MP Materials Corp. ($MP)

Good morning, everyone. We're going to start our fireside chat today. I still see people joining, but we're just going to do a quick intro before we dive into the topic today. So this is our last of our series of expert call/fireside chat that we brought to you guys over the last 3 weeks. We had the first one, thematic view on critical minerals. The second one or last week, with Adamas Intelligence really, I would say, digging into the rare earth market supply chain and the landscape of NdPr was pricing. And then today, we thought we would bring the main player here and that we are going to coverage MP Materials. So I have Ryan Corbett, CFO, and he's going to be with us for the next 35 minutes. So Ryan, thank you for taking the time.

Thank you, Corinne, happy to be here.

So I see -- by the way, just as usual, we're going to give some time for Q&A. So few ways you can email me, you can ping me on Bloomberg. I already saw some questions coming through. But we would prefer if you could just raise your hand and ask a live question. So we're just going to start, Ryan. Obviously, there's been almost 9 months close to a year now since the transformative agreement that you have with the Department of Defense. Can you kick off today's discussion with a high-level view of MP and the integration -- the vertical integration player that you are trying to be?

Sure. Yes, absolutely. I think the important thing to keep in mind about MP Materials for those that are newer to the story is it's -- the strategy of vertical integration isn't just an aim. It's something that we're doing at scale today. MP owns and operates Mountain Pass, which is one of the world's richest rare earth ore bodies. We're the second largest producer of rare earth content in the world today. We're one of the largest refiners of rare earth as well. We exited last year at a run rate of approximately 4,000 tons of NdPr oxide production on our way towards our targeted throughput of about 6,000 from our initial capacity. And importantly, there's a lot of talk about magnets, of course, given their criticality but there are a lot of process steps in between going from an oxide to a magnet. And so we've been on a pretty methodical approach to solving the entirety of the supply chain issue and really are the only company in the world with a true vertical integration capability that is operating today and generating positive earnings today at scale. So going from mining material, refining that material at Mountain Pass, producing rare earth metals, strip cast alloy flake, finished magnets all under roof is not done anywhere else, and we are doing that today. Certainly, the framework and really transformative partnership agreement that we announced with the Department of War as you mentioned in July of last year, allows us to meaningfully accelerate that vertical integration and really scale the Magnet business to match the tremendous scale that we have on our upstream and midstream assets, which we're working on as we speak.

Great. And then can you talk about the current agreement? I mean obviously, you have a floor price, you have an offtake agreement, you have a 10X capacity as well. Maybe just step by step kind of right from upstream to downstream, if you can talk about this?

Sure. Absolutely. I think the important thing about the partnership that we have with the Department of War is really -- we were the only ones that were positioned to be able to meet the needs of the moment. What we really need in the United States is to build on the existing capacity that MP Materials has been focused on building since 2017. What that brought to bear for us was a price floor agreement for our upstream and midstream assets referenced on NdPr pricing. And certainly, I'm sure we'll talk about this, it's really paved the way, I think, for other scaled producers in the industry, and it's really transformed already, and you've seen it manifest in pricing, the way the market operates today. And so on the material segment for us, we have a guaranteed floor price while maintaining upside to market prices for the critical value driver of that segment. In addition to that, one of the exciting parts of this agreement is our 10X facility that we announced in partnership with the Department of War. And so what that enabled us to do is invest rapidly and significantly in taking our ultimate targeted throughput of Magnet production in the United States from first, the initial 1,000 tons, that's the initial capacity of our independence facility that we're ramping as we speak. We're expanding that facility to 3,000 tons. And then we're building a brand-new facility that we call 10X. That's an incremental 7,000 tons of capacity. Importantly, that entire new facility has an offtake agreement with the Department of War guaranteeing us sales of magnet products as well as a guaranteed minimum earnings profile from that facility. I think the thing that I get questions on quite often at this point is when we announced the transformational deal, we gave a view as to what our minimum earning potential was given the various facets of the agreement. And we talked about roughly a $650 million targeted EBITDA minimum. I think a lot has happened since then. Namely, we announced a transformational deal, another one with Apple where we will be making magnets at independence for them and building a scaled recycling business with them as an anchor customer. In addition to a variety of other initiatives that we have in the works that provides very significant upside. That minimum guaranteed EBITDA. And so I think -- what's important to keep in mind is of that $650 million of EBITDA, north of $400 million of that is in the Materials segment. And we maintain upside exposure to raw materials pricing and NdPr pricing in that segment. And so we've seen the market react obviously, to the recent supply-demand dynamics and certainly to the fundamental changes that are present in the market given our deal. And so there's a significant amount of upside that we can get into on that in addition to the fact that the guidance that we gave on the magnet segment assumes just the minimum earnings that's guaranteed from our offtake agreement. We expect very significant upside to that as we commercially syndicate the capacity of the 10X facility.

