MP Materials Corp. ($MP)

Okay. Good morning. My name is Bill Peterson, U.S. metals and mining analyst. And we're really pleased to have MP Materials join our industrials conference. They've joined some other JPMorgan events, but this is a company that is no longer just sort of an upstream rare earth supplier. It's really evolved over time. And so maybe -- first of all, we have Jim Litinsky, CEO of the company. He's going to sit here for a fireside chat and answer all of our questions.

But maybe, Jim, can you kick us off with a high-level review of MP's business, the vertical integration strategy that I just spoke to as well as really this great sort of unexpected, but this agreement with the U.S. government and the Department of War.

Sure. So thanks, Bill. Thanks, everyone at JPMorgan. It's good to be here. Although, I guess, some bad weather has made it tough couple of days. So MP, we are America's rare earth magnetics champion. We have a fully vertically integrated business. We mine rare earth material, we refine it. We then send it to our magnetics facility in Texas, where we turn it into metal, alloy and magnets. We are also, as part of that, building a recycling business, which we can talk about. So we really have sort of the full vertical integration of the entire rare earth magnetic supply chain. And there is no other company in the world, including in China, that has all of those assets and expertise under 1 roof. And so we are very unique that way. As you mentioned, last year, we signed a deal with the Department of War. So the Department of War is our largest investor customer and business partner. And so what that means is as -- and we can get into this more. But as part of really the events of last year and the need to accelerate the supply chain and its importance for the future of warfare and frankly, the future of the economy, we needed to really accelerate all of the efforts that MP is doing. And so we signed a deal with the Department of War where they will provide a price floor in our midstream business, our refined products business as well as they are a 100% offtake customer for the new 10X magnetics facility that we're building that we announced actually very recently. We're building that also in Fort Worth. So we are 10X-ing our business in very short order and as part of that, they will -- DOW will be a 100% customer on a minimum profitability basis, but we will syndicate the vast, vast majority of that to commercial industry. And so particularly as we look around the world today and see whether it's in Iran with drone swarms, or if it's in physical AI as we see the growth of robotics or frankly, what's happening in auto with maybe a little bit more of a switch to hybrids. We have a lot of demand for rare earth magnetics, and we are the American champion delivering.

So last year, maybe around this time, obviously, things are sort of, I don't know, heating up a little bit ahead of all of these announcements. And I would have asked you a question about supply and demand. I would have been particularly concerned about supply, maybe I'm less so now, but you've outlined just several times over the past year, all these demand drivers, and you just spoke to a few of them. But like -- when you look across your end markets, what does it look like today for permanent magnets, what areas are strong? I'm not sure if there's any that are weak, but more importantly, how should we think about the future dated demand as it relates to physical AI. You talked about robotics, drone. We've hosted a couple of eVTOL companies here today. How should we think about that on your business?

So it is -- what we're seeing behind the scenes today is pretty extraordinary. It's fever pitch. And I had thought that given that we're now about a year since sort of the trade war stuff kicked off last year that we might have seen that settle down. If anything, we've seen that accelerate. Sort of the big areas behind the scenes, physical AI is just -- and there are a variety of verticals, as you mentioned, robots, drones, EV mobility, all of the things that are happening that you all are seeing, we're seeing interaction on that front. Data centers are driving disk drives. That's another new one that we've seen in recent months, where we've -- some of what you're seeing out there with shortages around memory, that -- or CPUs that actually extends to a number of other aspects of the data center. And so we're seeing disk drive use cases go up. And then obviously, across consumer electronics and some of those other use cases, it's sort of stable demand. But what I would say is versus a year ago, maybe or maybe really 18 months ago, kind of prior to the election. I think the -- it appeared that the EV use case was accelerating. I think you've seen some tempering of that, obviously, you're all seeing the same thing where EVs are slowing down. But in place of that, really hybrids are making up for that and then some because actually a hybrid motor typically uses a bigger rare earth magnet than an EV motor. So we're agnostic to that. And so as we look behind the scenes, I'd say that versus a year ago, it's quite extraordinary, all of the use cases sort of seem to have quite exciting growth. And then obviously, just given the fact -- and we can talk more about this, but given the fact that physical AI is a dual use item, and so I think this is a really key point that I'd like to just end this question with, which is just that although we're in a trade detente with China right now and rare earth magnets are flowing to a reasonable degree for general industrial purposes. Anything that is a dual-use item is not coming out of China. And so if you are -- if you need magnets at scale for robotics or drones or anything that the Chinese government deems to be a dual use case, you're not getting them today. And so obviously, the customer conversations around that front are pretty extraordinary as well.

