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

Hi there. So thank you for just continuing with the day. It's my pleasure to introduce Ryan Corbett, who's the CFO at MP Materials. And I think the way we'll start off, Ryan, thank you very much for doing the discussion today. Let's just jump right in.

This virtual conference has been focused on battery materials, which technically, your products are not directly involved in. So can you just give us your perspective on a brief overview of your mission, and in particular, talk about market structure, how the rare earth magnet market differs from the battery market in terms of structural dynamics?

Sure, absolutely. And hey Laurence, thank you for having me. We appreciate it. Happy to be here. certainly, while we are not in the battery, we are close by to the battery, and we often get confused as being a battery material. And I think a lot of critical minerals these days sort of just get characterized as such but rare earth permanent magnets are generally found in the motor. And what we do at MP Materials is own and operate the Mountain Pass mining and processing facility, which is at Mountain Pass, California, which is one of the world's largest rare earth mining and refining facilities. We have, for the past many years, been one of the world's largest producers of rare earth content. About a year ago, we embarked on ramping up our refining facility to produce the separated rare earth products, namely NdPr, neodymium-praseodymium that form the fundamental building block of permanent magnets. In addition to that, we have what we call our Stage III at our Independence facility in Fort Worth, Texas that will take that NdPr oxide and produce finished magnets. And so the thing that's so fascinating about where we sit in the supply chain is if you think about an electric vehicle, for example, and talking about battery materials, you generally have a very big battery converting stored energy into motion via a drivetrain, via a motor. And rare earth permanent magnet motors are the most efficient form of translating that stored energy into motion. In terms of other use cases, of course, it can go the other direction as well. Using an example of a wind turbine taking motion and converting it into energy, oftentimes, you find rare earth permanent magnets as one of the most important pieces of that puzzle as well. In terms of market structure, to your question, this is a part of the supply chain not unlike many others but there's a pretty acute issue, specifically in the rare earth space with concentration of this industry in China. Today, about 60% of rare earth mining is done in China. About 85% of rare earth refining and about 90% of magnet manufacturing is done in China. And so the single point of failure risk of this industry is extremely pronounced. I think fortunately, MP Materials is an alternative to that in a lot of ways. Certainly, given the fact that we are a scaled producer, we do sell our products into the Chinese market. It's an important market for us, given 90% of magnets are made there, and we're much, much larger on our up and midstream business than we are today, at least in our downstream business. But it's an area of focus for policymakers, for EV manufacturers, for robotics manufacturers. You name it, where having that single point of failure, obviously, over the long term is a significant consequence and concern. And so that is the mission of the business, to really solve that issue, to bring the full rare earth supply chain back to the United States of America, back to the Western world and do that at scale. And so there's a lot of hopeful projects out there. There are a lot of potential projects to address one piece or the other within the supply chain. But we believe that it is critically important that if we're actually going to make a difference here and in the relatively near term, we need to be able to address each piece of this value chain at scale and be able to compete in a real way. And so that is -- that's the mission of MP, and that's what we've been executing on.

And often, we hear the discussion framed in terms of you think about the volume leverage to EVs, like 10% of the market moves to EVs, it gives you this much demand. People don't seem to have much of a sense for like, the sensitivity to the type of EV. So just to be clear, can you give us a sense for like what the potential impact is? And how important could other applications, heavy-duty trucks, aircraft -- just -- where could there be some flex in the models where the kind of headline doesn't capture it?

