he has not buzzed in yet.

Maybe I can talk a little bit about the journey because they've been nice enough to join us either in person or virtually. So this is a company that's been in an evolution since purchasing the Mountain Pass mine out of bankruptcy and really looking to vertically integrate the rare earth metal and refining space and ultimately becoming a producer of a permanent magnets for the space, which are critical for electric vehicle development. And we had talked a little bit before in my prepared remarks about geopolitics and the importance of supply chain security. And clearly, if we're thinking about companies within the electric vehicle space and their sourcing of really the entirety of the powertrain of the vehicle, including the power of the wheels. This is a company that is as well situated as any. So I see that Ryan has joined here, so I will -- I'll see the floor. Hopefully, that was -- those remarks were okay by you, Martin.

Of course, thanks for the intro. I'm going to try to share my screen while Ryan walks through the slides.

Sorry, I was a few minutes late. Little IT difficulties there, but just made it, obviously, our typical safe harbor we make forward-looking statements, you can look at our SEC filings for reconciliations on our non-GAAP measures as well as our risk factors. And then I'm sure Martin probably may have already covered this as I was fumbling with IT that we're coming up on our quarterly results here soon. So we'll avoid any discussion of our Q3 results. With that out of the way, for those of you that are new to MP, I think the opening comments were spot on in terms of just the criticality to the automotive supply chain of rare earth Magnetics. MP is the North American leader in this space. We own the Mountain Pass mining and processing facility in Mountain Pass, California. We have brought that operation back from what was a cold idled status in 2017 to the second largest producer of rare earth products globally. We have also embarked on an initiative to bring not just the production of the raw materials, but the refining of those raw materials back to the site, which we are in the process of ramping up and have successfully made in the LTM period over 600 metric tons of NdPr oxide, which is the fundamental building block of rare earth permanent magnets. And then the next step in bringing the totality of the supply chain back to the United States, is the downstream portion of our business, which is production of finished rare earth permanent magnets, our foundational customer in this initiative is General Motors and we will be providing them with finished magnets at the end of 2025. Go to the next slide. I think this is all probably obvious to you guys that cover this space, but it's just fascinating to see sort of the scale of change that electrification brings to the automotive supply chain, in particular, this sort of framework is relevant frankly, not just for automobiles, but for things like robotics, industrial automation and things like that as well, where those growth vectors drive a pretty significant portion of our business as well. But I think the one that gets the biggest focus and has for sure, the biggest growth potential is what we are confronting in the electrification of autos. Looking at just mineral content per vehicle, I think that's pretty well understood certainly as we go from ICE powertrains to electric. And I think the important thing to consider as it relates to where we sit in the supply chain is plug-in hybrids, EREVs that have become particularly popular in China that I think are making their way here. All of those continue to generally have -- we're at permanent magnets in the traction motor. It's something like 94% of current kilowatt hours deployed are being powered by a rare earth permanent magnet in one way, shape or form. Certainly, that could diversify over time into other solutions. But just given the significant advantages of permanent magnet machines, we feel very strongly that what you're looking at here from an NdPr demand perspective, it was something that the industry and the supply chain is going to have to confront over the next several decades and something that we're well positioned to support. This slide kind of gives you exactly what I was just trying to articulate in a bit better of a graphical form here. You look at where we sit over on the left-hand side of the page, electric vehicles and wind turbines or the areas of significant focus for those that are looking at the growth vectors of this space. And certainly, as you can see, going from '25 up to 2040, there's a very significant amount of growth assumed here. And this is sort of taking the middle-of-the-road approach. This is not assuming we get total bet penetration in North America or anything like that. There are other pretty important growth vectors for the business. One of the most exciting emerging portions of that would be the robotics use case. But certainly, I think we'll talk a bit about, given all this potential growth and current growth and excitement we've seen some pretty volatile pricing over the last several years and not necessarily driven by the same drivers that you've seen in lithium, for example, where that's much more of a supply story. But I think the thing that's interesting that I'm sure we'll talk about in Q&A is this gray box of other is pretty significant still, the growth is not nearly as significant. But when you look at 2024, it represents a pretty significant portion of the total pie as we stand today, getting smaller. But I think that's where a lot of the drivers are that's explaining some of the pricing action that we've seen in our commodity, which we can get to it a bit. Go to the next slide. I always struggle presenting a slide like this because it looks just so terrifying. And the reality is that there will be a combination of different ways that this supply-demand imbalance gets closed. But I think the fundamental understanding of what are the demand drivers and how durable are they versus how easy is it to add supply in our particular market with comparing that to some of the other critical minerals that get lumped