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

Ladies and gentlemen, the program is about to begin. [Operator Instructions] At this time, it is my pleasure to turn the program over to your host, Michael Widmer. Please go ahead.

Thank you very much, and good morning, good afternoon, everyone. Again, I'm Michael Widmer, I run the Metals Research at Bank of America. This is going to be a very compressed high-intent session, actually, we have got 25, 30 minutes to talk MP Materials. And the raw material -- the rare earth. With me today, I've got Ryan Corbett, who is the Chief Financial Officer at MP Materials.

Now that's actually done right, and we had a brief chat before about how the market got from not knowing the rare earth element, rare earth materials a few months ago to being an expert at the moment. But I thought it would be still wise to maybe set the scene, a lot of talk at the moment about light rare earth, heavy rare earth and then also the magnets. So Ryan, What are those?

Yes, Michael, thanks for having me, and thanks to the Bank of America team. Happy to be here today. Certainly easy to do it virtually. So pleasure to be here. I think certainly over the last several months and particularly since the beginning of April, there has been an unbelievable sort of crash for us by the market and what are rare earth mostly because the importance of both the rare earth commodity products and most importantly, the finished products, finished engineered products the rare earth permanent magnets that they go into have become so topical given the geopolitical situation between the U.S. and China in particular, and the export controls that the Chinese have put on these critical products. And so it's important to think about permanent magnets as effectively one of the most important critical enablers of the modern economy. I think the Chinese, you tend to refer to them as industrial vitamins and they are what are needed to convert stored energy into motion in most use cases. And so there's a lot of focus on their use in electric vehicle traction motors, but we can't forget and one of the reasons that these became so topical is put traction motors aside and electric vehicles aside, think about the number of parts of the vehicle that move power seats, power steering, power windows, all of those actuators and motors tend to have rare earth permanent magnets in them because they are the best technology from a weight and power perspective. And so to your point, Michael, there is a lot of focus on trying to understand what are light rare earths, what are their importance, what are heavy rare earths, why do those seem pretty important right now. And to kind of set the scene what we really care about at the end of the day is an ability for the United States and the Western world to have a secure supply of permanent magnets for industrial applications, for energy applications, energy locations, you name it, for defense applications, drones, robots are becoming much more important users of permanent magnets. The vast majority of the content of a rare earth permanent magnet is NdPr, Neodymium-Praseodymium, which is, by far, the largest product that we produce in empty materials, there are small amounts of heavy rare earths that are added to certain magnets to maintain their performance at higher temperatures. These are the heavy rare earth elements, namely dysprosium and terbium. We also produce those at MP Materials and will be in production of refined heavy rare earths next year. But importantly, what matters is how do you get to the finished product to enable data centers, drones, robots, cars, et cetera. I think the focus being oftentimes in sort of the market commentary on the heavy rare earth portion of the suite of 17 rare earth elements right now is because those are the ones that we would use as sort of the way for the Chinese to put export restrictions on magnets. At the end of the day, the lights in the heavies are equally important. I think the United States and the Western world have made more progress on the light rare earths given the vast majority of the raw materials in a permanent magnet are the light rare earths, NdPr. And frankly, from our perspective, we, as a company and the industry with large have made a tremendous amount of progress in lowering heavy rare earth content for a given magnet use case. And I think that, that will continue over time. Really, the potential substitutions or other technologies for magnets that use less light rare earths have not proven to be particularly effective. And so at the end of the day, they're all important. I think we will play a role in critical enabling technologies, recycling, et cetera, that will allow us to drive more supply of these in the Western world, but that's sort of an attempt to extend the scene of a very complex state of affairs right now.

So you're focusing, as you mentioned, right now, a little bit also more on the heavy rare earth side. But from all of your commentary, is it possible to say that which of those sectors, the light, the heavies or the magnets, which one could see the strongest growth going forward? Or are they growing all the same pace?