Sure. Yes, I think there's a lot of discussion on this and frankly, confusion. And particularly when you look at how our commodity has performed over the last couple of years. I think there's a lot of questions given the fact that certainly, there were some pretty ambitious targets and estimates out there in terms of how quickly the world would move to pure BEV. Not all of those estimates have been hit but you look at the world's largest auto market in China. And now with world's largest exporter of vehicles, I saw a headline today, they're almost at 50% penetration on HEV across BEV and PHEV. So I think fundamentally, the thing to think about is one of the many reasons that we really like our position in the motor as opposed to in the battery is changing battery chemistries and then certainly changing overall powertrain strategies. Plug-in hybrid as an example, is not nearly as impactful for us in terms of the content of magnets in the motor. There is a pretty significant amount of magnet content in an internal combustion vehicle to begin with. I think the big uplift though that you see is in traction motors. And so one of the things that we've seen that we get a lot of questions on is plug-in hybrids have actually taken up not just in the United States, but in China as well. And actually, the total amount of magnet content in the plug-in hybrids in China is higher per vehicle than the magnet content in the pure battery electric vehicles. And we get a lot of questions as to why that is. And generally, what you see there is those plug-in hybrids oftentimes are either EREV form, which we may start to see a little bit more in the United States here coming up soon. But they tend to be higher-end vehicles with both a pretty substantial internal combustion powertrain with magnets in it and a pretty substantial battery still and a full traction powertrain, where you kind of get battery -- I'm sure you get magnet content, even I -- so you get magnet content across both sides. And so it's not always the case but we don't really lose sleep in terms of if you look at the various ranges of forecast from an electric vehicle perspective. We look at xEV, plug in, straight hybrid, full BEV. That's not really driving a massive plus or minus for us, particularly when you look at how much more room to run there is. To your point on some of the other use cases, Laurence, I think the thing that we also sort of think about when we look at just the scale of potential demand over time, thinking about robotics as opposed to just electric vehicle and broader sort of clean energy use cases. I think typically, we may have 2 kilograms of magnet content with a really big battery. Being at a battery materials conference, maybe this -- moving this direction is less popular. And EV is a big battery, small magnet, a humanoid robot, much smaller battery but you can have up to double the amount of magnet content in a humanoid robot than you do in an EV, the range is sort of 2 to 4 kilos. And then you think about the fact that some people are talking about having a billion robots out there just in the future. You think about just the sheer amount of magnet content that would be required there. It's -- you look at somebody's estimates out in 2040, you'd need 20x the magnet capacity to meet some of these robotics forecasts that we have installed today. And then you put sort of our initiative into context, we don't need to be the dominant magnet provider. We're 1,000 tons of NdFeB magnet capacity in our initial phase of our Fort Worth facility of Independence. The current market is nearly 200,000 tons. So from that perspective, we're a relatively small player. Certainly, our mid and upstream businesses are much more scaled. But that kind of gives you the sense of, frankly, the opportunity set in front of us as and when these different opportunities start to really come to pass.

And so one theme today has been the secular push to just bring down the cost of being an EV. And I think -- I guess you have the analogy also to the cheaper robots. Whether -- and there are multiple paths, cheaper battery materials, packaging solutions, including the durability, recycling, a lot of discussions on recycling economics. What can MP contribute to this directly or indirectly?