in when we look at electrification of the automotive supply chain, this gap is tremendously difficult to solve. The ability to add supply in our space is many billions of dollars, many, many, many years. And that's assuming you can find an ore body that can support that type of investment economically over the medium and long term, and there just are not a lot of options out there. I think the exciting thing for us as a business is we have plenty of opportunity for our ore body and our assets to continue to grow with the market. But it is something that certainly is a pretty significant imbalance as we move to the outer years here. The security of supply is something also that is critically important as we think about what did the automotive supply chain in particular confront through, for example, the COVID Chip nightmare. We equate a lot of the way some of the procurement for some of these things have been done and sort of tripping over dollars to pick up pennies. And when you've got a such a significant concentration in a market and a product as important as rare earth permanent magnets, it really speaks to the irreplaceable nature of our assets and the importance of us succeeding in this mission and what we're building. And again, this is important for automotive. It's important for a whole host of applications. In many ways, it's not an anti-China sentiment whatsoever. It's more that having the concentration of something so important in any one country is something that we believe is not tenable and shouldn't be tolerated by those that are building supply chains for the long term. And so that's certainly a big part of our mission and what we are aiming to address. And so in terms of how we're addressing it, I gave a very quick preview at the beginning, but three stages of our business in terms of how we refer to them. Stage 1, our upstream business, Stage 2, our midstream business in Stage 3, the downstream, all together are what encompass what we view as really the only raw material all the way to finished product solution for this industry. The interesting thing about our upstream asset is we've been in production at significant commercial scale since 2018. We've continued to make great strides in that business and continue to solidify ourselves as a low-cost producer globally in the rear of concentrate business, what we produce from our upstream initiatives. And on the midstream side of things, we've brought a state-of-the-art refinery where there was over $2 billion of invested capital. We have brought that online and are ramping that rapidly to a place where once we are through this ramp stage, and we've moved into more significant production volumes where we can more spread our fixed costs and all of that good stuff, we feel confident that we will be one of the lowest cost producers of separated refined rare earth products in the world as well. And there are a tremendous number of advantages that I can speak to in a moment as to why and how we're able to compete from a cost perspective, even with such a significantly concentrated environment and market in China. On the downstream side of things, we are building this initiative completely from scratch. It's something that has not been done in the Western world in many decades. And in some ways, in terms of our origin story and how we started with our upstream and midstream, which we can certainly get into, we're walking before we run on the downstream side of things and building a 1,000 metric ton in the FAB magnet facility that certainly, we are not coming out of the gate aiming to compete with the Chinese on prices in our magnetics business. We are aiming to restore a capability continue to learn and integrate and bring American innovation to that space, bring security of supply to our foundational customer and our other customers and then continue to move down the cost curve as we drive scale in that business over time and automation and all of those things that will enable us to be a full suite of products, both from upstream all the way to downstream for our customers. Go to the next slide. In terms of the specific advantages that we can bring to bear in our mining and beneficiation operation, there's a tremendous amount of history at the site. Mountain Pass was discovered actually in the late 40s and is one of the world's richest rare earth ore bodies north of a 6% head grade. And interestingly, if you think about comparing Mountain Pass you'll see headlines all the time about rare earth discovery in Turkey or in Greenland or here or there. And the reality is that it's not just about head grade. But the reality is that our head grade is many, many multiples of most of the potential hopeful projects and, frankly, many of the producing projects in China. So we start with a tremendous advantage there. But in addition, one of the most critical elements to a successful upstream operation is the makeup of the ore and how easy it is to create salable products and refine products from that ore. And so we benefit from what is a bastnasite host rock where the rare earth mineralization is found, which allows us to be one of the world's lowest cost producers of our concentrate product informs a tremendous basis for us to build our refining operation on top of. We've talked about the fact that over the course of the last several years, we've produced just over 40,000 metric tons of REO in concentrate for those where this is new and some of these metrics don't mean budget. It's a very significant player in the market. But what we have said is our target is in our Upstream 60K initiative that we've called it, we aim to increase that production level by 50% over the next 4 years. And frankly, that initiative will take a very modest investment to actualize given all of the scale of the existing asset and some of the amazing talent that we've built to drive success in this business. Going to the midstream operation, which, for context, we've been investing in upgrading some of the facilities on site for several years and completed that and launched production really just about a year ago. And so this is a relatively new set of assets for us, but it is absolutely not a new set of operations for Mountain Pass and for many of the folks that are running the business for us at site. This is a portion of the operation that actually worked very well under the predecessor operator, but we're required some investment to bring back some of the refining assets that are able to leverage best some of the advantages I mentioned about the ore itself just a minute ago. And so we spent several hundred million dollars on this initiative. As I mentioned, we launched about a year ago. We've produced in that period of time, over 600 tons of on-spec NdPr oxide. Importantly, through all of the stages of our business and primarily with the NdPr oxide production. 