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

Hello, and welcome to the MP Materials Special Event Investor Call. [Operator Instructions] Also as a reminder, this conference is being recorded. If you have any objections, please disconnect at this time. With that, I would like to turn the call over to Martin Sheehan, Head of Investor Relations. Mr. Sheehan, you may now begin.

Thank you, operator, and good morning, everyone. Welcome to the MP Materials Special Event Call to discuss our landmark private public partnership with the Department of Defense. With me today from MP Materials are Jim Litinsky, Founder, Chairman and Chief Executive Officer; Michael Rosenthal, Founder and Chief Operating Officer; and Ryan Corbett, Chief Financial Officer. . As a reminder, today's discussion will contain forward-looking statements relating to future events and expectations that are subject to various assumptions and caveats. Factors that may cause the company's actual results to differ materially from these statements are included in today's presentation, the related press release and in our SEC filings. In addition, this presentation includes some illustrative examples of forward-looking estimates of adjusted EBITDA, which is a non-GAAP measure. Because these are illustrative examples and forward-looking estimates, we are unable to present a quantitative reconciliation to the most directly comparable GAAP financial measure. And lastly, any reference to our discussion today to EBITDA means adjusted EBITDA and tons means metric tons. Please also note that the related press release and slide presentation are available on our website. With that, I'll turn the call over to Jim. Jim?

Thank you, Martin. Good morning, everyone. Today marks a truly transformative moment for MP Materials and for the United States. Earlier this morning, we announced the formation of a landmark public-private partnership with the Department of Defense. Before I get into the details of today's announcement, I want to express our deep gratitude to President Trump, our partners at the Pentagon, our customers, our shareholders and our employees. Thank you for your unwavering support and commitment. At MP, our mission is to restore the full rare earth supply chain to the United States. As many of you know, we have been at this for quite some time, both executing on our mission as well as screaming from the rooftops about the importance of eliminating America's single point of failure in the supply chain. Recent events have clearly heightened the urgency of our mission, and I am proud that our work has helped put America in a better position. We are honored to be called upon, and we are answering that call. We understand that this partnership is ultimately on behalf of the taxpayers and our national security. And with that comes a great responsibility to get this done right. Moreover, across the political spectrum, leaders and citizens alike understand the stakes, securing America's supply of rare earth materials and magnets is essential to our economic and national security. Today, President Trump and the Department of Defense are taking bold, decisive action at precisely the right moment and they deserve real credit for elevating this to a national priority. Let's now walk through the structure of our partnership on Slide 4. This initiative represents a long-term multibillion-dollar commitment to accelerate American rare earth supply chain independence. There are 3 main pillars: DoD investment and strategic capital; and NdPr price floor commitment; and a 10X magnet manufacturing expansion. First, the Department of Defense is making a $400 million investment in MP in the form of convertible preferred equity. This investment converts at a fixed price of $30.03 per share and has no cash dividend. It has a 7% annual paid-in-kind liquidation preference should the preferred not convert to common. In addition, DoD will receive a 10-year warrant also exercisable at $30.03 per share, which increases their underlying as converted, as exercised ownership to 15% of our pre-transaction shares outstanding. DoD is also providing a $150 million 12-year loan, specifically to fund the expansion of our heavy rare earth separation capabilities. The loan is at a fixed interest rate that will be set as the 10-year treasury rate just prior to the draw plus 100 basis points. We expect that to fund within 30 days. Second, DoD has committed to make sure MP achieves a $110 per kilogram price floor for all of our NdPr products: concentrate, oxide and metal. If the market price is below $110, we will receive a quarterly cash top-up payment from DoD for the difference. That price protection on NdPr products will apply whether we sell or stockpile the materials. Importantly, there's a shared upside in this agreement. Once our new magnet facility, what we call 10X, achieves its target capacity, the DoD will receive 30% of the upside above the $110 per kilogram threshold. The price floor commitment contract is for a 10-year term beginning in Q4. Now on to the 10X facility. MP will construct this new plant as part of our next major phase of magnet manufacturing expansion. Between 10X and our Independence facility, which we will also begin to expand, we are targeting 10,000 metric tons of annual capacity, enough to meaningfully support U.S. defense and commercial needs. DoD has made a 100% offtake commitment for 10X related production to satisfy defense volumes and support commercial syndication. The offtake is structured with cost-plus pricing with a $140 million annual EBITDA guarantee with a 2% escalator starting in 2026. And once again, we structured this with aligned incentives. The DoD will receive the first $30 million of upside beyond the $140 million EBITDA floor, and any EBITDA beyond $170 million will be shared equally between MP and DoD. The offtake agreement has a 10-year term that begins at 10X commissioning. With that, I will hand it over to Ryan to go through more detail on all of this. Ryan?