Yes. Thanks for that overview. So I talked a little bit about this agreement with the Department of War, but I'd like to double click on this. So this results, at least within our coverage universe, sort of unmatched earnings visibility. But can you run through the different components and I guess, avenues to the upside within this? You talked about the price floor, but what happens when prices exceed that. You have some opportunities to drive incremental output based off some of your prior expectations around the mine site. And then, of course, the 10X agreements.

Sure. So around last summer when we announced the Department of War transaction, we had a slide I love that sort of outlined our path to $650 million plus of normalized EBITDA. And so let me just give you the simple components of that. And that $650 million was what we really view to be post execution of the 10X facility and bringing online a couple items that we'll talk about in a second, that we sort of viewed our new normalized EBITDA floor of $650 million plus. The simple way you get there is with approximately 6,000 ton run rate NdPr of with a $110 floor on the commodity, less a low 40s cost that gets you a little north of $400 million EBITDA. And then the remainder is the EBITDA generation from our contracted business in the Independence magnetics facility, which is GM and we'll talk about Apple in a second. And then our 10X facility as part of our deal, as I mentioned earlier, we have a minimum profitability threshold. With that $650 million did not include is any price above $110 so as the commodity prices, if we have materially higher moves NdPr, we have substantial upside in the commodity. It did not include Upstream 60K which is our expansion at Mountain Pass. We've made great efforts on that. You can sort of see our run rate production, and we believe we're really on track to hitting that. It does not include our recycling business. So actually right around that time, right after that, we announced our pretty transformational deal with Apple as well, where Apple, we had been working with them for 5 years, putting together the pieces of a great technical partnership and business relationship where Apple will be our global supply chain partner to source recycled feedstocks so spent magnets. We're building dedicated facilities at Mountain Pass to receive that at scale. We'll be breaking ground on that soon. And we will send material from Mountain Pass to our magnet factory at Independence where we'll make magnets for Apple as part of that deal, we announced, it was a $500 million worth of magnet minimum buy from Apple. And so -- and then lastly, as we think about our business, all of those things that I mentioned that are not part of that $650 million where there's material upside. The last piece that I would say is if you look at when I took this company public in the fall of 2020, we were just a concentrate business. And we talked having been a hedge fund manager for 15 years, and I see one of my former partners here, so that's always fun. It was very important to us to build a thoughtful public company. And we came to Wall Street in the fall of '20, and we said, this is our long-term plan. But in the near term, we've got to move downstream. But one day 2025 plus, we believe we can be in the magnet business, and we'll build that business. You fast forward to today 5 years later and you look at the scale and depth of our business, I think under any standard, we've dramatically outperformed what I think what we conveyed to Wall Street that we might be capable of when we went public over 5 years. And so what I would say, as we look out over the next 5 years, certainly over the next 12 to 18 months, we've got a lot of execution to do. We've really got to get this right. It's a privilege and honor to have the Department of War as all of those things, our biggest investor customer business partner, but there's no excuses, we must execute. And so we've got our hands full on that front. But as we deliver on that, I think our ability, and as we look around the world today, with the amount of capital going into defense tech, there's going to be enormous opportunities for us to grow our business in a variety of ways. And so I think as we look out 5 years from now, I'd like to think that our business will look as different versus today as we look versus when we went public. And so I think there's just -- we're sitting with a front row seat and the best partners you could possibly have to the single most transformational business opportunity of our lives, the physical AI boom. So I think we're in a really good position to find further downstream opportunities as a company, and I'm very excited about it.

I certainly have more questions on the midstream and some of your downstream activities, but we recently got announcement from one of your -- well, the key Australian peer with another price floor announcement as well. What do you think that does to the market? Is that even more evidence that you're going to see just more constructive pricing long term, maybe exceeding the $110 floor?