That makes sense. And then we will come back on the 10X facility in terms of like ramp-up and progress. But I just want to continue kind of on government intervention and policy. So we have seen recently some replicates of the deal that you have got, right, if I can say so, with all the non-China firms and very similar floor price. What's your view on this and kind of the overall support that we're seeing throughout the industry? Is it positive that you mean the government is at least not backing away and how the impact on MP basically near term and medium term?

Yes. I think one thing that's probably missed in the investing community is just how meaningfully positive some of these follow on, particularly the Lynas deal, which I'm sure you're referencing is for MP and particularly our competitive position, both in the material space, but namely in the magnetic space. And so undoubtedly, our agreement with the Department of War sort of paved the way for what we are seeing in the market today and you saw a reaction in market prices almost immediately. What I think is underappreciated about how meaningfully different the market is today post this follow-on announcement versus what it looked like before is effectively you have 2 scale producers of NdPr oxide outside of China, with Lynas deal with the government of Japan, they have guaranteed 5,000 tons of their output to the Japanese magnet industry, which also is a great customer of ours in our Materials segment. They also have effectively a ROFR up to over 7,000 tons. And then when you look at their potential joint venture in Malaysia for a magnet facility, the vast majority of Lynas output is spoken for. Obviously, you look at our business, and we are rapidly vertically integrating. So the concept of the nearly 50,000 tons of magnet capacity that's been announced in the Western world over the last 18 to 24 months, and the availability of the critical feedstock of NdPr to power that is really in question. And so I think not only will you need to see meaningfully higher prices in order to incentivize any sort of reaction. I mean 50,000 tons of magnets is 25,000 tons of NdPr. We're one of the world's largest producers by far, targeting 6,000 tons. And so the dynamics of this market from a supply-demand perspective, primarily in the Western world ex China has really transformed. And the availability of that product is really a question. And so if you think about our competitive position as a fully integrated magnet producer, the only way to guarantee as a customer that the critical feedstock to power this product is available is to come to us. And so I think we're tremendously excited about what we've seen develop in the market. And I think what you've seen is proven producers are the ones that have been able to garner the requisite support with real teeth in it in order to drive this market forward.

No, I think that makes sense. And we had a very similar conversation with some, Ryan Castilloux from Adamas last week, and I think where really the bottleneck is in the industry. So that's very in line. Maybe one last question. Obviously, we cannot deny it the conflict in Middle East. I think it has begged some investor question. I wonder as well how it can impact you kind of maybe like a positive here? What's your view?