Thanks, Jim. Let's move to Slide 5, which outlines the NdPr price floor commitment. This agreement is foundational to our broader public-private partnership with the Department of Defense, and is designed to counter nonmarket forces that have historically held back the establishment of a scaled, secure domestic supply chain for rare earth magnets. While many people appreciate that subscale refining capacity represents an industry bottleneck, we know that the most pronounced choke point is actually in magnet manufacturing, and the 2 are interdependent. Therefore, it is imperative that we secure the foundational capabilities that MP has built in both upstream beneficiation and midstream refining that have enabled our growth into a downstream magnet manufacturer. In other words, without a resilient upstream and midstream source of Magnet feedstock and a scaled capability to recycle this war for magnet finishing we cannot and will not have a resilient magnetics industry in America. This is where the partnership with the government begins, providing the certainty and economics needed to secure this important capacity for our country while shielding against foreign market manipulation. The NdPr price floor agreement establishes a minimum realized price for our materials of $110 per kilogram of NdPr. The minimum price floor covers all of our NdPr containing products: concentrate, oxide and metal. And will provide for a floor price adjustment, whether we are selling the product, stockpiling it or consuming it in our magnetics business. This minimum price floor agreement begins at the start of the fourth quarter and runs for 10 years. Functionally, each quarter that the market price of NdPr is below $110 per kilogram, the Department of Defense will provide a payment to MP Materials covering the difference between the market-based benchmark price and $110 multiplied by the quantity of our products sold, stockpiled and/or consumed. We believe this construct provides a reasonable and responsible level of minimum economics needed to properly incentivize a fully integrated domestic magnet material supply chain at scale. In addition, this framework is a win-win for MP and the Department of Defense and U.S. taxpayers as we will share upside should market prices exceed $110 per kilogram, which we continue to believe is a strong possibility with DoD entitled to receive 30% of the value above that threshold. The graph on the screen should give you a sense of how this benefits both the company and DoD. Note also that the upside sharing commences once the 10X facility is able to produce at its target capacity of 7,000 metric tons, which takes us to Slide 6. As Jim mentioned, we are also announcing the construction of our 10X facility, which, when combined with our expanded Independence facility, will grow MP's downstream business to an estimated 10,000 metric tons of magnet manufacturing capacity. We are going to undertake a comprehensive site selection process and expect to begin construction as soon as possible, taking the various lessons learned from Independence and working to rapidly bring capacity online to meet both market demand and U.S. strategic objectives. The 10X facility offtake agreement is a 10-year commitment by the DoD to purchase 100% of our new facility's production capacity. The 10-year commitment begins once the facility is commissioned, and the economics of the EBITDA guarantee scale as we put that targeted full capacity of 7,000 metric tons of finished magnet equivalent into service. The agreement calls for the DoD to purchase magnets in a cost-plus structure where we expect the 10X facility to generate a minimum of $140 million of EBITDA on an annual basis. The $140 million minimum also carries with it an annual 2% escalator starting in 2026. In addition, as capacity is syndicated to third-party defense and commercial customers over time, we expect significant potential upside above this minimum guaranteed EBITDA level. As Jim noted, the DoD will capture the first $30 million of incremental realized EBITDA up to $170 million, and we will then split any further upside equally with the Department of Defense. The right side of the slide gives several different theoretical examples to demonstrate the upside opportunity for both MP and the Department of Defense. Importantly, while magnets produced at Independence are not covered under this offtake agreement, our demand pipeline with commercial customers gives us the confidence to embark on expanding Independence to its full 3,000 ton capacity, where we continue to expect to generate attractive returns on capital. Another important aspect of this agreement is that DoD and MP will collaborate on sourcing of heavy rare earth feedstock with Mountain Pass positioned as a refiner of choice for the Western world. The DoD's role here isn't just about meeting its own demand. It's about catalyzing the build-out of U.S. manufacturing at scale to serve the broader U.S. economy. Rare earth magnets are essential inputs to manufacture goods at the heart of our industrial base, from cars and electronics to drones and robots. The 10-year window of this offtake gives us the cash flow certainty and runway needed to accelerate the build-out of our downstream business and realize the economies of scale necessary to establish a competitive position in the global marketplace. With the start of commercial production at Independence serving as the foundation late this year, an exciting expansion close behind it and 10X entering commissioning by year-end 2028, we are well on our way to achieving full vertical integration and meeting the rapidly growing needs of the Western Magnetics market. Moving to Slide 7. I want to pull together the various pieces of this announcement to lay out the earnings profile of MP Materials as we move into this next phase of growth. Starting with our Materials segment. If you assume the minimum $110 per kilogram market price floor for our targeted NdPr production and the related target cost structure and add in our Magnetic segment, which here we are illustrating with very conservative assumptions on an expanded Independence facility, along with the 10X facility at its minimum $140 million of EBITDA, and including the burden of unallocated corporate costs, we see pro forma annual EBITDA exceeding $650 million with ample levers for further upside. To talk about that opportunity set, I will hand it back to Jim.