Yes. It's an excellent question, Bill, because I will say there's kind of thinking back to my old hat days. There are a handful of times where if something happened in the market and maybe the market didn't react or didn't fully appreciate it. And whenever I was sitting in a conference and a CEO or a management team said, hey, X just happened, take note. The market didn't get it, like take note, usually, pretty soon thereafter, the market took note. So I will say the following: X just happened, take note, what Bill just mentioned, I don't think 48 hours ago, I just don't think the market fully appreciates what happened. And what happened was Japanese industry essentially off took almost all of Lynas' output with a price floor sort of a nongovernment involved price floor with, obviously, material upside. It appears from everything public. But basically, what just happened is the Japanese magnetics industry, a couple of players took down essentially all of their output. So that means a couple of things. One, it means that there's a major concern around access to NdPr, right? Not heavies NdPr. There's a major concern that there is enough -- and you can see that because if you look at the amount of magnet capacity that's coming online in the West and the amount of available NdPr in the West, the math doesn't work. If you are building a magnet factory today and you don't have a secure source of supply, odds are very high, you will fail. Almost a certainty. And so what that also meant is not only is it extraordinarily bullish for the price of NdPr. And as those of you who know me do this now for 5 years, commodities are commodities, you never know. And I always kind of preface price discussion with, it's a commodity and nobody knows, so take me with a grain of salt. But I will say that seeing that kind of reaction seeing Japanese industry take down their spot. That is a huge indicator. And it fits with -- for those who are following our industry closely on our call a few weeks ago, we announced that we have a new strategic partnership with a large industrial and technology company that wanted a huge amount much more than we could have given them of our NdPr. And so I think you're really seeing the beginning stages of a global squeeze on NdPr, which should be super bullish for prices, certainly more bullish than maybe the reaction as well as a recognition that the magnetics business that we're building that the strategy that we've undertook that, frankly, was validated by the Department of War and wanting to accelerate us, vertical integration matters. You don't solve the problem until you solve the problem. You can have all the rare earths in the world but if you don't have magnet capability, you haven't solved the problem. You can have all the magnet factories in the world, but if you don't have the feedstock, you can't make magnets. And so at MP, we have put all of these pieces together -- there is no company like ours that has done that. And so we will be able to have an attractive magnetics business and we certainly have our downside protected whereas others trying to compete will scramble for frankly, unavailable feedstock. And so it puts us in a really extraordinary position. And so obviously, we're excited about that, but that would be my reaction to the news of 48 hours ago.

Great. And one aspect to build magnets, obviously, is having your stable supply, which actually for you is yourself. So how is the midstream going? What gives you confidence in achieving run rate levels later this year. And how should we think about any potential upside, whether it's through efficiency gains or maybe incremental investments.

So as we said on the call the other -- a few weeks ago, we exited the year at approximately a 4,000-ton run rate. So the vast majority of what we produce, we're now refining. That ramp is going extraordinarily well. If you think about from when we commission that to today and the scale that is approximately 4,000 tons -- metric tons of material. It's been going really well. We've got a bit more to go throughout the remainder of this year to get that to what we expect our normalized output to be. And that is just sort of standard blocking and tackling some material handling or a few bottlenecks in the process of things that we're going to get some incremental equipment or some changes to. But we feel very confident about exiting this year at our run rate. While we're doing that, we also feel very confident about continuing to make incremental progress on Upstream 60K. When we went public, I believe our target was around 40,000. We blew past that. We blew past 50,000. And now -- so we feel that we're solidly on track on Upstream 60K. So from an upstream and midstream standpoint, we're really executing on all cylinders.

So moving to magnets, so you talked about execution being key here, but it's always difficult for us to kind of gauge your progress. So Independence is targeting the magnet sales later this year for GM. Can you talk about and speak to the qualification process and how we should think about the cadence of magnet production thereafter? Where do we stand and where are we going?