Sure. That's a great question. I think fundamentally, the reason that NdFeB permanent magnet powertrains have such a high market share in electric vehicle applications today is because of their inherent efficiency benefits on an order of magnitude of 10% to 15%. And so when you think about the fact that magnets represent several hundreds of dollars of content in an electric vehicle versus the battery maybe being tens of thousands. If you can shrink that required size of battery for any given range, that tends to be the direction that automotive suppliers and OEMs are trying to go. There's always a discussion of different motor technologies. There will always be a variety of different motor technologies. But fundamentally, I think that rare earths are inherently driving efficiencies to allow electric vehicle adoption and the like. Certainly, over time, I think one thing that we focus on quite a bit is not just purely from a dollars and cents perspective, but from supply chain security perspective. You hear a lot about, okay, assume rare earth motors are going to be the standard and rare earth magnets are going to be the standard because of the efficiency is so clearer. How do we reduce the amount of rare earths within any given magnet? You hear a lot about that. And generally, what that focuses on is reducing the heavier rare earth content within any given magnet. And that's something that we spent quite a bit of time on, on our own in developing our magnet technology. Given, we at Mountain Pass do have both a very significant amount of light rare earths and heavy rare earths, we're skewed certainly towards the light rare earths side. So continuing to find efficiencies and bringing down the content on the heavy rare earths is something that we can contribute. I think the -- for us, our current business plan, given the scale of our upstream and midstream business, we did not go into the magnet business out of necessity. We went into the magnet business as a logical extension of our midstream business to satisfy a very clear demand and ask from our customers. And so we're not going into this business sort of trying to follow the Chinese rule book, if you will. Given the scale that they have developed over the last several decades, we're not going into this assuming we're going to come in with a lower priced magnet. It's almost the opposite in the early days, unfortunately. But I think with scale, with efficiency, with technology, with automation, I think we'll very rapidly come down on cost curve and be able to be competitive globally within this business. And I think the amazing head start that we have is being globally competitive on the up and midstream side of things. But the way, I think, to continue to enable rapid electrification is to provide security of supply where we can have a diverse and robust supply chain in the Western world and ensure that there are not a continuation of certain trends where you've got trapped capital and you've got investments that cannot -- that can't produce when you've got the geopolitical uncertainties that we have today. And so I think that, that is sort of the major contributing factor. I think the last thing I mentioned, you asked about and mentioned recycling. Again, being sort of a primary product producer, I think it is often lost on the broader investing public and frankly the broader public at large that the investments, the capabilities, the assets to be at-scale magnet recycler are the fundamental assets and technical capabilities that we already have, I would not be surprised if over time, as feedstock becomes more readily available, if we become one of the world's largest magnet recyclers. At the end of the day, and to your point, also on efficiency and bringing costs down, what are the major uniquenesses of our fully vertically integrated model is a significant portion of material in magnet manufacturing is lost after the production of magnetic block in slicing, grinding, cleaning, coding, making the right magnetic shape. All the way from soup to nuts, you can lose 30% of your material as waste or what we call swarf in magnetics and magnetic manufacturing. Having the capability to turn those products back into their component parts at Mountain Pass is something that is very unique to us. You see a lot of point solution providers that are just doing magnets out of flake, for example, needing to try to rapidly build up partnerships from the ground up to be able to address all of these issues to be competitive, and we have this unique opportunity where we've got the capability to deal with swarf. We've got the capability to deal with finished magnets. And so I think that positions us very, very well and allows us to address those needs. I think at the end of the day, from a cost perspective, there's a lot left to do in terms of sourcing the right feedstock from a recycled product perspective. I think the thing that's also fascinating and I think a really important point to consider is, I think a lot of product manufacturers will go into this saying, we won't recycle, we won't recycle only. And the reality though is in order to do recycling at scale and to do recycling cost competitively, recycled magnets with magnets being such a custom-engineered product, have different makeups across every type of magnet, different percentages of NdPr and heavies and this and that and the other thing. To be able to manage the variability in recycled feedstock but have low costs, having the huge amount of very consistent primary feed that we do at Mountain Pass, being able to absorb a pretty significant variability in recycled feedstock, given the consistency of our existing upstream assets or upstream feedstock is one of the reasons that we will be able to be incredibly competitive on the recycled side. And so I think that, that is sometimes underappreciated in terms of people talking about recycling. Having it all under one roof, I think, is absolutely critical.

And so on the -- you mentioned sort of the custom formulations or customer magnet designs. Can you just dig into that a little bit, how flat or open is the IP in magnet production? And how can MP distinguish itself from Chinese competitors on that front? Or is it simply a matter of being competitive on the vertically integrated cost position?

