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

So good morning. It's Laurence Alexander with the Jefferies Chemicals team. It's my pleasure to introduce Ryan Corbett with MP Materials. We're going to do a fairly loose and goosey fireside chat. If anybody has any questions, please feel free to chime in. But for those who are less familiar with MP, if you wouldn't mind just starting off with a very quick overview.

Sure, absolutely. Thanks for having us again. Appreciate it. So for those of you that are less familiar, MP Materials is the Western world's largest producer of rare earth materials. We're the only scaled producer of NdPr oxide in the Western Hemisphere and are the only scaled business with a fully vertically integrated platform with demonstrated capabilities from mining through to magnet manufacturing. We have been on a journey of building the business in stages. We're at the point where we are nearly complete on the optimization and growth of production of NdPr oxide at our Mountain Pass asset, which is Mountain Pass is really the cornerstone of the rare earth industry. It's where much of it was born, and it is such a tremendous asset for us to build this platform on top of. We've taken our successes in the upstream and midstream side of the business and have integrated downstream into rare earth permanent magnets, which if I was at this conference 3 years ago, I might start explaining to everybody what magnets are. I think today, now most people know what they are and know how incredibly important they are, which is a major sea change, I think, for the industry is just the broad recognition of how critical they are. But we've built out a very interesting business in rare earth permanent magnets starting with the automotive sector with our first foundational customer being General Motors. We've expanded that business to incorporate Apple as our next foundational customer, speaking to sort of the vertical integration, not just for magnets at our Independence facility, but as our sort of keystone foundational customer for our scaled recycling business. I think the thing that is so critical to appreciate about this business is the vertical integration really allows for efficiencies across the value chain. And so that was a very exciting announcement we had last year. The other very exciting announcement and really, I think, a sea change for both domestic critical minerals policy and industrial policy as well as a major accelerant for our business was the announcement of a public-private partnership with the Department of War in July of last year. That deal came with a variety of attributes to it, namely a price floor on our critical NdPr commodity as well as accelerating our investment into expanding the downstream side of our business, where we've now undertaken what we're calling 10X to build our next magnetics facility. We've broken ground and are making really amazing progress in getting that facility stood up. We are partners with the Department of War in that facility where they are a 100% offtaker and have guaranteed a minimum earnings level at that facility with the ultimate goal of commercially syndicating that out to commercial customers and defense industrial-based customers. So that, on top of a lot of excitement on the material side of the business where we've continued to find opportunities for very high return incremental tack-on projects like our chlor-alkali facility, our heavy rare earth separation capacity and things of that nature have definitely all kept us quite busy at MP.

And so your two foundational customers are both fairly large companies. So can you talk about how much engagement you have with other OEMs and how that level of interest has changed given China's frequent use of export curbs as a policy tool?

Sure. I think maybe I'll tackle it both on the Material side first and then Magnetics. I think from a Materials perspective, the export restrictions that China has brought to bear, I think, across both segments, both products, really, I think, have illustrated the single point of failure that has been evident that we've been talking about for a very long time, but that I don't think the supply chain managers of every large OEM fully took seriously until they were forced to. We get a lot of questions also about there's the upcoming Trump-Xi Summit and what we think may come out of that. But the fascinating thing to think about is from an industrial capacity perspective, so many of the things that ultimately are built in the U.S. ultimately touch other parts of the world, Japan namely. And what we've seen is, clearly, there is difficult relations between the U.S. and China, even more difficult relations between China and Japan. And that is really starting to impact the industrial supply chain. I think that there was a major panic with Magnets at the beginning because no one really knew what the pathway was to be able to get export licenses and things like that. Those have flowed some, but not very much. And I think that everyone on the Magnetic side that we talk to, I think we would characterize it as the genie is out of the bottle or Humpty Dumpty is not getting put back together. Like it kind of doesn't matter what happens in the sense that you can never allow your business to be that reliant on the whim of an export official at the port coming out of China to decide if your automotive plant is going to stay open or not. And so across the board for some of the materials that we produce on the refined side as well as in the Magnetic segment, the level of engagement is huge. And I think the beauty of the structure that we've put together is Independence with General Motors and with Apple, the vast majority of that volume is spoken for. And then with 10X, with the investment and offtake agreement with the Department of War allows us to be very methodical in approaching contracting that facility. We think about it as every day, the strategic value of that asset grows as more businesses really come to understand how difficult this is going to be in the Western world and I think start to fully appreciate the value of our integrated and vertically integrated supply chain. We've talked a lot about where we think the bottlenecks are going to be, and we are one of the very few companies that I think can actually address the problem.