Well so in auto, there's something called PPAP, which is just a production part approval process. It's extremely rigorous. And the goal of it is to make sure that you can technically and capably produce what you're supposed to produce as well as do it at the scale that you're supposed to be doing it. That is a multi-month process. And actually, that is really in the magnetics business, certainly, that is the hardest -- doing an automotive PPAP is really the hardest thing. I think we've shown charts like this before, but auto spec, rare earth magnets are on the sort of the scale things are the sort of the most challenging doing physical AIs or robot or drones or other kinds of magnets from there is quite a bit easier from a technical standpoint. And so we obviously have -- being able to execute in auto out of the gate is critical. And as we've said to the Street, we expect to be producing revenue from GM magnets, which means we're through that process and manufacturing at a scale in a way that is approved from that process. So we'll be producing revenue from that later this year. We're obviously now making magnets at commercial scale. So that's going really well and on track.

So coming back to sort of, I guess, more base materials. So we often get questions, I'm sure you do too, around heavies. And you guys, I think, have a pretty interesting story around this saying that heavies you still need, but maybe a less sort of intensity than before. China really does dominate this space. So what is the heavy strategy? What is your ability to, I guess, process third-party feedstock. Are you making third-party purchases today. If so, from what regions, but maybe you can also speak to all the work you've been doing to, I guess, limit the amount of heavies. You talked about this in the earnings as well.

Yes. So there's 2 pieces to this. First, there's our heavies what is our supply that we can put into our process. And so as we said on our call, we're going to be commissioning our heavy separation facilities at Mountain Pass imminently this summer so we'll be producing separated heavies this year, later this year. As we have been doing that, we have -- we've been stockpiling our own SEG+. So think of the SEG+ as when most of our feed goes into our process the lights go one way I'm really simplifying, but the NdPr that we're after is going one way. We've been taking the SEG+ in recent years and stockpiling that. So we have quite a bit of material to work with. Then obviously, we'll be sending our continued material through that. But then once we bring our separated heavies online, we size the heavy separation capability to be materially higher than what our ore body would be able to produce with the thought that we'll bring in third-party feedstocks so we can really ramp that up. We've been sourcing third-party feedstocks, One attribute of our deal with the Department of War is that they're partnering with us to do that. And it's an attractive partnership that way because there's no financial cost to us to do so. And so we're sourcing third-party feedstocks. We've had our own stockpile and then we have our own material feeding through. So we feel really confident about our heavy supply. I would then say on the flip side, what's really interesting is that as we look at the business so if I rewind back to February of 2021. So when we went public, we didn't have a single employee in our magnetics business. Our first hire was February of 2021. We started building that team. We now have north of 200 people in our Magnetics business, and we've really -- it was sort of a private market Manhattan project. We had to bring together a lot of disciplines, metallurgy, experts that could help us build a Grain Boundary Diffusion process, which is the doping process is the end of magnetics. There's a variety of disciplines that came together to kind of create IP and maybe I should step back in really simple terms, when you make a magnet, it's not like these are just standard commodity products where they're all the same. These are highly engineered industrial products. And so what that means is you get a spec, but how you get to that spec may be different. And so the ability to make formulations with your alloy and then to get maximum performance with your GBD, your Grain Boundary Diffusion, that's the name of the game. As we started building this business, clearly, the Chinese are on the cutting edge of technology as far as getting all of this done. For years now, we have been dissecting every magnet possible, understanding the IP landscape where the white space was, how we could work. We've been working on this formulation process and so if we go back to -- and I don't think people fully appreciate the scale of investment that was happening at MP over the last number of years to build out this capability, the IP that we now have, but if we go to about 18 months ago, if you had said to me, what is the heavy content that you will need to make your DM or automotive spec magnet that you're going to be making in a couple of years and what that number was. And at that time, we would have believed -- we're sort of -- we're not fully there at the best of the best, but we're out there sort of in the top quartile and you look at what our estimate was for the need for heavies. Fast forward to today, we've made such advances that I think we're probably looking at something around the order of 60% less than what we thought we would need 2 years ago. And that really is a function of some great advancements that we've made from an IP standpoint in the lab, extraordinary team that we have doing all that work day-to-day painstakingly and so we feel very confident that, one, our heavy needs were lower than what we thought they were a couple of years ago. And then add on top of that, that heavies are mainly for temperature resistance. And so actually, when it comes to physical AI, when we think about robots -- humanoid robots drones, it's very likely that actually there won't be any heavies usage. We believe we make humanoid level spec magnets. Obviously, there's not much of an industry today. But as we look at that use case, without them. And so I think as we fast forward to when 10x comes online and as we start to see some of this growth actually happen in the next 3 to 5 years, I think that it will be, frankly, an affirmation of what you've actually seen on the ground from the 2 big data points we discussed earlier, which is just that NdPr is the name of the game. That is the bottleneck. You see it from Japanese industry and what they did. You see it from what we announced on our call, but really for the parties out there kind of talking about heavies being the bottleneck, I think that really reflects sort of maybe not a full appreciation for how magnets are made or how this industry works and for some of the advances that we've made on an IP front. But we feel really good about the leap ahead that we've made versus many others in executing that. And obviously, we're going to continue to invest in getting that business to be better. And I do believe that within the next, I used to say a year ago, in the next 5 years, I'd like to -- we should be the best magnetics company in the world. I think in the next 2 to 3 years, MP will leap ahead of anybody in Chinese industry as well, from a capability standpoint, from an IP standpoint in rare earth magnetics.