Well, I think they're all interlinked. I actually think despite all the focus on the heavies, the heavies will probably grow the slowest because what you'll see is the vast majority of the use case of NdPr is in permanent magnets. In permanent magnets, you can pick your third-party research almost everybody has them at a double-digit CAGR, which makes perfect sense given their end-use applications. And so let's take that for what it is. There are various applications within that 10% plus CAGR that are growing very rapidly that either require fewer heavy rare earths at baseline because they're not operating at super high temperatures or if they do require heavies, the focus of R&D has been on lowering the units of heavies per unit of magnet, for example. And so I think you'll see NdPr and magnets grow in lockstep at double-digit CAGRs. I think heavies will grow slightly slower, not to say they're less important. That's just the reality of the market.

Okay. And when we look at kind of the last few weeks, China did put a temporary hold to its exports. How do you think that impacted the market? And also like was there any read through to MP Materials, which I think there was, but I just thought I'll ask the questions on that.

Sure. Sure. It's a great question. And look, I think it's fascinating to see how this export control mechanism was implemented -- if you think about how the magnet market has developed over the last 20-plus years is the Chinese have gained increasing dominance and have continued to support their industry with focused industrial policy and subsidy regime. What customers have been able to do is they can get whatever magnets they want at a very low price, given the subsidized environment, and so it's one of those scenarios where if it's easily accessible and there's no real meaningful economic or sourcing impact for getting higher and higher and higher specifications why not put the highest spec magnet into your application. And so what you're seeing is with the Chinese basically taking what could have been a pretty narrow interpretation of heavy rare earth export controls, but applying them to magnets and then looking at the fact that every customer really had no issue of being able to put a few heavies in there because it lets us not really test how things go at 120 degrees C, 150-degree C it made everyone realize how over specced their magnets were and how reliant they were on this magnet regime dominated by the Chinese. And so the implication for us as a company and certainly us as an industry and a country, is a real wake-up call to industry as to how they were rolled into the sense of security from this focused industrial policy over the last several decades and just how vulnerable we really are as a society to the ability for the Chinese to just turn the spigot off. I mean, if you think about what they could have done, they could have said, "Oh, we're just going to restrict heavy rare earths themselves." That would have impacted Japanese magnet makers, U.S. magnet makers perhaps that are fledgling European magnet makers, and it might not have really made the industry think about how important the magnets themselves are, but instead putting those export controls on the magnet every major OEM, whether it's automotive, industrial, defense, aerospace, is sitting here saying, I've got 3 weeks of inventory left for a piece of my supply chain that I never thought twice about and now I'm recognizing I might not be able to get that over the next 6 weeks, the next 6 months. And then what happens if the geopolitical situation evolves further, it really is what we at MP Materials have been saying for the last 7 to 8 years of -- again, this is not an anti-China thing. It's any country with the level of dominance in a critical enabler of the modern economy with such scale and dominance, it's untenable -- you name the country, and it still wouldn't work. It just so happens to be one of our most critical geopolitical potential adversaries right now as we look at this trade more dynamic. But that is hugely supportive of what we are doing at MP Materials. And we talked on our last earnings call about the fact that -- and we sort of joke internally, like I don't think anyone of this company has worked as hard as this, except for maybe like cramming for exams in college is what it feels like it is absolutely nonstop. And it's -- I mean, it's a great opportunity for us, but it really gives you a sense for how behind the 8 ball, so many Western European, American, Asian manufacturers were and just relying on the single point of failure in the supply chain.

So the question here, looking at China's dominance at the moment, can we actually reduce the dominance. And one question actually, if I may, we were always -- there was always talk about how cost efficient the Chinese can operate in one of those materials. What's the CapEx and the OpEx environment for you in the U.S., actually?