Yes, sure. I think I tend to get questions both on from our supply chain perspective what are the impacts on the business. And then to your point, I think there are implications from a demand perspective. And so on the supply chain side, I mean, obviously, fuel prices are up, fuel, diesel, et cetera are relatively immaterial proportion of our total production base and cost structure. And so from that perspective, there's no material impact. I think there are also concerns globally about sulfuric acid supply this sort of comes back to one of the great advantages of the Mountain Pass ore body being a bastnaesite site ore. We don't do a sulfuric acid leach or sulfuric acid roast. We do an oxidizing roast without acid in order to convert our product into oxide. And so from the commodities that we do consume hydrochloric acid, caustic, et cetera, we haven't seen a meaningful impact and so from a cost structure perspective or a security of supply perspective, we don't have any major concerns. Certainly, a conflict is a conflict and that's tough generally on shipping, et cetera, but nothing meaningful. I think from a demand perspective, to your point, this really just underscores, we saw it and are seeing it actively in the Russia-Ukraine conflict. We're certainly seeing it with the Iran conflict. This is really almost a drone war. And so when you think about how the market is developing, and I know you covered this a bit with Adamas, drones are flying magnets, flying NdFeB magnets. And so the reality is that as our industrial base in the United States and particularly the defense industrial base continues to mature and invest in some of these critical enabling technologies, whether it's robotics or drones, these are all major users of NdFeB magnets, even significantly more content often for some of them than you even see on EV platforms and automotive platforms and consumer electronics platforms. And so we remain incredibly excited about the demand opportunity. And when you think about the concept of how demand is shaping up, there are 2 critical elements of that, that I think are important to understand. First is something like a drone, whether it's a consumer drone or a defense drone or robotics application, that is a dual-use technology. And so if you are a producer, an OEM for those types of products, you will not be able to source your magnets out of China. There has to be a scaled producer in the western world where you get your material. And then on top of that, if you look at the technologies that we're talking about, often these are technologies where both from our technology from a magnet making process and product development perspective and just generally, given the application, there is often much less heavy rare earth demand and content within those magnets. And so really, I think the underappreciated bottleneck here is not access to heavy rare earths, like a lot of folks like to point to is access to NdPr. And so with all of those things combined, again, we think that our cycling initiatives, it really -- the market is playing into our strategy perfectly at this point.

No, that's very interesting. Again, I think that's relatively aligned with what we have talked about with Adamas last week. So let me check -- maybe let me pause here. I know we have 20 more minutes. Does anyone here have any questions? I think I saw some hands being raised at the beginning of the call. Sorry, we have a lot of people today.

That's good.

That's very good. Yes, I don't see any hands raised. I have some questions but I keep it light. You talked about drone and defense. And kind of don't have to be too deep, but what's your view on the demand vectors over the next 3 to 5 years? Is it really like AI and robotics taking over a part of most of the demand, I think, from Adamas, that was very clear. That was the key takeaway last week.

Sure. Yes. Undoubtedly, there are sort of -- if you look at the business and the demand profile without that significant new growth vector. The market remains very attractive, right, despite EV penetration, for example, not ramping the way that many anticipated 3 or 4 years ago even on ICE platforms, almost every single ICE platform is getting electrified in some way, any pure ICE really ends up being a mild hybrid. And so magnet content per vehicle continues to increase very significantly. And so we continue to see the automotive business as a very attractive and growing business for us. Our deal with Apple, consumer electronics is growing really rapidly. And I think it's underappreciated, frankly, the scale of magnet demand within consumer electronics. There are the sort of less sexy items, elevators and escalators and things like that, but obviously being levered to real estate. But then you get into sort of these really exciting new areas that we've talked about and so if you look at AI, certainly, the physical layer of AI, robotics is hugely exciting. Every single actuator and you think about the dexterity that's required for these particular use cases is driving and is anticipated to drive really significant demand for incremental magnet capacity. And then you think about almost the underappreciated sort of behind the scenes piece of powering the growth in AI. Data centers need cooling. Every HVAC system, efficient HVAC system has magnets in it. While there's a lot of focus on memory and what we see is -- not all that memory is flash. A lot of that is HDDs. HDDs are a big spinning magnetic head. And so the use cases there are multifaceted and are growing very, very rapidly. And so that absolutely opens up new and exciting opportunities for us. And then the drone comment that we talked about before, undoubtedly, that's driving new demand, both consumer and defense use cases. And so there are a lot of new growth elements to the story. And I think what was always present continues to be pretty attractive in its own right.

Have you seen a shift in terms of like you haven't announced an offtake agreement with like a robotic company, right? But like have you seen like an increase of maybe people approaching you from that part of the demand? Or is it taking longer?