Yes, I had a question about 10X, but actually one leg to the stool that you mentioned earlier, but didn't mention just now, it was recycling. So how does that augment both maybe in NdPr but maybe like the heavies strategy as well. Does that largely help you meet your needs as well?

Yes. And I think maybe another thing that's for those who are newer to the space that might not be fully appreciated is the importance of recycling and again, our vertical integration strategy. If you make a magnet, let's say it's a smartphone magnet. These are tiny. You can pick up your phone. These are tiny thin oddly shaped things typically about 50% of the material comes off when you're finishing that magnet or earlier in the process, comes off in the form of dust or swarf, it's -- you lose it in the manufacturing process. And maybe for an EV magnet, it's closer to 20%, but somewhere between 20% and 50% of your raw material that's going through your process you lose. Well, the Chinese historically are selling magnets for the cost of raw materials or less. And so if you're a western magnetics producer and you're losing 20% to 50% of your material, and you have no way to monetize that, that's a disaster. That's just -- the math doesn't work. And so we were very focused. And but by the way, you need to have the ability to refine and separate to really be in that business at scale. And so -- what we have been focused on, and obviously, for the last 5 years prior to the announcement, we were focused on with Apple is making sure that we could build a recycling business at scale where we could take end-of-life magnets, calcined magnets as well as the swarf from our manufacturing process, send that all back to Mountain Pass and so that we could take advantage of that raw material to really have sort of a full closed-loop process. And so that's sort of the genesis of the Apple deal. And obviously, we're very grateful to them. There's probably -- they are one of the largest rare earth magnet consumers in the world. They're certainly one of the smartest and thoughtful supply chain companies in the world. And so to have them as a -- customer and business partner of our recycling business at Mountain Pass is a really important thing. And I think to be economic in the magnetics business, you really need to have that piece of it. Otherwise, let's say, you're a stand-alone magnet factory in the U.S. You're either losing 20% to 50% of your cost structure versus us or someone else or the Chinese or you're getting a small piece of that via some other recycling relationship that currently doesn't exist. And so it's really hard to be economic. And so really that vertical piece of just having that full loop positions us really well.

On the 10X, you recently selected a site, made that announcement here recently. This is slated to ramp later this decade. How should we think about the ability to accelerate the growth time line? What has been the level of interest from customer offtakes realizing that you have the backstop, but -- and when might we be -- expect to see further announcements from a commercial side.

Yes. Well, as I mentioned earlier, we are seeing fever pitch -- and I go back to this concept of dual-use technologies where people are just not getting access. And I think that's hitting hard across the defense supply chain and some of the other supply chains where people are realizing that even in this day time period, magnets -- rare earth magnets are really hard to come by. And by the way, if you can get them to get your license to get them you have to get a license, which means you have to share details about your product, your spec, sometimes pictures. But essentially, to get a rare earth magnet today, you have to hand over your IP to some entity of the -- some downstream entities, so to speak, of the Chinese government. And so I think, obviously, there's a lot of parties who don't like that. And so what that means is we're very confident that we'll -- we wanted to fill 10X today, I think we could certainly fill 10X today. But the structure of our deal makes it such that we can be thoughtful about how and when we fill 10X, we obviously want to maximize value for shareholders and make sure, frankly, that we're an important supply chain partner to national security needs. And so the way our deal works is that the moment we bring that capacity online, we have minimum profitability with an inflation kicker that kicks in. And so it's a very financially attractive structure that allows us to be thoughtful about when and how we bring customers on to that. And I think if you were building sort of an on the spec enormous facility, you'd sort of feel like you had to rush to bring customers online. It's sort of the opposite with us, which is we know the economics, we can be thoughtful about how we build out that customer base. And we're obviously having those conversations now. And I think I expect to have material upside to that business versus sort of what our stated minimums were. The good news is all of you get to participate, even if you're not MP shareholders, the DoW is an economic participant in that via 10X as well as obviously via shareholding. So it's really a win-win-win for us to kind of execute on that for everyone.

