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

All right. Good morning, everyone. So I'm Ben Kallo. This is my partner, Davis Sunderland. We cover sustainable energy and mobility. Within that, we cover MP Materials. Very happy to have Martin Sheehan here. He's the VP of Investor Relations. Thank you, Martin, for coming. Maybe because we have a big group here all with different exposure to MP. If you could just maybe give us a 2-, 3-minute overview of who MP is and then we'll start from there.

Yes. Before that, yes, I just want to make [indiscernible] anyone has any questions, small room, please just raise your hand or you can e-mail [email protected] [indiscernible]. Sorry, carry on.

No, no problem. So thanks for having me, Ben and Davis. Unfortunately, our CFO on the name of the sign there couldn't make it today. So I'm -- the B team is substituting. So I apologize about that. I also want to say to everybody in the room, everybody out there listening to the webcast, Happy Veterans Day. At MP, Jim always talks about how we are patriotic capitalists, and we believe in the mission that we're on to bring the rare earth supply chain back to the West in the United States. And so we appreciate all our veterans out there and all the work they put in over their career. So thank you. With that, MP. So we are the only sort of fully integrated Western rare earth producer and supplier in the United States. We have Mountain Pass, which is a world-class. And when I say world-class, I really mean world-class ore body. It is one of the best 2, 3 ore bodies in the world in terms of producing and concentration of rare earths. The key 2 rare earths being NdPr, neodymium and praseodymium. Those are critical in terms of magnets, NdFeB magnets, neodymium-iron-boron magnets which are very high-powered magnets and they're used in all sorts of applications. We are now moving downstream where we are actually now refining NdPr oxide at Mountain Pass. And we have built a facility in Fort Worth, Texas. We call it Independence because of what we're -- our mission, but it's also on the corner of Independence Parkway and Victory in Fort Worth, Texas. And we are building magnets for our foundational customer, GM. By the end of this year, we should be in initial production for GM. And also Apple will be taking a significant amount of the capacity of that facility. So we are building out a complete end-to-end supply chain, whether it's mining, refining, metal making, alloy making everything. I don't think there's another company in the world that does all of the steps. And so again, a truly vertically integrated company. And obviously, we have some big partnerships, which I'm sure we'll talk about a little bit more.

So I make the joke because I covered the previous owner of the Mount Pass Mine, Molycorp that we've heard rare earths more in the last 6 months than the last 15 years. Could you just talk to us about how this bubbled up to such importance and then we'll go from there.

Yes. Again, neodymium magnets are used in so many applications. I think most people think of them as sort of in the EV traction motors, but they're used in your laptops, your iPads, your -- you name it. HVAC systems, any sort of electrified motion is probably using a neodymium magnet in it, particularly if size and power are really, really critical. So the fact that they're used in such proliferation and the fact that 90% of those magnets today are made in China, 90% of the metal making is done in China, 90% of the refining of neodymium-praseodymium is done in China. Now suddenly, you have a situation where Independence Day came was Independence Day with the tariffs in April. And whether people didn't realize how much NdFeB magnets are used and the proliferation of them or if people didn't realize how tight the supply chains were for those magnets or that would China even use this as a cudgel against the United States, I'm not sure what happened. But in the end, China pulled the trigger, so to speak, and basically, in April stopped or certainly made it extremely difficult to export magnets out of China. And we saw major manufacturers, OEMs have to shut down truck lines because they couldn't get a magnet for a speaker, for example. So that really kind of really set the wheels in motion for the DOW to kind of come and start talking to us about how do we get a supply chain stood up in the United States much more quickly than the path we were on at the time.

Maybe just to take a step back to, could you just talk about the different stages of the value chain and then how China has the control over the different parts of that?

Sure. So China has something like 60% of the world's reserves of rare earths. They mine about 60% or 70% of the world's rare earths. They refine, like I said before, about 90%. They metallize about 90% of NdPr. And then they produce something like 90% of the world's magnets. So all of the magnets that all these name brand companies are buying, they're basically getting from China, right? So the value chain, obviously, is completely tied into China. And so -- and now that they have sort of use this lever against the -- not only the United States mind you, but the world, right? There's a lot of reports, India couldn't get magnets, right? Korea couldn't get magnets. And I think even as recent as last week, we were hearing that certain customers or certain customers of China could not get materials out of China. So, yes. So we're just sort of in this unique position of trying to stand this back up in the United States and trying to do it as quickly as possible.