Sure. No, it's a great question. And I think the important thing is to understand not all rare earth assets, certainly, mineral deposits and reserves are created equal. We are fundamentally in a great position because we have an Mountain Pass, which is sort of a freak of nature from a mineralogical perspective. What is needed to break the Chinese dominance in this space is a viable, dominant set of national champions that can benefit from the positive flywheel that the Chinese have but do it in a way that is within the framework of the western free market economy. And so I think that MP Materials is really at the forefront of that and leading that charge as a national champion in the space, and it's why we have been so aggressively investing in our vertical integration strategy for the last several years. We started to see this flywheel start to turn in a positive direction in 2021. We took the company public in 2020 with a mission to go from producing rare earth concentrate, but we actually believe, to your point on cost competitiveness, we think we are the lowest cost producer of mixer of concentrate in the world, including the Chinese, depending on how maybe Baotou allocates their cost between iron ore and rare earths, maybe they're a close second or maybe we're a close second. But regardless, where we sit on the cost curve is Tier 1 without a doubt. And so we've been able to leverage that and the goal when we went public is leverage that into building out our refining capability at scale where we have a lot of benefits and competitive advantages versus the Chinese and a lot of disadvantages. At the end of the day, we do believe that they all will come out in the wash where we will continue from a vertically integrated perspective through the separated rare earth oxides be competitive with the best Chinese producers. And we've seen -- if you just look at the public Chinese producers out there, and they're reporting at 40 -- mid-40s NdPr prices, none of them are making money. That tells you where the cost curve sits. And we spoke on our last earnings call about our view of getting from sort of the 60s where we sit today, given our underutilization of our assets as we ramp into a very similar cost position. And so we feel good about that. What is important to actually be able to produce scaled magnet is that full vertical integration, which, frankly, you don't even really see completely in Chinese industry because there will be 40% ownership here and 60% ownership there. But what we are building is go soup to nuts from the mining all the way through to the engineered finished product and then tacking on the recycling piece of that, where, for example, anyone setting up a magnet manufacturing capability in -- outside of China needs to contend with the fact that going from a magnet block to a finished magnet that's going to go into a traction motor, you may lose 30% to 40% of your material from cutting, slicing and grinding of that magnet to a final shape. You have to do something with that. And Mountain Pass is positioned as the scale leader in being able to take that type of material, what's called swarf and bring it back into the front end of the process and turn it back into a usable product in sort of a closed loop. And so there's a lot of discussion about recycling, end-of-life recycling and things like that. But fundamentally, you have to have that vertical integration to be able to be cost competitive with the industrial effect the Chinese have created.

So let's actually just stick with that vertically integrated. It came up a few times now. I think you have got this agreement with Maaden as well, where you're looking to build a fully integrated supply chain as well. Could you talk a little bit about that agreement because that would actually, I think, not really focus on U.S.

Sure. No, it's interesting. We tend to be a company that does not announce MOUs. We're sort of allergic to doing that just because you're probably well aware of the space we operate in, that's riddled with MOU press releases that don't mean much. We tend to execute first and then announce it later, but we thought that this was such a critically important acknowledgment of how the United States and its allies globally can work together to continue to diversify the supply chain what we see as a pretty significant opportunity over time for MP Materials. And again, we've got such an amazing set of investment opportunities in the United States right now. This is one where, certainly, Maaden will be a big contributor here, and we can provide our technical expertise to them and work together with them, but it's to be able to create a filter rate to everything I just talked about in terms of the way the Chinese dominate. For example, the refining capacity in the Chinese market is significantly greater than their upstream mining market share. They import a significant amount of raw materials and what they've been able to do is set up an industry structure where they are the refiner of choice for projects in Africa, projects in South America, projects elsewhere in the world that can't support the cost of building out a full refinery but can get to some sort of mixed unrefined product and then need an outlet to sell it. What we are doing at ourselves at Mountain Pass is our heavy rare earth separation capability set to take your party feedstock to be able to play a role there. But then for this Maaden understanding is looking at the opportunity to build out a very scaled refiner to the world. Certainly, you think about Saudi Arabia, they have plenty of expertise in oil and gas and refining, large-scale industrial manufacturing and the ability to be able to bring to bear a refining framework where what matters is access to commodity chemicals excellent in the kingdom. Cost of power, cost of construction, skilled workforce, those sorts of things where they have a lot of advantages that would allow us to look together to build something very meaningful. And so more to come there over time. But it's an example of the way that I believe to my point earlier on needing to build scale national champions we're very pleased that this is a real validation from a very skilled operator in this space like Maaden as to MP's position as a player that now has built out capabilities across the suite of necessary capabilities, upstream, midstream, downstream, including magnets and so something that we're excited about over time.