You spoke to it earlier, but in terms of -- there's been a lot of announcements on Western supply, including especially the U.S. domestic projects. You talked about maybe how you should have some competitive advantages, especially as it relates to recycling swarf so forth. How should investors view the competitive landscape with -- will there be enough demand to absorb the supply? How should we think about that?

Well, I think certainly, if you believe that in the next decade, we will see growth in physical AI use cases. I think we have a real shortage. We have -- there's -- what we're seeing, there's going to be a run on NdPr because pretty thing that's happening structurally in the economy today should mean more -- if you need -- if there's motion, there's actuation, that means you need rare earth magnets. And so I'm certainly very bullish about the demand backdrop. What I would say is what we see -- there are a lot of -- obviously, the excitement around both the trade war issues as well as now the growth cases that we're seeing in the economy admittedly a few years out. We're seeing a lot of excitement in capital formation, particularly on the back of our deal for other parties trying to be in the space. What I would say is that, again, I'm biased, but I think this vertical integration strategy that really stems off of an extraordinarily economic mine and refinery that really matters. If you don't have those pieces upstream, you really can't have the rest, the idea that you could sort of start with magnets. I think there's certainly, multiples of what we're doing of magnet capacity that's expected to come online in the West. I don't think they'll have feedstock. I think that will sadly be something we'll sort of pick the best of those assets at $0.05 or less on the dollar and likely have that opportunity. But if you don't have an economic upstream, we don't see -- unfortunately, we don't see any viable mines in North -- and certainly in America today, I do think that we'll see some stuff out of Southeast Asia, some stuff in South America. But these things, again, I would say, are incredibly hard to bring online. One data point that I think I mentioned a couple of calls ago. And so if you want more detail on this, take a look. But as we look around and see dozens of companies and people trying to promote a me-too strategy with respect to what we're doing. If you look at the rare earth industry today, there's really only 4 mines in the world that currently represents somewhere between 80% to 90% of supply. So there's 2 sites in China. There's Northern China Baotou and then there's Maoniuping and then there's Mount Weld, which is Lynas and then us. And so as we look around at all of these projects to really and then we've seen a number of projects that are really struggling to get online, I just -- I don't think we're going to see a state of the world 5, 10 years from now where you're going to see dozens of sites online. I think you're going to see some of these structural forces result in sort of us having the ability to really grow our business and that will happen in the various verticals of mining and refining. When you talk about our refinery that we're going to build in the Middle East. But I think you're going to really start to see the industry form around champions. I think, obviously, that we're in a really good position for that.

So this year, fairly elevated CapEx. But as we think about cash flow improvements maybe in the coming years, how do you think about capital allocation, you kind of briefly mentioned potential for M&A? What about other things? You think about buybacks, dividends or further reinvestment?

Yes. Well, as you all know, I'm certainly an opportunistic investor. As a company right now, it's very clear that over the next 12 to 18 months, we've got to bring 10X online. We have to execute. We have it in Independence. We have to continue that. We have to certainly execute all the projects that we have in front of us. We have an enormous cash balance. So we feel very comfortable about our balance sheet. We're going to generate a lot of cash. And so we'll certainly think about attractive capital allocation things to do soon thereafter. But I think first and foremost over the next year and change we've got to execute to make sure that we get those things online right? But there's no question that I think we're going to quickly transition to generating a lot of cash. And so we'll take advantage of that accordingly. And then of course, I'm always free to change my mind.

Well, Jim, thanks for sharing the insights. And unfortunately we have run out of time. Look forward to following the progress and best of luck here ahead with all the projects you have going on.

Yes. Thank you.