3 of the top 5 global automakers are our customers at this point, and we're continuing on our plan to continue to grow production over time here and continue to be able to broaden our geographic base with our upstream product, the ponderance of refining capacity is all in China, as we talked about. With this refined product, we open up the market for ourselves and are able to sell into Japanese, Korean Magna makers and others in the space where there is no real refining capacity for them to be able to take an upstream product. And so that's a problem that we are solving for them rapidly. I think in terms of how you do this, given particularly the reputation that mining and materials gets in terms of certain difficult environmental signatures of these types of operations. We are incredibly proud of where we operate and how we operate. We get a lot of questions from investors, what's it like to run a big mining operation in California? And I'll tell you, it forced a lot of creative thinking at the beginning. And so a perfect example of that is our water recycling facility and tailings management plan where we are one of very, very few mining operations globally that has a dry stack tailings process. We're effectively nothing that touches the process ever touches the ground again. And we extract ore, pull out the products that we need from it. Dewater, the slurries that are created in the process and return effectively to drive product back to ground. That is something that is very rarely employed, but we found a solution that allows us to continue to be very, very cost competitive while also meeting some of the most strict environmental standards. And we actually recently published an update to our environmental report. And so we encourage folks to take a look at that. It's something that certainly for a lot of companies, particularly companies like ours where we are a relatively young business. It's certainly a journey, but it is something that we get a lot of engagement from customers and investors on, and it's something that we're proud of the journey that we've been on and results we've been able to drive and certainly more to do that over time. In terms of the downstream operation that I mentioned our initial metal alloy and magnet manufacturing facility, which we call independence. The thing that is often not really well appreciated in a business like ours that's relatively nichey is in order to get a full solution to get to a finished magnet, you need the upstream. You need the midstream. But then there are many process steps going from and NdPr oxide, which we sell for context of scale, our midstream operation went at full tilt would make enough NdPr oxide for 10 of these total facilities approximately. And so this initial entrance into the downstream part of the business is much smaller scale for us in terms of overall volumes, but I think absolutely critical in demonstrating the ability to do all of the requisite process steps at commercial scale in the United States in order to solve what is a really significant supply chain challenge. And so within this facility within independents, we will go from oxide produced at Mountain Pass, California, ship that to our facility in Texas, where we will turn that outside into a metal product. We will turn that metal into a strip cast alloy, which forms the basis of taking that alloy, pressing, centering, finishing, slicing, bind and coding into a highly engineered final finished magnet product where we often frankly hesitate to talk about this in tonnage terms even at this point because this is discrete manufacturing, not process it's not like our upstream, midstream business. These are critical individual, highly engineered magnetic parts that form the basis of the rotor and stator and how those move within a traction motor and an electric vehicle. And so it's something that is absolutely critical and being able to do all of the process steps in one facility, frankly, is groundbreaking and something that we're very excited about. So this facility is a 250,000 square foot state-of-the-art purpose-built plant. We broke ground on this in -- for context in April of '22. So not that -- not that much more than 2 years ago. We are in the building. It houses not just the factory, but our magnetic headquarters where we have nearly 100 employees at this point, working feverishly to meet the demands of our customers. What our current targets are is to be in commercial production of NdPr metal at the end of this year. We demonstrated our ability to make NdPr metal in North America at a commercial pilot at another facility a couple of quarters ago. We are deploying that capital and those assets into the facility that you see here. We're working to ensure that we've got prototype magnets available for our customer for validation. And then we are targeting serial magnet production at the end of 2025. So not too far away from now. It's something that we are incredibly proud of the progress that this team has made. It's something that when we took the company public in 2020, was, frankly, an idea on a piece of paper. And so going from an idea to breaking ground in less than 2 years and then breaking ground to a facility that's going to start generating revenue here pretty soon is a pretty feverish pace, particularly for something in this industry and something that we're very, very proud of. With that, I will -- I guess, Brian, we can turn it back to you in anything you want to cover.