Thanks, Ryan. Let's stay on this slide because I want to reiterate the importance of what we are showing you here. As a result of this partnership, MP now has a variety of contracted cash flows backed by the United States government that extends for at least the next decade. This long-term financial visibility reinforces MP's role as a trusted partner and is a highly valuable cash flow stream in and of itself. Yet, we believe there is significant potential upside ahead. MP retains substantial exposure to NdPr pricing, positioning us to benefit from market strength over time. We also expect to grow our NdPr products business over time via Upstream 60K, while our Magnetics segment remains a powerful growth engine with considerable runway. Together, these drivers give us confidence in our potential to outperform over the long term. And lastly, with our position as a national champion reinforced by a durable and scalable economic platform, we believe MP is uniquely positioned to unlock significant new opportunities in all the major streams of our current business and beyond over time. Let's wrap up on Slide 8. This transaction is a win-win-win. It's a win for MP shareholders, it's a win for the United States government and U.S. commercial industry, and it's a win for American taxpayers. It dramatically accelerates the build-out of a fully integrated, scaled, rare earth supply chain right here in the United States, directly addressing a major economic and national security vulnerability. It helps safeguard trillions of dollars in downstream enterprise value across American industries focused on Physical AI and other dual-use technologies, securing a foundation that is core to America's role as a global economic and technological leader. It aligns public and private interest through shared upside and strict performance expectations, creating true accountability and partnership. And ultimately, it reinforces MP's role as a national champion with the scale, durability and economic firepower to lead America's reindustrialization in this critical sector. In closing, we recognize the profound significance of today's announcement. It marks not just a milestone for MP, but a model for what's possible when the public and private sector come together with a shared purpose. We hope this milestone serves as a catalyst for continued collaboration, combining American ingenuity with sustained leadership from Washington to rebuild one strategic supply chain at a time. With that, let's open up the call for Q&A. Operator?

[Operator Instructions] Our first question will come from Ben Kallo from Baird.

Congratulations. Maybe a lot to unpack. Maybe first, just on the $110, that price. Can you talk about how you guys got there? Number two, just on 10X, on the future output of that, does that all go to DoD or do you guys find customers through that? And then maybe a follow-up after that.

All right. Thanks, Ben. This is Jim. And I guess, congratulations to you as well as a taxpayer. You have a very large mark-to-market gain this morning. So actually, Ryan, why don't you cover $110 and 10X?

Sure. Yes, Ben, I think the deal that we announced today is a partnership that was negotiated with multiple prongs to it. And so I think the important thing to keep in mind on, looking at that particular prices, this is all a package that was negotiated in a way to incentivize the conditions that are necessary to enable accelerated vertical integration at scale. And so I think that's the major message. As it relates to 10X and the customer set, I think the important thing from an investor perspective is the DoD is standing behind the full volumes. But certainly, as you can see from the structure that we negotiated, I think both the Department of Defense and MP believe that there is quite significant upside to that minimum, which we believe would come from syndicating much of that volume out to commercial customers once we have ensured that DoD's needs are satisfied.

Maybe just a last one and I'll jump back in. Just more short term, the planning laid out for Stage II, [indiscernible] does that change in light of this? And then on 10X, could you just talk about the ability to procure equipment in the timeline that you gave? And I know there's guarantees here, but just anything you can talk to on that. And congrats.

So short term, no, nothing has changed. Obviously, we were working to ramp and continue to work to ramp as quickly as possible. Obviously, today's news and this partnership, the goal of the partnership is to catalyze much more of our supply chain as quickly as possible. So obviously, we want to accelerate our efforts, but it really accelerate the scale of our efforts. And what I would say, just a thought on 10X, you may remember this, Ben, but when we originally started building out Independence, and this goes back to 2021, it was always sort of top of mind that, that would be the first of a number of facilities or the first of much bigger production. And so we spent a lot of time as a team thinking about the equipment, and not just the equipment for that facility, but how we would be able to modularly expand within that facility and then in other facilities. And also thinking about sourcing of equipment and making sure that to the extent that our vision around single point of failure came true that we'd be able to build this out. And so I think we've done all that. So I think we have a lot of that advanced work in thinking about 10X and how we're going to do that. We've been thinking about it for a number of years.

Our next question comes from George Gianarikas from Canaccord Genuity.