I'm sure we'll spend some time talking about the DOW agreements and transformational benefit for the business. But maybe just to start and level set to you, depending on when you came out the MP story, Stage I, Stage II, Stage III, now materials and magnetics. Wondering if you could just talk about the production of each stage, how you've added value through each one and where things will ultimately be going, maybe, say, middle of next year?

Yes. So it starts with obviously mining and beneficiation where you basically take 6% or 7% ore out of the ground, and we concentrate it up into a 60%-ish concentrate. Historically, we sold all of that to China because it couldn't be refined anywhere. But over the last several years, we actually invested in the facilities that the predecessor company built but changed some of the process steps and didn't have the capacity that was needed. So we spent a couple of years upgrading that facility, optimizing that facility. And then we started actually refining NdPr in late 2023. We're now at about half production, if you will. Our goal is to get to 6,000 tons of NdPr oxide production annually. We're at about half that run rate right now. So we're making good steady progress. Our goal, again, if we can keep on the current pace would be around the end of 2026, we would get to that full production level. And then, of course, we're also producing now magnets in Independence or we'll soon. We actually are making magnets in that facility in the -- using the prototyping equipment, basically what we call the NPI, New Product Introduction area, where we actually are producing magnets that meet GM spec. The big step now is we're commissioning all the commercial scale equipment right now, and we will be bringing that online at the end of this year, so we can again start making magnets for GM. We actually are already making metal for GM. So we're taking NdPr oxide and turning that into NdPr metal and generating revenue and EBITDA from that. So that's kind of like the near term of where we're at.

I want to get to kind of the most recent summit with the President and she and what's changed. But before we go there, so starting with in April and limiting rare earth's magnets. I think the previous administration wanted to do something in critical materials and rare earths. This administration really did the first kind of big deal with you guys with the DoD. Sorry, I still say Twitter 2, but the Department of War. And could you -- I know it's complicated, but could you kind of provide some framework just around what that deal entails?

Yes. So because we have already invested close to $1 billion or roughly $1 billion between the refining aspect of Mountain Pass plus building this facility in Fort Worth, the Independence facility for GM initially, we were sort of well ahead of the game in terms of having this vertically integrated business. And so I think when China kind of put the hammer down on exports of magnets, the DOW came to us. They did some pretty significant due diligence at both Mountain Pass and at the Independence facility and then went into sort of a deep and very challenging negotiation with Jim and the team to figure out how do we make magnets yesterday, right? So it's sort of an operation warp speed and also making sure that the refining side of the business isn't subject to the mercantilist policies of China in terms of putting pressure on price as opposed to letting the market sort of dictate to itself. So we had this, again, protracted and challenging negotiation with the government such that we would get a price floor on the NdPr oxide, we produce of $110 a kilogram. At that time, the market was maybe 55.

And just to be clear on that, you get that price guaranteed regardless of what you do with it, if you sell it or...

Or stockpile.

Or stockpile.

Right. To the extent because we're still ramping our refinery, we are stockpiling some level of that concentrate that we produce. And we actually get some payment from the DOW for that stockpiling starting October 1 last month. In addition, so now in addition to the $110, obviously, they want a magnet facility. So first, they wanted us to fill out the Independence facility because at the time only had GM. It was 1,000 tons to GM. That facility can do about 3,000 tons of magnets. Obviously, we were in pretty deep discussions with Apple at that time. So they wanted us to fill up that facility which we did with Apple eventually maybe a week after the DOW deal. But they also wanted this, what we call the 10X Facility, 10X because it takes us to 10,000 tons of total magnet production. And so they have agreed to buy all of the output of that 7,000 ton facility, right? It's a guaranteed offtake. It's a cost-plus deal with the plus being $140 million of sort of guaranteed EBITDA. Obviously, we can syndicate that to commercial customers, which the DOW is happy for us to do because they share in some of the upside of EBITDA to the extent that we add on profitability from commercial customers versus the DOW deal. So they also invested $400 million in preferred equity, which can turn into about 13 million shares. And they have a warrant, which if they exercise, would take them to about 15% ownership of the company. So if they will be or they technically are, I guess, or maybe not technically, but they are our largest shareholder. Jim, our CEO, is close behind. So owner-operated, but -- so sort of a really good partnership in terms of helping us support the refining business, making sure we have capital there to an incentive there to keep investing to keep that business going despite no matter what China does, so to speak. And also a magnet business, which hopefully kind of leads the industry and starts helping ancillary industries grow around it.

