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

Where you are. It's great to have Ryan Corbett, CFO of MP Materials with us as well as Martin Sheehan to participate in this mining symposium critical minerals and rare earths. We're going to be hosting this session together with Stephen Burt, my colleague that leads the global Automotive Research and sustainability here at Morgan Stanley. My name is Carlos De Alba, and I lead the Metals and Mining group in the Americas also here in the research department. So we're going to keep it very conversational. We're going to have -- we're going to go straight to Q&A. Please feel free to send your questions -- [ more the Merrier ]. This seminar is basically for you. We have some prepared questions that we're going to start with. But definitely, I encourage the audience to send the questions, and we'll read it out to Ryan. Before we begin, let me mention some disclosures. For important disclosures, please see Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative.

All right. Well, Ryan, thank you again for joining us. We were just talking before, what a difference 3 years or 2 years make in terms of the interest that we see in the market from investors in rare earths and even in MP Materials for sure. So thank you for spending this hour with us -- these 30 minutes with us. So why don't we begin with something that definitely is -- has differentiated MP Materials. And that is the deal that you guys reached with the Department of Defense, Department of War. So why don't you maybe tell us a little bit about the background, the history about it, the conception, the negotiation of what it really became a landmark deal and why MP was the chosen one in your mind?

Sure. Yes, happy to. And thanks, Carlos and Stephen, for having us. Happy to be here. I'm actually sitting in my office at the Independence magnetics facility right now, a lot of progress going on here. So it's pretty exciting to see. It's always good to get down to Texas. So I think fundamentally, what you saw with our transaction and partnership with the Department of War really is an acknowledgment of the vertical integration strategy that we've been pursuing since 2017. We have demonstrated at scale at MP Materials the ability to bring back to the United States scaled mining, concentrate production, refining, metal making, alloy making, powder production, [indiscernible] or finish to a magnet. The thing that is often very underappreciated about this space is the number of process steps that are required. We see a variety of different folks throwing their hat in the ring to do one part or another of the supply chain, which, of course, we will need point solutions in a lot of parts of the supply chain. But what we really need in order to combat the Mercantilist policies of the CCP that has put us in this position of supply chain and security is to have a national champion in the space that is scaled in all of those individual verticals. And so that's not to say again, that there aren't going to be other players there. But I think what the DOW saw is that MP has been able to demonstrate true production in all of those various verticals that are required to actually get us from rocks in the ground to a magnet in your electric vehicle or your iPhone. And so fundamentally, I think that's really the differentiator. In terms of how the deal came about, certainly, I think we have been almost yelling into an MP hallway about the risk that the supply chain posed to the U.S. economy for the last several years. And we've kept our heads down and we've executed on bringing this capability back before it was sexy to do so through a lot of blood, sweat and tears. I think we've talked about the fact that we've invested $1 billion of private capital into the supply chain and created a capability that didn't exist before. I think our engagement with the U.S. government goes back many, many years. We had our first agreement with the then Department of Defense under Trump 1.0. We had a further technology investment agreement with the Department of Defense under the Biden administration. And then certainly, the world changed in April post Liberation Day in the sense that what was always a theoretical risk of the Chinese weaponizing the supply chain became real. And frankly, no matter what everyone is saying about temperatures lowering, rising, lowering, the reality is that they have begun to ahead with the supply chain. And so whether they pull a trigger or not is another story. But I think that the importance of having a scale capability in the West has never been more important. And I think you combine what I just talked about a moment ago about demonstrating the capability at scale across the full vertical supply chain and then the incredible necessity to move at warp speed to drive even further scale is what really brought this deal together.

That makes sense. And you just alluded to obviously all the critical steps and everything that MP is doing and will do along the value chain, all the way downstream. Maybe for the benefit of the audience, can you -- you just had your earnings call last week, but could you refresh what are the critical projects along the different stages and maybe the time line for those projects?