Just enormous -- so congratulations from me as well. So could you just help us compartmentalize the 10,000 tons of capacity that you'll have post construction of 10X? So that first 1,000 is dedicated, I believe, to GM. Is the additional 2,000 Independence, is that DoD related? And can you help us maybe quantify how much DoD demand is there and how much there is for potential commercial related capacity from the final product?

Sure. George, it's Ryan. You have most of that right. Obviously, the first 1,000 tons at Independence is related to GM volumes. As we mentioned in the announcement, the 2,000 ton expansion that we are looking to undertake will be available for commercial customers. We're in discussions with many customers. And clearly, as you've seen from starting in early April, the focus on moving the supply chain to the United States has been pretty extraordinary. As it relates to the 10X facility, obviously, you add all the numbers up, you get to 10, which leaves 7 for 10X. What I'd say there is what DoD is focused on here is not just satisfying their needs. It is focused on ensuring that there is a scaled domestic industry, and that starts with vertical integration at scale. And so from that perspective, we certainly feel very, very confident that DoD's needs will be met out of this facility. And we believe that there is pretty significant incremental opportunity to bring quite a few commercial businesses into the fold in that facility.

And I would just add one thought on that, George, which, as you know, you've heard me say a number of times, the big growth area over the coming 3 to 5 years and beyond, aside from general electrification which is growing, is physical AI, right? You have a lot of people talking about how they expect robotics to be the biggest industry ever. And clearly, drones and robots are the future of warfare. I think we see that around the world. Again, you've heard me say that. And so direct demand versus just the downstream supply chain of commercial industry that have dual-use applications, it's somewhat of a colliding area, so to speak. And so again, this is really important to have this supply chain in place to enable both military and dual-use applications.

Maybe as one follow up. So if my memory serves, when you first announced Independence, you said that less than 10% of your NdPr capacity would be dedicated to that, which sort of implies that you have enough NdPr even before 60K to feed 10X. And you also mentioned that you have -- you're looking for feedstock for heavies outside of your own feedstock. So is that math right that your entire NdPr production will be dedicated to 10X and then your feedstock will eventually come from outside sources and refined at Mountain Pass?

George, it's Ryan. I think generally, the math is right. It obviously really depends on the type of magnet that we're talking about to get you to the exact amount of NdPr content. And I wouldn't underestimate also our ability to bring some of the work back into the fold. And so even at 10,000 tons of magnets, depending on the types of magnets, we may still have excess capacity. And obviously, it will take us some real time to get to full vertical integration. And so obviously, it's important that we continue to support our third-party customers with NdPr content. But in general, that is the right way to think about it. As it relates to your question and comments on heavy rare earth feedstock. As you saw from some of the features of this announcement, there will be further investment in Mountain Pass for heavy rare earth separation. We're well on our way to getting that done and we'll continue investment into that, which positions Mountain Pass really as a refiner of choice in the Western world to bring to bear the various feedstocks that are out there that can't support the economics of building out a full point solution for refining on their own. And so I think that's another important facet of this agreement is it's a critical enabler for the rest of the industry to come along and build out to support scaled magnet manufacturing. And so I think you have that right as well, and it's an important part of this agreement.

Our next question comes from David Deckelbaum from TD Cowen.

Congrats, Jim, Ryan, Michael and team on a pretty momentous milestone. I did want to ask, you laid out the timeline with targeted commissioning of 10X in 2028. So can you talk about just sort of the near-term management of the business in the context of selling NdPr versus stockpiling concentrate until then? Because obviously, you're receiving an incentive price, it seems like with immediate effect now to stockpile the concentrate, and we should see that immediate uplift to EBITDA in the third quarter. So how are you thinking about kind of ramping towards that Stage II nameplate to satisfy what you would need in that 10X expansion over the next few years?

Sure, David. Yes, I think the way that we think about it, and to Jim's earlier comments on the ramp of Stage II, we are still absolutely focused on ramping Stage II capacity as quickly as possible. There's very significant demand from the ex China market that is continuing to grow for our NdPr products, and we expect to continue to meet the demands of our customers over the next many, many years. And so from that perspective, there really is no change. Certainly, to the extent we are producing excess [ con ] in the very short term over and above what we're able to refine, this does provide a benefit to that from the perspective of being able to be receiving the minimum price floor on the NdPr content contained within that concentrate. But it really does not change the way that we're managing the business. We see that with everything we've seen in the market, a healthy ex China magnet market is beginning to form and we expect to be able to meet both the internal demand and external demand of that market.

I appreciate that. I'm also curious how much of this plan, as you think about the future, will contain capacity for recycling materials or refining or receiving third-party feed as the content requirements here for some of your future ambitions are quite large.