One question that we Davis and I get very frequently on this is what's the upside, if you have this guarantee and they guarantee this sort on the magnet facility. And maybe just -- there's several different areas I could see, but if you could just kind of give the top 3.

Top 3. Okay. So one would be the fact that the -- we laid out sort of a minimum EBITDA profile of about $650 million and about $400 million round numbers was related to NdPr oxide production in that minimum $110 price point. That was predicated on us producing 6,000 tons of NdPr oxide and selling it. So that was kind of the -- that's our ramp, right? That's what we're trying to get to by the end of next year. But we also have a recycling capability now. Apple is investing with us to build a recycling capability. That will produce NdPr oxide for them and for their magnets. That would get the top-up payment. Also, our upstream, our concentrate business is heading towards 60,000 tons of concentrate output. That would add another 1,000 or 2,000 tons of NdPr oxide potentially to the extent that we refine it, et cetera. But certainly, if we -- even if we stockpile, we will get some payment for that. So that is upside that's not in that model. And then there's third-party feed from that model. So the $110 is -- price point is certainly one big area where there's additional upside. And then on the magnetic side, if you -- again, if you think about this minimum floor of $140 million of EBITDA with the DoD buying all of that 7,000 tons of output to the extent that we can sell a lot of that commercially to commercial customers, we believe there's upside there in terms of driving additional EBITDA based on how we negotiate with Apple and GM. Now the DOW would share in that upside, but again, that would be additional upside. And then lastly, look, we're going to be producing a lot of NdPr oxide over the next several years. Obviously, we'll sell that into the market, so to speak. But also, there's the opportunity to just expand beyond this 10X Facility, right? So -- and then if you really want to look downstream, as Jim likes to say, like 5 years ago, we never would have thought we had a magnet facility built, right? And here we are, we have a magnet already built. We're about to embark on 1,000 tons of production in the coming years just for GM. In 5 years, who knows what opportunities will be out there. Maybe we move even further downstream and vertically integrate even further using that magnet as kind of as the linchpin for what we do next. So the team is really, really excited about what we're executing on and the opportunities down the road to really expand the business.

Another question we get very frequently is what happens if the geopolitical tension subsides and things go back to normal, if you will. And going back to Ben's point earlier about the recent summit between President Trump and GE, I guess, where do things stand now? And what happens in the event that we can be friends with China and there's some sharing of maybe U.S. producers going back to buying from China? Or I guess, do you expect that to happen?

First, I think today, it's a little unknown what's going on in China in the sense that they agreed to roll back the October restraints, if you will. But the April ones are still out there in theory where you have to get licensing licenses to get NdFeB magnets released out of China. And we just saw an article where they're hiring 60 people to help with that process, which sounds like it's a process that's not going away. Maybe they'll do it faster, but it doesn't sound like that process is going away. And I think at the end of the day, maybe most importantly, they can just pull the trigger again tomorrow, right? I mean there's nothing that stops them if something else in the world happens that they're not happy about, that they just put those restrictions back on. So most importantly, from our perspective, is our customer discussions have not stopped or nothing has changed from an interest in -- from potential customers in wanting to stand up some level of supply here in the United States and from MP. So I think not much has changed. I don't think we're ever going back -- look, will companies buy magnets from China? In that world, of course, they will. China dominates that market right now. There's -- we can't pull all of that supply chain back here tomorrow. It's going to take years, right? So I think that's always going to be -- they're always going to be a player in this market. The question is, will -- I think companies now realize you can't have a single source of failure like this.

Sure.

You guys have talked about -- one question we also get a lot is in magnet production. You have the light rare earths, you also need heavy rare earths. You guys have -- could you talk about the projects you have underway to refine heavies. I think you guys address your current needs on the call, but if you can just talk about that because there is some thought out there that you guys are light on heavies and you're short on that, and so that could be a risk to you guys.