Sure. Yes, happy to do it. At Mountain Pass, we've continued to invest. We've been investing in a heavy rare earth separation capability for many years. I think the new news, if you will, that we provided on the most recent earnings call is that we're targeting commissioning of our heavy rare earth separation circuit that's been under construction for several years in the middle of 2026. And so importantly, we've designed the capacity of the heavy rare earth separation circuit, both to separate our own ore in the SEG+ that we are currently producing and stockpiling as well as bringing in third-party feedstocks to enable sufficient dysprosium terbium production to satisfy our needs in our downstream business. And so there's always been particularly recently, a lot of focus on the heavy rare earth question. I think for us at MP, what we are focused on is ensuring that we have the heavy rare earth that we need for our own magnet production. And so we've not needed to necessarily pound our chest about this, that and the other thing. The reality is this facility, we put some pictures in the earnings deck is very, very well advanced, will be commissioned in the middle of next year and will support our own internal capability, which we're very pleased about. In addition to Mountain Pass, we've discussed our investment in our chlor-alkali facility. This is something that if you think about the process of refining rare earth elements at scale, it requires a significant amount of commodity reagents. We have a great asset on our site at chlor-alkali plant that was built in the 2011 time frame. The prior operator of the site, frankly, didn't complete a lot of the brine purification and sort of upstream steps that are necessary in order to feed clean brine to the facility and really create what is a very interesting closed loop that enables regeneration of hydrochloric acid and caustic soda with our own waste brine. And so that's something that we're excited about from both a supply chain security perspective and a cost perspective. It's one of many initiatives that are underway to continue to improve our cost profile on the refining side of the business. And then we've also announced pretty quickly following our announcement of the DOW transaction, we completed our negotiation with Apple despite what many may think these were totally independent deals. We've been working with Apple for nearly 5 years behind the scenes on magnet recycling technologies to again be able to provide a solution at scale to bring both post-industrial and post-consumer magnet waste to bear to create recycled rare earth products and then turn them into magnets at our Independence facility. And so we are building a dedicated recycling circuit for Apple at Mountain Pass in addition to building out incremental recycling capability, both for our own magnet swarf and kurf as well as the potential for other customer agreements to fill out that facility. And so that is something that we're very, very excited about earlier stage in that build-out at scale given the recent announcement of the Apple transaction, but something that we think we'll be able to bring online relatively rapidly. So that's sort of the Mountain Pass side of things. On the magnetic side of the world, we are working furiously to complete all the various stages of commissioning of the Independence facility to get into service here on production of magnets of the commercial equipment by the end of the year. We've been producing magnets out of what we call our new product introduction facility where we've built out our various recipes, if you will, for the magnets that will be going into our foundational customer, General Motors. We'll be transitioning those -- that production over to the commercial equipment at the end of the year. We're also rapidly advancing the expansion of Independence to support first our Apple transaction that we just discussed a moment ago. And then in addition to Independence, what we've talked about is our 10X Facility. And so that is a greenfield facility where we will target production of 7,000 tons of finished magnets. We are in detailed site selection as we speak. We are progressing building the team very, very rapidly to oversee the construction and commissioning of that facility and so we'll continue to provide updates on that facility as we have them.

Great. Before I pass it on to Stephen, let me remind the audience, if you have any questions, please submit them, and we'll be happy to read them and Ryan will respond.

Thanks, Carlos. Ryan, I am really excited about the opportunity for MP, but also, frankly, just from the United States perspective, the steps you're taking to help eventually eliminate dependencies on China. I think you laid it out really well. And before we go into a little bit more on sort of stepping up and going further, I am just curious in terms of your general take from your dialogue in D.C. So for example, we go down to D.C. regularly, we get a sense that there is sort of -- like this is an urgent mission from Team Trump to try to eliminate dependencies of all sorts, not just rare earth, but just more broadly. What is the messaging broadly you're hearing from D.C. these days given your relationships?

Yes. Look, I couldn't agree more. I think the reality is that if you look at what happened in these trade negotiations, it's -- you cannot doubt that the rare earth magnet issue played an absolutely critical role in the negotiation of those agreements and the shape of those agreements. And so it's something that we can solve and we absolutely have to solve given what depends on the supply chain downstream, right? If you think about all of the future excitement in robotics, AI, data centers. So the physical manifestation of all of those depend on the supply chain, let alone the fact that 30% of magnets go into the automotive supply chain in some way, shape or form, which is one of the largest employers in the United States. If you think about the number of different industries that depend on a strong automotive business. I think it's a single largest employer soup to nuts in the United States. And so there are so many reasons why having strength in the supply chain is a total game changer for the United States on the world stage. And so it's something that we've acknowledged at MP. And it has formed a poor part of our mission since we acquired the site in 2017. And so it is very refreshing to see real results in this administration to get this problem solved.

Yes, it's encouraging. It's obviously it's -- it's a long run to get there, but we -- we're going to take that road. And it's remarkable to me that just within the War Department you mentioned earlier, I mean when you look at many of the U.S.'s most important military assets, I mean, this stuff sort of shows up in ways that, frankly, aren't always completely understood, but audits of different programs show that the stuff is probably more prevalent than appreciated. So -- a big issue. Ryan, I wanted to talk about growth beyond where you are now, I guess, [indiscernible] where investors were greedy...

What have we done for you lately, right?

Exactly. And I guess where I wanted to go is sort of as you deliver on the initiatives that you've laid out, where would the U.S. stand broadly in terms of rare earths and sort of magnet potential. Where do we stand then?