Sure. Yes. And look, to put a fine point on that last comment of yours. Having vertical integration is important from a capability and scale perspective but we absolutely are not taking -- we say we're not going to rob Peter to pay Paul, right? We're not sending through NdPr oxide at a discount to our magnetics facility in order to be able to win business on magnetics. As you can imagine, we are many, many multiples the size in the midstream business than we are on the downstream. And so magnet manufacturers are our largest customers. And so we're certainly not trying to compete against them on the price of the upstream feedstock. And so to answer the latter part of the question and thinking about IP and the IP landscape, interestingly, a significant amount of intellectual property on the magnetic side was developed in Japan over many, many, many decades. Japan led the world in magnetics manufacturing for a very long time until the Chinese took their sort of typical industrial playbook and drive very significant scale there. I think the good thing about where we sit today in the magnetics landscape is there's a pretty significant amount of foundational intellectual property that has expired or is rapidly expiring. If you combine that with the fact that -- and this is something that hopefully folks will start to get a better appreciation of as we enter magnetics manufacturing and magnetics production is we've had a very methodical approach over the last several years of surveying the IP landscape and understanding what we consider both white space and green space, which encompasses areas of the IP world where there is no protection, and we have freedom to operate and then areas where there was protection and there no longer is and we have freedom to operate. And we've actually utilized quite a bit of -- frankly, before AI was a sexy thing to say, but AI to look at the landscape, which is incredibly broad and figure out what types of formulations are open for us to use. And then the next step of that, where we're at right now is iterating and iterating and iterating on that and then looking at the products that we're able to provide ourselves from our upstream business and finding new and better ways to do this. And so I think the great thing is we don't have this innovator's dilemma where we've got a bunch of infrastructure, a bunch of capital that was invested 5 years ago or 10 years ago or 15 years ago that really operates best with this formulation or operates best if you do it this way. We didn't have to worry about that. We had a clean sheet of paper, and we were able to look at both the IP landscape and just general manufacturability and say, what is the most efficient way to bring this capability to bear. And so -- and the way that, that manifests itself in customer interactions is oftentimes in the magnetic space, these are custom engineered products, right? And so we'll get a spec sheet that will say, this is the remnants we need. This is the coercivity we need, this is the shape we need, this is the size we need. And it looks like this, and it's got this many segments. And we'll say, well, what is really the max operating temperature you're going to see here? Well, it's really 130, but we measure it to 150. So okay. Well, if you just measure it at 130, we can do this, we can do that, we can make it this shape. We can do it with this many segments. That's sort of thing where we can make a much cheaper magnet that hits all your specifications. And so as opposed to just doing a build to print, really the back and forth with our technical team that's developed a pretty significant amount of knowledge, I think, is a real benefit to our customers. I think the thing also that we can do a better job really explaining and showing to the public is within this facility that we built in Independence, this 250,000 square foot facility, we have a full new product introduction facility and laboratory that's thousands and thousands of square feet dedicated to every single piece of the operation that we have -- that we will be doing at very significant commercial scale. Slightly shrunk down with complete analytical capability to be able to iterate on these processes in real time and do it in a way that's a lot more efficient. And so that's what we have been doing to develop our own set of capabilities and our own set of formulations to meet our current customer needs, but importantly, also look at future customer needs, future improvements in the way that we do our manufacturing to be cheaper or better, et cetera.

And so you mentioned economies of scale a couple of times. Can you put that in perspective for the magnet business in two ways? One is if you were to scale up the magnet business to match your upstream production, roughly how much would that represent in terms of sort of percentage of the car fleet or the EV market that you'd be serving? Roughly how much would it cost? And what sort of scale do you need to get to be competitive with the Chinese producers where economies of scale are no longer the differentiating factor in the relative price?