Well, I think what I would say there is several thoughts. In April of last year, when the initial export restrictions from China were placed on the market, everyone was in tactical mode. Every customer was frantically trying to ensure that their assembly lines did not shut. And we saw some actually shut. We saw an automotive manufacturer have to curtail and stop production. And it's interesting, it wasn't a magnet going into a traction motor. It was a magnet going into a speaker. It's pretty tough to sell a car without an audio system. And so it gives you a sense of just how pervasive magnet content is across all of these technologies that we're used to just being able to buy with no problem. And so I think what we have seen is a shift from a tactical mindset of ensuring that lines don't shut tomorrow to a much more strategic mindset of how do we ensure over the next 3, 5, 10-plus years, there is a solution here given how rapidly content is growing. And so we announced a strategic offtake for our Materials segment last quarter, which was a very significant transaction for us for an American industrial company that I think speaks to the change in mindset where the end user is now truly focused on ensuring the entirety of the supply chain is covered. And again, that is exactly where our strengths lie as an upstream and midstream producer and as a magnet producer, being able to guarantee that security of supply. So we see a meaningful shift. And certainly, we have a tremendous number of conversations ongoing. I think what should be clear is General Motors is our foundational customer at Independence. That covers the initial capacity of that plant. Apple is anchoring the expansion of that plant. The Department of War is backstopping from an offtake perspective, the entirety of 10X. So effectively, from my perspective, I'm sold out. Certainly, I think the goal and the interesting thing about the Department of War partnership is if you read the documents that were filed publicly, the target is to work together to develop the various magnet grades, both for their use and for broader U.S. industrial use that opens up the widest aperture for us to address the U.S.' needs. We've already agreed with them on those particular specifications. And so I think when you fast forward into when we are in production at 10X, we will be able to address the vast majority of the use cases that we've spoken about. And so it puts us in a very good position from a product and process perspective to meet the needs of the moment. And so from my perspective, we are in no rush to announce a bunch of offtakes. We've got sort of the fundamentals beneath us to continue to build this business and do it in a thoughtful way. And we have always been extremely methodical in the partners that we bring to bear on our platform. And so we'll continue to approach it the exact same way we always have.

That's very helpful. In the interest of time, let me move -- one more question on the rare earth's market and then kind of, on your mining and refining progress. So on the rare earth's topic like the market itself. I mean we had a conversation with Adamas about the price bifurcation, right? Like China versus ex-China and I think it's becoming evident. What's your view here? And do you expect the ex China should be around that 110? Do you expect it to further climb up? And then if you can talk us what I believe you are looking at some of the benchmarks, which come from Asia and China, so that's kind of a disconnect here as well.

Right, right. Yes. I think that in general, we're always reticent to give specific price forecast on what we think exactly things are going to do. But when you look at how meaningfully the fundamentals of the ex-China market have shifted over the last 18 months, it's really hard not to be extremely bullish NdPr -- particularly ex China, to your point, on bifurcation. Certainly, you've got the 2 largest ex-China producers now with a price floor agreement with various governments. The conversations that we are having on the midstream side of the business are certainly indicative of the fact that these other potential consumers of product understand that the market has changed. Historically, the conversation completely centered around Asian benchmarks, that conversation is meaningfully shifting. And so I think we're seeing that pivot happen real time. And so that is a tremendously exciting development in the market, given the fact that we sit at a place in the cost curve where we can enjoy significant benefits from upside in pricing. And to the point I discussed earlier on the need for incremental supply, much of what we are seeing if it comes online, is going to be at a very different cost structure and point on the cost curve than where MP Material sits. And so that really positions the upstream and midstream business for success. And so I think that's a very, very good development. I think that as we think about how contracting will work over time. The reality is that we've got the opportunity with our recycling business as well to continue to scale and drive incremental NdPr production out of our existing facilities and out of the recycling facility that we're building. And so even at 10,000 tons of magnet capacity, 10,000 tons of magnets is roughly on a yield adjusted basis, 5,000 tons of NdPr. So we already have that 1,000 at our targeted throughput add on to that pretty significant increment from recycling and we have either the opportunity to sell our product as an upstream midstream product into the market and enjoy that upside or continue to grow the magnet business and be able to enjoy the upside via that side of the coin. And so -- what -- I think the dynamics of the market will present to us and what we consistently tend to see is the highest return on capital opportunity for us. Often, it's just reinvesting in Mountain Pass for if you get any other sources. And so I think that, that opportunity set just continues to grow with what we expect we'll need to develop within the market.