Yes. Look, I think that one of the things that we see a lot is a desire to talk about the issue as a resource issue, right? We need more rare earths. I think the fundamental truth from just a U.S. perspective is Mountain Pass and the ability to expand Mountain Pass is, by far and away, the best source and sufficient to support pretty significant growth on a stand-alone basis. Again, there are other technologies that I think are useful. I think certainly, we believe we'll lead in those. If you think about some of the technologies that we'll use on portions of the heavy rare earth elements that are sort of less scaled chromatography, things like that. We have that technology, we know how to do that. It works at smaller scale. Recycling is another area where, of course, we need more of that. And we think recycling can and should play a very big role. But I think frankly, MP will help lead on that front as well. And so if you think about it from a resource perspective, today, we're exporting the vast majority of our oxide and metal products overseas. And so as we build up our own magnet capacity, that will become internalized. But I think even if you do the math at a very high level and think about 10,000 tons of magnets, the rough rule of thumb is divide that by 2 to think about the NdPr oxide that will be required to support that NdPr magnet tonnage. So 10,000 tons of magnets is 5,000 tons of oxide. We've already told you we intend to get to a 6,000 run rate at the end of next year. That doesn't include recycling and some of the other Upstream 60K initiatives and other areas for growth. And so the reality is, again, from a resource perspective, we feel very good about being able to supply the United States from a resource perspective. And then, of course, the question becomes, okay, well, if that's the case, do you guys see the opportunity to grow the magnet business as well to sort of continue to stay matched there. And I think we look at that all the time. Our main focus right now is heads-down execution mode. But undoubtedly, if you think about the incremental material that we'll bring to bear Mountain Pass through recycling through Upstream 60K, through other partnerships that we think about all the time, there is a real opportunity to scale this business very, very significantly over the next 5-plus years.

It's a great overview. We've gotten a number of investor questions, which is great. A lot of engagement here. And I want to go to one of the questions, Ryan, which deals with sort of just managing the technical execution challenges. And so the question is, some of the difficulties that Molycorp faced were technical, trying to do too much at once, having more processing. How would you characterize the technical challenges? And how are you managing these definitely? How are you sort of managing that?

Sure. I think fundamentally, we see the comparison of the prior operator. We see dumping blamed for their failure and the reality is until recently, we had no air cover on pricing either and we thrived as a public company. And so that alone is certainly not the reason that we're in this position. We've seen technical challenges as the blame. The reality is if you step back and look at what really happened, it was a flawed business plan and a flawed flow sheet layered on top of each other, right? And so the reality is that we have approached this from the perspective of, despite doing a lot at once, ensuring that we actually approach it in a step-wise function in perfect or at least have visibility to nearly perfecting the first stage before we move on to the next, right? And so we spent many years focused on ensuring we could produce a very, very high grade and high recovery mineral concentrate that we could generate significant amount of free cash flow. And frankly, within a year, when prices were high in 2022, we generated enough free cash flow basically to cover the entirety of the investment in our Stage 2 operation to then refine that product. And so I think we were very methodically focused on addressing the issues of the prior operator in building a business that can self-fund in order to move on to the next stage. And so we frankly adopted a lot of the mentality as we move further downstream. And so looking at Stage 2, certainly, we dipped our toe, if you will, into the magnetics business starting in 2021. We built a business, frankly, where we partnered with GM who I think approached this industry very thoughtfully and allowed us to build a business where we took the risks we were comfortable taking. They took on some of the risk profile as well. And so it allowed us to focus on ensuring we were building that business thoughtfully from a risk-adjusted return on capital perspective. And so it really, from our perspective, didn't require us to walk while we chew gum, right? It allowed us to build that capability from scratch, hire a team, foster innovation. We're at nearly 200 employees at Independence now. And that wouldn't have been possible without designing the business plan thoughtfully to be able to adjust for and control for that risk. And so now we're in a position where we've got clear line of sight on our Stage 2 business. We've got clear line of sight on our Stage 3 business. And so now it's sort of okay, Stage 3.1, if you will, of really going into expansion. And so I think that we feel very, very confident in the technical expertise that we've built over time. We've tried to demonstrate at smaller scale before going full hog into large-scale. Perfect example is this new product introduction facility that we built in the Independence plant. And so it's all about just managing risk, frankly. Technical is always one risk, but that's our job as management is to manage that.

Fantastic. And so far, so good. You really delivered against a lot of people that were maybe skeptical when you first started with the project. We're getting some questions from the audience at different stages. So let me go from upstream to the downstream. The first one is why did you stop concentrate sales in the second quarter?

Yes. I mean the true answer there is we had actually decided to cease shipments following the reciprocal tariffs that started going back and forth and sort of our view that we were at a point where selling that commodity for such a material discount to its intrinsic value didn't make any sense. And so we'd see shipments at that point. And then as part of our framework of agreements with the Department of War, we further agreed at that point that we would no longer sell any of our products into the Chinese market. And so that's the sort of 2 prongs of that approach.

And then moving on to Stage 2. The question is, what would be the absolute maximum capacity in that stage 2?