And so when you look at it in retrospect how much have you invested so far already? What are you planning to invest? Where is a production volume right now? And where would you like to take that going forward?

Yes. So to give some context here, we took the company public in 2020. And since then, we've invested nearly $1 billion of private capital into this supply chain across upstream, midstream and downstream in the United States. That's more than probably adding up anybody else in the space and putting a factor on it. That is because we do have such a tremendous asset in Mountain Pass that is so fortunately placed on the cost curve to enable us to generate cash flow to reinvest downstream, which we have done and I think it's brought us to a point where aside from what has happened starting in April, we, as a company, were somewhat at a place where we were looking at being an almost in harvest mode for all of this exceptional investment we made, the world has changed slightly since these export controls have been put in place. I think customers have really come to recognize that this capability needs to exist now, not in 5 or 10 years, and so we are certainly working on opportunities to heed that call. Today, we've set up a business that will produce about 6,000 tons of NdPr oxide in our midstream business. with rough rule of thumb, you double that number to get to the quantity of finished magnets you could make with that NdPr. So that's enough to make, let's call it, 12,000 tons of magnets over time. Our independence facility in Texas is initially equipped to produce 1,000 tonnes of finished magnet. So it gives you a sense of the ability for us to continue to grow our business at what we see, particularly now in this market environment, attractive returns on capital. And so we are working with a wide variety of end customers and other stakeholders, including government on what is the most thoughtful way to get from A to B. And I think the important thing for us is seeing a real pull from industry and government to create the heft and scale that's required to have a vibrant downstream market. There is a world where we were a big midstream producer and had a nice sort of attractive small downstream business attached to it. I think the world has changed in the sense that I think there is much more focus on getting the end product in country for country. And so we'll see where that takes us. But regardless of how this shakes out, we're extremely well positioned to be able to grow the business over time, and we'll just follow the market and be thoughtful.

And you just mentioned government as well. I think let me ask you one question because President Trump kickstarted a Section 232 on process critical raw materials and derivative products. What's your views on that initiative.

Sure. It's interesting. There was an early investigation into the national security implications of rare earth permanent magnets in the first Trump administration and certainly, we provided our views and comments there. And in the first Trump administration, we were so much earlier in our maturity. It's amazing actually to think about how much has happened through that period of time. But our view was, undoubtedly, these are critical for national security, but putting a tariff on magnets before there is any domestic production of magnets, it's just attacks. It's not really changing things. What you've seen is going from Trump 1.0 into the Biden administration, there was another reevaluation of these and mind you, first Trump administration, their finding was absolutely a national security implication, absolutely dumping going on, but not sure that tariffs are the right answer right now. We agreed with that assessment at the time when Biden took another review of this, particularly in the context of the threat posed by Chinese electric vehicles and what that would do to our automotive industry. When 100% of tariffs were put on under the Biden administration onto Chinese electric vehicles, a 25% tariff was put on specifically on to rare earth permanent magnets, that is at a time when a 25% tariff was viewed as like huge. These days, 25% tariffs is sort of nothing. Now we've got 232 investigation into understanding, let's understand full soup-to-nuts, the raw materials, the finished products. And at the end of the day, the United States now has a capability. The United States is scaling that capability. MP is leading that effort. And undoubtedly, there are artificial subsidies and market structures in place in China that allow them to exert the influence that they have. And so certainly, we think it's an important tool in the toolbox for the administration. I think it's one tool of many. And we're hopeful that as we've heard so far, there's been a desire to approach this from a whole government perspective. We hope and expect that, that remains the case. And so I think this will be one of many levers that the government can and should pull. And it's not just our government, I think all Western governments need to be looking at these issues to be able to foster a critical capability in the Western world where the pure economics of it make it very challenging without batting the mercantilist approach that the Chinese have taken.

Interesting methods. Thank you. Thank you very much. Look, I promised you, it's going to be intense and short, that it was. I promised also to keep it to 25 minutes, we are now at 26. So let me say thank you very much for taking the time today. It was a very interesting chatting. And yes, I wish you all the best.

Absolutely. Thanks, Michael. Appreciate your time.

Thank you.

Great.