Okay. That's fair enough. So maybe jumping on the asset itself and like Mountain Pass. I mean you have NdPr expected to exit this year run rate of 6 kiloton, right, I believe. Can you talk about the next maybe key dates or milestones to reach that target? Are you on track? And then I do believe like about 18 months ago when we all went on site with you guys, there are some discussion about maybe upside for production, like looking at the mine plan improvement, have you been giving more thought on this?

Sure. Yes. I think that where we sit today and our discussion on where we exited 2025 gives us tremendous confidence in our ability to hit our targeted throughputs. At this point, from a milestone perspective, what Michael, our COO guided to last quarter was at least a 20% sequential growth coming into this quarter, a bit of upside in the next 2 quarters, which if you look under the hood, what that really means is for example, in April, starting imminently, we'll take our planned plant shutdown where we do our typical preventative maintenance as well as addressing some of the key bottlenecks in this debottlenecking initiative of getting to 6,000 tons. And so when you see slight growth sequentially from Q1 to Q2, what that really is, is some downtime and then some pretty meaningful growth coming out of that downtime. And so we will methodically reach and target by the end of the year to be run rating at our 6,000 ton throughput. And at this point, it's really addressing key mechanical and material movements through the plant as well as just continuing to hone and improve mechanical reliability on certain assets. There's a very clear pathway to address these. And so that sort of manifests and our obvious confidence in getting there. I think that what we expect to see from a resource perspective over time, you look at the existing mine life embedded in our S-K 1300 report. I think what we expect for Mountain Pass is many, many decades beyond what's already in that mine plan. And so the way we've always thought about it is given the way we are running the business and the way we are leveraging the mine and the mine plan to date, and then generally, what we've experienced from our public markets investors is, there wasn't a tremendous amount of value placed on big headlines on resource and reserve statements and things like that. And so we've been focused on running the business. And if there is a business need to further define the asset, we will do so. I think what we're starting to see is both a business need to further define the asset as well as an appreciation, I think, in the investing public for the longevity of this asset. And so certainly, we are looking at the opportunity to further define the ore body. We think there is tremendous potential upside there. And just putting it into basics, our cutoff grade is 2.5%. Our waste stockpile is probably the U.S.'s second best rare earth ore body. And so there are obvious pretty basic mining technologies that we can bring to bear to be able to leverage that over time. And so I think longevity of the Mountain Pass asset is not anything that I ever lose an iota of sleep over. And it is something that I think we will continue to invest in and prove out over time the potential upside within it.

No, I think that's fair for anyone that hasn't been on site. It's a pretty -- it's an impressive site and operation really. Maybe kind of a similar question for 10X and more like on the magnet and Independence. Can you highlight like the path to the 10X and maybe like the key milestone that investors should be expecting?

Sure. Yes. As you look at Independence, obviously, what we talked about is -- we are beginning the production qualification process for our products and for our commercial process within the facility. We expect to have revenue from magnet products in the back half of this year from a foundational customer. And so from that perspective, there's a very clear pathway to getting through that process and starting to generate magnet revenue out of that plant. Obviously, we're currently generating revenue and earnings from the precursor products that we produce here. We've talked about the start of production for our Apple partnership beginning in the middle of 2027. And so you'll be able to layer that ramp up on top of the ramp of the GM capacity. That -- both of those will be a modest ramp to get to the targeted throughput. Then you layer on, again, what we've guided to for 10X. While it's an ambitious target, we feel like we've got the pieces in place at this point to get to a mid or end of '28 commissioning of that plant. We announced a couple of weeks ago, we have the site selected. We are imminently about to be moving dirt. We've made a tremendous amount of progress on long-lead equipment ordering, design, et cetera. We're certainly extremely appreciative of the state of Texas and Governor Abbott's office for approximately $200 million incentive package for that plant, of which about $66 million is direct grants to us that we will achieve as we continue on our pathway to execution there. And so again, we've got supportive regulators, supportive environment and an absolute focused warpspeed mindset to get that facility online. And so there are a number of milestones to look out for over the next several years as we bring each of those pieces online.