Yes. I can't get through a meeting without talking about heavy rare earth, that's for sure. Yes, so understand that Mountain Pass is a -- because it's a bastnäsite ore body like most monazite and bastnäsite ore bodies, like most ore bodies in the world. They're light rare earth rich, if you will. But Mountain Pass is massive, right? We're producing -- we're on the way to producing something like 60,000 tons of concentrate, right? So 60,000 tons of REO in concentrate. So it may be a very small percentage, but it's a small percentage of a very big number, right? So the amount of rare earths -- heavy rare earths, dysprosium and terbium in particular, which are used in these high-end magnets, there's plenty, if you will, in the ore body based on what we're mining today and we'll be processing to take care of GM's needs, their 1,000 tons of magnets. In addition, right now, we're stockpiling, right? We're obviously mining it right now. We -- our separations facility is under construction for heavies and -- excuse me, dysprosium and terbium. And so we're actually stockpiling that. We have hundreds of tons of what we call SEG+, basically heavy rare earth concentrate sitting on site ready to be produced. So we are now building this heavy separations facility at Mountain Pass so that we can produce about 200 tons of dysprosium and terbium. Apple is going to bring their own feedstock because they want recycled feedstock. So initially, they're going to provide their own feedstock. That feedstock will have dysprosium and terbium in it, right, because it's spent magnet waste. So in other words, between the ore body and the fact that we're stockpiling SEG and Apple, we have plenty of dysprosium and terbium for the Independence facility, the 3,000-ton facility. What we need is likely more dysprosium and terbium for the 7,000-ton facility, the 10X Facility. Here, we'll probably have -- we believe they'll have multiple opportunities here in terms of both feedstocks as well as more recycled materials. So we're in a sort of a unique position where we can help maybe a on a clay stand up a concentrate type business like a stage -- what we used to call Stage I business, an Upstream business. Where we could be the offtaker. We could JV, we could do -- we could obviously provide a lot of technical support. And so -- and we have a pretty -- because Mountain Pass is so big, the refinery is so big and scaled, we have a lot of leeway in the types of feedstock we can take. So we feel very good that we'll have multiple providers for that feedstock. And the nice thing is, because we will be, if not the low-cost producer, a low-cost producer like NdPr, for example, and because this feedstock will become with that NdPr. And oh, by the way, we get a $110 top-up on that NdPr we would produce, right? We're in a unique position to be a good partner in terms of getting those offtake agreements done. So maybe with that, I'll leave it there.

One question that I don't think or one area doesn't get a lot of focus is on recycling. Could you talk about maybe first, the Apple relationship? The history of it and then kind of what the recycling facility, how long that takes to stand up and then what kind of benefits that has?

Yes. What's not well understood is that about 30% of the NdPr oxide produced in China comes from what they call swarf or kerf. It's basically waste off the manufacturing line in the magnet facilities. So I mean, think about it, you make a big block and then you have to cut it and shave it. And suddenly, there's all this waste and blocks chip and things like that. And so it's all dysprosium, terbium and NdPr, right? So you want to recycle that. So in China, that all gets recycled back to the refiners. So the beauty of Mount Pass and Independence in this 10X facility is all under one roof now. So when we make this -- when we get this magnet waste out of these facilities, we'll be able to recycle that back and reuse it and obviously, that drives down your cost, if you will, it extends your mine life, all sorts of things that are beneficial to the company and particularly from a cost perspective. So we've always known we had to do this. With Apple, the beauty is -- since I think the iPhone 11, they've always used what they say is recycled material, mostly swarf and kerf to recycle magnets to use in their iPhones, et cetera, and their -- all of their products. So they want to use dedicated recycled materials. So they are -- again, they're prefunding us about $200 million of prepayments. That will go to building out the Independence magnet facility for them, but it also will go to building this recycling circuit at Mountain Pass. And so they will have a dedicated circuit so that we can take magnet scrap, whether it's post-industrial waste or post-consumer waste which certainly initially Apple will provide, and we will then refine for them. And so that circuit will come online over the next year or 2, couple of years. I don't think we've given an exact date on that. But again, that will be used to separate dysprosium, terbium NdPr for the Independence facility to make magnets for them.

Maybe if I could ask one going back to magnetics and just looking at the commercial pipeline. If you could talk just a little bit about how the pipeline changed before and after the April export controls, before and after the DOW agreement? And then I guess part 2 is looking ahead, when we think about you signing offtake agreements, does that come before or after the 10X Facility is built or along the way? Or I guess, just piecing together the time line there?

Okay. A lot of questions there.

Maybe a lot all at once.

Yes. So starting -- where would you like me to start? So the...

Maybe start with how the commercial pipeline has changed year-to-date out of these agreements?