Sure. I'll take the first part first. The way we sort of roughly -- and again, it's hard because it depends on the car, it depends on the magnet. It depends on the yield loss, depends on a host of things. But really simplifying a thousand tons of magnets, which is our initial scale, is about 0.5 million cars. So if you think about that and what that means in terms of NdPr oxide, the upstream feedstock that we're providing at Mountain Pass to your point on fully vertically integrating, 1,000 tons of magnets, roughly just cut it in half to think about the oxide tons required. It's about 500 tons of oxide. So theoretically, 6,000 tons of oxide is about 6-plus million vehicles. So that's a third of North American automotive production. And so again, I think that's super important to think about in terms of our addressable opportunity and how important this is. And us being one of the most scaled providers on the up and midstream. Again, you tell us either North America is going to 100% EV and we're fully vertically integrating, we can only address a third of it. Or North America is only going to 1/3 EV, we're the only North American producer and probably will be for a very long time that we could just sell in North America and be totally fine. And so it's a pretty amazing scale of opportunity ahead of us. And again, this is just talking about EVs, leaving out all the other opportunity that's out there. And so that is something that we're tremendously excited about. In terms of thinking about how you go about and what would make us want to go to that scale of production. There's a lot of things that need to fall into place to really continue to expand the downstream footprint. And to your point on economies of scale, what is that cutoff point? I mean, again, we're 1,000 tons. The Chinese market is almost 190,000 tons. Within the 4 walls of a facility, you start to lose economies of scale at some point. You could easily triple our facility and still kind of be achieving great economies of scale within those 4 walls. But it's not just about that. You also need to think about every piece of the puzzle, every piece of the supply chain. So again, I think that one thing that's really underappreciated. I hear a lot of folks talking about how we're going to go do magnet production. Okay. Great. You're going to do magnet production. And they talk about let's get oxide from MP, we'll get oxide from somewhere outside of China. Where are you going to get the metal? You got to turn the oxide into metal. And there's not a tremendous amount of North American metal production. There's basically none other than what we were building. There is none. We also have relationships and tolling partners broadly throughout Southeast Asia, where there's much more industrial density in that space. But there are a lot of things to think about that need to be built at scale in order to really drive this business. And so I hope that we are identified as really trying to be thoughtful in bringing commercial scale to each of those pieces of the puzzle before trying to go whole hog into one or the other. And so that's really how we think about it is restoring the full suite of capabilities. And then again, we don't need to own the market. We are totally open-minded to working with customers, suppliers, et cetera and continuing to build scale in each piece of that supply chain. But the exciting thing is, I feel strongly that we are leading the way on a lot of these areas. And there's -- in some ways, we solved, hopefully, in the relatively near future here, the chicken and egg problem. No one would come and build a magnet plant without security of upstream supply. We've demonstrated our ability to be a scale producer on the upstream side of things. We were not content to sit around and wait for a downstream industry to develop on its own. And we found a really thoughtful way to enter this business. And so we will continue to push forward on that. But again, a diverse set of players in this space is absolutely the key to continuing to drive sort of further supply chain security because, again, I think it's about a single point of failure risk. Single vendor risk can be a thing, too.

And so let's tackle that out -- tease out two threads there. First, in terms of what this means for your balance sheet and your CapEx. How you think about the CapEx for the balance of 2024, 2025? How you think about cash inflows versus what you need to spend to scale up to get to your production targets?

Sure. I won't get ahead of our Q4 call here where we give sort of formal 2025 CapEx guidance. But we tried to give some pretty clear indicators of how we're feeling about things in our last call. Importantly, I would flag from a sources and uses perspective, while commodity prices continue to be challenged and we are absolutely in a pretty critical phase of ramping our midstream assets. And so we are absolutely not at sort of our run rate cash generation capability in our core business. We do have the fortunate ability to bring in a very significant amount of capital to the business, nondilutive capital to the business over the next 12, 18 months. We laid out about a quarter ago, $190 million of identified cash inflows that would cover a pretty significant amount of the remaining capital requirements to sort of finish our main set of projects. Last quarter, we collected on $20 million of that in receiving a tax credit. And so of the $170 million that's left, $100 million of that is in the form of customer prepayments as we continue to progress on our Independence build-out in Fort Worth. And then the remaining $70 million is made up of both 48C and 45X tax credits either related to the former -- in the Independence facility and the latter on the Mountain Pass facility as we continue to execute on critical mineral manufacturing where we've got the 45X production tax credit for those. And so that is nothing to sneeze at. It's something we're pretty happy about. We think it's an important thing as part of the IRA that really, again, I think there's a lot of focus on IRA, what does it mean? What is it going to look like under a Trump administration, Trump 2.0, et cetera. But these are areas of the IRA that are absolutely, generally bipartisan, supporting domestic manufacturing, supporting critical minerals manufacturing that with the actions we've seen even just most recently, as recently as last week in terms of this geopolitical uncertainty of having access to critical mineral supplies, as bipartisan as it gets. And I think a real focus of the incoming administration, in addition to the outgoing administration, so we feel quite good about that. In terms of capital outflows, on the flip side, we had guided initially 2024 to be about $250 million of CapEx. We flagged in our last quarterly call that, that would come in closer to $200 million. And that $50 million will roll over. Before we have that timing shift, you can imagine, we would have gone from $250 million and had a very significant drop down in capital spending required in 2025 given the fact that we're just coming to the tail end of that $700 million plan that we had laid out many, many years ago to do completion of Stage II optimization, build out the initial Stage III facility, the Independence facility, heavy rare earth separation and some of our other initiatives. And frankly, I think in a world where you're seeing so many projects with cost blowouts, like I think when this is all said and done, when we are finished, we will look back at the capital spend versus what we have laid out from a design perspective back then and we'll be within spending distance, we'll be within 10% of that number. And so we feel good, we continue to feel pretty good about that number. And so that would necessitate that we'll have a nice reduction in capital intensity. That's not to say that we don't continue to find really exciting opportunities to invest in our business, I think that is a great thing about being a growth company. But importantly, we are transitioning into a state where I think about it as the number of in-flight projects that need to be completed or shrinking. And so from a discretionary cash flow perspective, I expect to see a very significant increase over the next several years. And then we will continue to weigh what is the best use of that capital with exciting projects that we can continue to do versus other uses or areas to deploy that capital.