That's great, Ryan. And I greatly appreciate that. I think you touched on it a little bit. The China dynamics are one that we're going to talk about a lot over the course of the next couple of days. potentially any benefits or challenges that come from a higher tariff market that MP may face in the event that's where geopolitics goes.

Certainly, I think we're a global business. Our mission, obviously, is restoring this capability in the United States, but we're a global business. We sell a significant amount of product to China. We sell a significant amount of product to Japan, Korea domestically and are building out a domestic capability. And so anytime there's tariffs on either side, it always introduces uncertainty. But I think the most important sort of fundamental thing to think about here is, regardless of who's in the White House, this initiative that we are on this space is, frankly, is talking about it this morning, it is bipartisan, it's amplified. This is something that we have seen significant support from the Biden administration, the prior Trump administration, we think that this is something that is important on both sides. And then when you think about what tariffs could mean either from the U.S. from China. I think at the end of the day, what it brings us back to is what are the tariffs there to do they're there for reshoring, right? They're there to let our domestic industry develop in a way that allows us to compete economically on a global scale. And nothing could be more directly on message for us than reintroducing a domestic supply chain for something absolutely critical to electrification to defense, to green energy, whatever it may be, this is something that really is a critical capability. And so I think an example would be we saw not too long ago, earlier this year, in conjunction with the announcement of the 100% tariffs on Chinese made electric vehicles. We saw 25% tariffs on Chinese-made magnets coming into the United States. So products that essentially would be direct competitors to our magnet products being sold in the United States. Look, from that perspective, is a 25% tariff of Panacea, absolutely not. But does it make buyers really think twice about the prices that I am being quoted for my magnet in China, where if you do the math, sometimes it's less than what the required materials would be to make sad magnets. Is that sustainable? Is that something that makes sense to buy 100% of our magnets from very likely not. And so again, I think we are a global business, and we want to be globally competitive, and we will continue to work to sort of compete on a global scale. But I think these are the sorts of things that sort of draw attention to the criticality of our mission and just make customers think about the susceptibility of a supply chain that has such a heavy concentration in any non-U.S. country and certainly in a country like China.

That's greatly appreciate it. I think if we're looking at your financials, I think it can be misleading because a couple of years ago, we were nearly $400 million in EBITDA and this year, it's going to be a little more -- considerably more challenged. Part of that is due to stranded capacity for the investments that you're putting in. But also some of it is due to the volatility that we've seen in the NdPr market. So maybe you can just talk about the levers within your P&L that are really driving this?

Yes. Look, I think it's absolutely right that we view sort of what has been a challenging year to date through Q2 and certainly a challenging 2023 coming off of what was a peak in NdPr pricing and our commodity pricing in 2022 we can't control prices, obviously, despite my best efforts. These products sell in a global market, like I said, and as much as you often hear people talk about, and it's kind of wild to hear where you'll hear some hopeful projects out there that say, oh, this project pencils at $90 NdPr, $150 NdPr, whatever it is, and that's with them coming up with, frankly, plus or minus 25% estimate on CapEx that really is plus 150%, minus 15% is generally how these things go. And so it really speaks to the difficulty in building something of scale in this industry. And so I think the volatility in pricing in some ways, underscores the strategic nature of our asset that we can compete. Look, this is not -- it has not been a beautiful P&L over the last couple of quarters, as you can see. But I think it also, to your point, doesn't tell the whole story. If we were making the same product that we had been making over the last 4 years only, and that was sort of coming through the P&L it would be a totally different story where not only have we been in that business for many, many years, have scaled that business. But we're actually taking that product that normally flows through the P&L as significant revenue and capturing it, running it through a refinery and then filling the sales channel for our refined products. So we're actually -- it's not just about cost structure, and that is part of it, which we can talk about in a moment, but it's really that we're self-cannibalizing. And oftentimes, it's sort of misunderstood when you think about some of these new projects coming online, oftentimes, they're going from nothing to a refined product. we have, frankly, what is the benefit over the medium and long term, but in this very short-term ramp of our midstream asset, we're cannibalizing our own sales. And that is a temporary impact that we will roll through over time.

Yes. Now it's -- there's so much here, as I mentioned before, this is a conference looking at issues for the next 4 years, and you're clearly a stock for the next 4 years. We are bumping up into time, unfortunately, but I want to thank you both for joining us and greatly appreciate the insights that you provided. So thank you very much, Ryan.

Appreciate the time, Brian. Thank you.