You'll find out over time. Fundamentally, as a team, we don't like setting new targets before we've got the absolute clear line of sight, at least, on the same assets, right? I told you it's 1,000 tons of Independence on this equipment. I am telling you I'm going to get to 3,000, but it's a new investment. In the Stage 2 refining, we're going to get you to 6,000, and then we're going to tell you what comes next. I think undoubtedly, if you layer in the recycling capabilities, certainly, our ability to produce will be well in excess of 6,000 tons when you bring that capability to bear. But I do think just from a virgin material perspective, our view is there likely is some real headway there on the refining circuits over time as we dial them in.

And then staying in that stage 2, the next question is, can you process heavy rare earths like terbium, dysprosium and samarium? And another question on this area is how will MP secure all the heavy rare earths that is needed -- that are needed to scale up the magnet production?

Sure. Yes. Certainly, we absolutely can process and produce heavy rare earths. We are producing at scale, SEG+ concentrate and have been for the last 2 years. The heavy rare earth refining circuit, as I mentioned, will be commissioned mid next year. The vast majority of that investment, frankly, is complete. And that was actually part of an agreement that predates sort of our larger framework agreement with the Department of War where they were a participant in the heavy rare earth separation capability that we built out at Mountain Pass. As part of the new set of agreements with the Department of War, we are approaching the acquisition of heavy rich rare earth feedstocks as partners. And so frankly, there probably is no more powerful partner in the world than the U.S. Department of War. And so we are very encouraged to buy the interaction and partnership that we've had with them to date on working through the various opportunities for third-party feedstock to feed that refinery above and beyond our own internal feedstock. And so as we talked about, we've sized the refining capacity to be able to serve our downstream needs, and we feel very confident that we'll be able to secure feedstocks over time to feed that.

And then the next question on Stage 3 is how will the company manage the yield loss in magnet making, which is around 25% to 35%?

Sure. Yes, I think that is fundamentally one of the reasons that we so strongly believe in our vertical integration strategy. If you are a stand-alone magnet manufacturer without integrated recycling capability, you sort of forced to sell this product on to the market generally at some significant discount if you can even find the capability in the Western world to process this at scale. And so from our perspective, yield loss in the magnetic business is opportunity in the materials business. And so it's one thing that we are, I think, best positioned to be able to tolerate and create value both for ourselves and for our customers. The great thing about Mountain Pass is having the scale, the virgin feedstock allows us to be able to bring in such a variety of external feedstocks given sort of the base load that we get from the virgin material. One of the things that's difficult about recycling is if you're always bringing in different magnet grades, different magnet types, different compositions, it's hard to get good yields on that product. But given the fact that we've got that base load, it allows us to bring in such a variety of different material and continue to produce quality product and high yields in the Upstream business. And so the way we intend to manage it is to leverage our vertical integration and I think provide a best-in-class solution for the Western world.

That definitely is one of the things that -- one of the many things that sets MP Materials apart, the ability or the presence that you guys have along the supply chain. One last question before we wrap up, I just came up from the audience. The question is about the purity of refined rare earths. It is of critical or is vital, the level of purity for certain -- critical applications and that this is something that maybe others have fallen behind or the U.S. has fallen behind the Chinese due to the years of experience that they have. How are you going to solve this issue?

Well, so I think different applications have different purity requirements, right? Certainly, you can tell that our focus on the NdPr side is certainly, our existing magnetic customers where we are selling into some of the most demanding and scrupulous customers in the world with Japanese magnet supply chain that's selling into the Japanese automotive business. They are some of the most quality-focused individuals that we've ever dealt with. And so we feel very good about our ability to execute on that opportunity. And then, of course, the vast majority of product and growth over time will go into our own magnetics business. It's actually one of the other elements of the vertical integration strategy that we find so interesting, right, is -- you see specifications on the market for certain rare earth, let's say, where there's a very, very tight iron spec. But then, lo and behold, 5 minutes later, you're going to take that material and mix it with iron in a magnet. And so certainly, there are parts of the individual processes where iron could be complexify things. But the reality is that our position on both sides of the coin as producer and consumer, I think over time actually will give us some really interesting competitive advantages to be able to avoid overprocessing to certain purities that aren't actually necessary. And so while the market needs it and demands it, we certainly have the capability to meet market demand. But over time, I actually think it's a source of advantage from a cost savings and complexity perspective to be able to see, do we really need to hit Five 9s on this? Or given the fact that we actually own the downstream piece, we could measure the true implications of changing the specification in a way that the supply chain is not capable of doing right now.

Fantastic. Well, thank you very much, Ryan, for joining Stephen and I. It was great to host you. Fantastic to see all the progress that you are making and all the best as you continue to ramp up the different processes and the projects that you are working on.

Yes. Thank you so much, guys. Good to be here. Appreciate it.

Thank you.