And then just very quickly, how important is diversifying either your customer base or product mix? And are there key litmus tests customers are telling you they need to see to validate your Stage II, Stage III production before you can even consider expanding the scope of either?

Sure. No. I think from a Stage II perspective, I mean, to sort of zoom out and again, something that I think is kind of fails to be appreciated is we are currently qualified with our products and selling into 3 of the top 5 global automakers. Whether that's via other magnet suppliers, our own products directly to them via magnetics agreement, et cetera. And so I would say, our -- just looking backwards from last quarter's production on oxide, well, we continue to talk about how we need to continue to get better, we need to grow production, we need to get to our target. LTM as of the last quarter, we did over 4,000 tons of NdPr production. Like this is no joke, this is real scale. And so if we're doing that and selling it all, which we are, that would require that we are pretty well qualified into some of the most scrupulous and demanding customer sets in the world on Stage II. So customer qualification and diversity on the midstream side is a nonissue. On the Stage III and Independence side of things, what we are looking at is continuing to stay true to our business plan, which is in the early days, ensuring we have great customer alignment, approach this as a partnership and be able to have a high volume, low mix set of initial customers where we can drive scale rapidly. We don't want a customer that's giving us 50 parts and 50 tons per part. That doesn't get the job done from an ability to really drive early scale. Eventually, will that be of interest to us? Sure. But right now, that's not the right fit for us. And so I do give -- when you look at sort of the landscape of automotive suppliers in terms of automotive OEMs walking the talk, GM has been at the forefront here and has put a lot of trust in us, as we have in them, to be able to deliver on our commitments. And so I think they absolutely deserve a lot of credit there. I think there are others that are going to be fast approaching. And frankly, as we get into production, there are certain automakers that just, frankly, couldn't get out of their own way in terms of being able to accept the fact that we don't have a facility to give them samples out of today. But we will, and by the time we have samples, we probably won't have any product available to sell them. And so that is kind of the state of affairs for a lot of discussions right now. But of course, there's always a discussion on how do we expand thoughtfully over time. And so pretty soon, we'll be making real automotive quality and scale magnets. And so that probably will change the cadence and shape of conversations that we have in that space.

And then one last quick one that came in is, in terms of robotics customers, you have customers who are looking at U.S.-based robotics production, looking for U.S. magnets? Or are they all kind of international customers just looking for diversity of supply?

We see it all over the board, all across the board. Robotics, I'd say industrial automation and robotics sometimes can get kind of smushed together. And so we have conversations -- if you think about large-scale industrial applications that require motion, semi-cap equipment, things like that have real magnetics needs. And so we talk to those sorts of players all the time that absolutely want a diverse set of suppliers. But then you've got sort of the newer upstarts on the humanoid side that haven't driven manufacturing scale yet, they're sort of building their supply chain from scratch organically now before they're at scaled manufacturing and so we have those conversations, too. I think all of them are a great opportunity. And again, what it comes down to is exactly what I mentioned before, we are not demand constrained. We're really trying to find the right partners at this point to continue to kind of grow thoughtfully into this opportunity.

Okay. Great. So that's all the questions that have come in. So thank you very much, everyone, for listening. Thank you, Ryan, for the discussion today.

Thank you.

Let me pass the conference back to JDS.