Well, it changed dramatically on April or whatever that was, fourth, fifth, sixth because suddenly, people knew they only had 2 weeks of magnet supply, a week of magnet supply in their manufacturing facility. So the phones immediately rang, can I get a magnet tomorrow? And of course, the answer was no. But we did point a lot of people to our Japanese customers who are buying our NdPr oxide. I'm sure our Japanese customers are happy about that. So maybe they could help them. But that drove the DOW deal ultimately, but it certainly drove a significant amount of phone calls across every single vertical you can think of about when can I get a magnet from MP? If I can't get one tomorrow, can I get one in 2 years, right? And then in addition, I think when we signed the Apple deal and the DOW deal, I think the same thing happened, I think I don't know if it's a little bit of FOMO or a little bit of like, oh, my gosh, you got 7,000 tons to -- you've already filled out 3 and now there's only 7, I better get some, right? So that also sort of kicked off a wave of discussions. And I think, again, the discussions continue. As we said on the call, I think Ryan said, well, look, we have the luxury here because the 10X Facility is sold out already to the DOW, we have the luxury to take our time and find the right partners, find the right -- not just customer but what kind of magnets do we want to make? Obviously, low SKU counts, high volumes is better from a cost perspective, probably better from a return perspective. And obviously, we're still arguably getting our feet wet here, right? So it's certainly -- I don't know if you remember from our Q1 call, we called it a freak out moment, right? We have to listen to our pre-call, our pre-earnings music often always, we'll always have a message, if you will. And so yes, and so again, the great thing is that these discussions continue, and we're optimistic we're going to get additional deals done. And there's no rush, right?

True. And you already started to answer it, I guess, but just to round out that thought, I mean, do we think of these announcements coming between now and when the facility is ultimately commissioned, maybe some before going after?

Yes. For all I know, tomorrow, a deal gets announced, right? So I think I think these deals will come and they'll come when we're -- when both sides come to put pen to paper.

Maybe very quickly last questions. Just the site of the 10X Facility, when should we learn more about that?

Well, obviously, sooner rather than later, right? I don't think we've given a hard time line because there's a lot to go through, right? We're figuring out what are the permitting issues. Obviously, labor is going to be really important, right? We're going to have to hire a lot of people. It's --metal making is a 24/7 operation, right? So you're going to need multiple shifts. Obviously, there's something to be said about being near the Independence facility because that's where all the kind of state-of-the-art equipment is in terms of like testing and that sort of thing. So we'll see. Obviously, we want to get the best tax deals we can get done, right? So we're going to try to run a competition here. But it is sort of -- I would say that's kind of front and center right now with everything they're doing right now. Getting this facilities, the site selection done is really important.

We've all seen a lot of announcements across the value chain of players that want to get into the business from large players to start-up guy companies. On the magnet side, the question we get a lot is just about oversupply of magnets. If you have several players coming into the U.S., how do you guys think about that?

Yes. I don't think we are all that concerned about additional supply coming online. First of all, we're sold out for the next -- arguably the next decade, right? We have a customer in the DOW is going to take every magnet we can make. And obviously, hopefully, we syndicate a lot of that. The second issue is there's so many different kind of magnets. Like I said, there's like 70, 80, 90 magnets in an ICE vehicle, right? So there's just -- there's so many opportunities for niche players to specialize in, et cetera. And I think to really build out the industry, there's all these support industries, too. So as what we believe the national champion like we can lead the way and help start to develop these sort of ancillary industries here in the States or in the West. And then if there's other magnet makers, that's great. Their challenge will be feedstock, right? That will be like where they're getting their alloy from? Where are they getting their metal from? Are they doing it themselves? Where are they getting their NdPr oxide from? Where are they getting their dysprosium and terbium from? So whether that's through recycling or something like that, we'll have to see. But that will be their challenge. Like that's the beauty of us is that we're vertically integrated. We have the feedstock, right? We have the magnet capability now.

In our last roughly minute, I know we're about to run out of time, and thank you very much, Martin. Just wondering if you could talk about the spending that will happen between now and the 10X Facility ramping up Independence. You mentioned prepayments from Apple, which were also a part of the GM deal. So just, I guess, sources of capital and capital needs over the next intermediate term?

Right. We're sitting with about $2 billion of cash on the books. I think we have roughly round numbers, about $1 billion of debt. So we're net cash positive. Obviously, with the new $110 price for our cash from operations starting in Q1 of next year will change dramatically to the positive, if you will. So we believe we're fully funded with that capital plus cash flow profile for the next few years to fund the capital. I think part of the DOW deal was the fact that we had to be fully funded for this facility, the 10X Facility, not to mention Apple and et cetera. So obviously, we'll start to give a better guide at sort of an annual basis in February. But anyway that $2 billion plus the cash flow from operations puts us in a great shape.

Thank you Martin.

Thank you.

Thank you. Thanks Ben.