So that's good. Why would you say it could be the most like a few of the challenges that could arise. Is this more from a technical point of view to reach it? Or is it more like maybe like a government support that could change over the next few years?

Sure. I think, fundamentally, we are in execution mode, right? We've got a binding agreement with our partner in the Department of War. We feel very good about that relationship, and that's enabled us to accelerate our investment plan. We are making tremendous progress as we just talked about on the upstream and midstream side of the business as well as the magnetic side. I think that we are -- we set ourselves very ambitious targets from a technical perspective on the magnetic side of the business. And mind you, we hired our first employee who is our EVP of Magnetics, our head of that business unit in 2021. And so this is a relatively new initiative and what we've been able to accomplish from a product quality perspective already and a process development perspective has impressed us even beyond what were very, very ambitious targets. And so I don't think of this as a specifically technical challenge. This is just an execution and debottlenecking challenge fundamentally. And that's something that we have proven our ability to overcome with the progress that we've shown at Mountain Pass as an example. It's underappreciated. I think that we had 0 refining really until 2024, and now we are one of the largest refiners in the world from a total standstill. Same with the upstream business. In 2017, we started with nothing. We had 8 employees. And we're the second largest producer of rare earth content in the world. And so I think we have the fundamental building blocks in place and we've proven our ability to execute as an operator over time to meet our challenging targets. And so we expect to continue to do that.

That sounds good. I think we're left with 1 or 2 minutes here. Maybe like a closing comment or commentary for investors. I mean the stock has had a lot of volatility as expected. I think after it was announced the agreement last year, we saw a lot of people just kind of jumping into the name, not necessarily knowing much about what you guys are doing. It was more like a geopolitical and government policy move. And then we kind of start saying like investor coming back to the fundamentals and exactly what we're talking today about progress and execution and even cost. But what would you say to those investors that are still a little bit on the sideline and waiting to enter MP?

I think fundamentally, everything that we've discussed I think, underscores the thoughtfulness and focus of the strategy that we have been on since the inception of the business, approaching this in a staged approach and building a true scaled vertically integrated platform. My view is that there is no one else that has the set of assets that we do that will enable us to meet the actual end need that the market is asking for. And there is no one that can do it at the scale that we provide. And so that scale, your comment on costs. I think this industry is a scaled industry. You look at the structure of the market. The vast majority of the NdPr market is supplied by 3 mines. That is a structural issue that will not be overcome by announcements of some discovery out here or out there. And so what it comes down to is a demonstrated ability to execute. It comes down to the fact that this is not really an on-the-come story. Yes, we have a tremendous amount of growth and execution ahead of us that will continue to benefit the business and our shareholders. But right now, we are generating significant earnings in our Materials segment that we talked about a moment ago, is a huge piece of the puzzle, a huge piece of the pie for our targeted earnings profile. And so we have a very unique mix of significant growth in cash from operations while having very high risk-adjusted return on capital opportunities to invest in. And so I'm incredibly bullish obviously about our opportunity set. And the X factor that I think kept a lot of people on the sidelines for a very long time was how do you control for the mercantilist threat from China. And the reality is we have addressed that problem uniquely in the partnership that we've created with the Department of War. And so with all of those pieces in place, we are heads down in executing this strategy.

Yes. No, I think that's fair. The China dependency, not just the fact that they were the #1 but price was dependent on whatever China decided to do, and I think that was a big factor. I think for investor now, you have a certain visibility and path like in terms of financial in the pricing that you get. We're like a minute or 2 late so I'm going to let you go. Ryan, thank you so much for being with us. I really appreciate. I appreciate everyone on the line. That was one of our most attended fireside chat of the year. So pretty good. I'm sure you guys may welcome any investor on site so don't hesitate to reach out through us or through Martin from IR. And yes, thank you again. Have a good day, everyone.

That's great. Appreciate it.

Thank you. Bye.