And since you brought it up, I'll just jump straight into the Trump-Xi Summit. There's also a November deadline for the rare earth agreements. Where do you see kind of the main pivot points that could come out of this? Or what do you see as the main risks for the industry?

When we think about this, it's almost fascinating to think about the fact that November would represent a year of a pause on certain export restrictions, right? And from our perspective, what we are seeing from customers is what pause. It is incredibly difficult. And the data is publicly available, the trade data on gadolinium, Neodymium, heavy rare earth containing magnets like dysprosium and terbium going into Japan, all of those are basically 0. And it's pretty darn close to 0 coming into the U.S. as well. And again, you think about how our supply chains and the geopolitical rivalry here is developing such that the line between the traditional defense industrial base and the broad economic base is blurring. Is a data center commercial or is it defense? And you'd be surprised that the answer is maybe both. And so I think fundamentally, the way that the supply chain needs to be approached now is one where we just cannot rely on China no matter what happens at this summit. And so I probably am not the best prognosticator on exactly what our President and what Xi will say. But I think in a lot of ways, the script is already written from the perspective of the supply chain.

And so can you tie this into the upcoming election in the U.S., how you think about where are there areas with clear bipartisan policy support? And perhaps more interesting? Where are there areas where there is controversy or instability in the degree of policy support?

Sure. I think fundamentally, the great thing about where we sit as a company and where we sit from the perspective of providing a solution to the Western world is incredibly bipartisan. We've engaged with and worked very closely with each successive administration. We've had engagements and awards from the Department of War under both Trump 1.0 and under President Biden. I think that the issue of rare earth permanent magnets came to the forefront, of course, after Liberation Day with a full understanding of the scale and nature of the problem, which allowed us to act in concert with this administration to really address the problem. But you take as an example, the day our agreement with the Department of War was announced the China Select Committee, which is a bipartisan committee came out strongly supportive of these efforts. And since then, I think that there is tremendous bipartisan support for understanding, addressing the vulnerabilities that we have with our clearest geopolitical rival. There will always be disagreements on exactly how to achieve the ends. So there's agreement on the ends, maybe not the means always. But I think from our perspective, we've set the business up in a way where this is a strategy that will be able to be executed under whoever is in the White House, whoever is in control of the House and Senate.

Can you give an update on the near-term projects? I'm thinking particularly the NdPr production rates. You indicated they're nearly complete or nearly at target? And then also the magnet production for GM?

Sure. Yes. So certainly, we have been at the sort of debottlenecking initiative at Mountain Pass for a long time. We brought the separation capacity online at the very tail end of 2023. I think for context, a factory and facility and refining facility of this scale being able to get it to where we are today at roughly 1,000 tons a quarter of NdPr production. The only other comp in this space was Lynas when they brought their facility online probably about 10 years ago. It took them almost 7 years to get to full run rate capacity. We are targeting getting there at the end of this year. I think the amount of progress that the team has been able to make while continuing to invest in the background in the chlor-alkali facility, heavy rare earth separation, all these other things is pretty extraordinary. And I think fundamentally, the great thing about where we sit right now on this debottlenecking initiative is the major items to address at this point are mechanical reliability as we increase throughput and a lot of materials movement issues. So these are not sort of fundamental chemistry issues. These are very typical blocking and tackling for a facility of this scale. And so we continue to keep our heads down and execute on that to get us to our targeted throughputs. To your question on GM and our agreement there and the ramp of initial magnet deliveries, our target is to start what we call commercial deliveries at the end of this year. As we've talked about at length, the approval process to get into production, it's -- people call it qualification. It's not really qualification. The magnets are qualified. We know we're making on-spec magnets. We're making very high-quality magnets. And the team down there has done an unbelievable job in execution to get there. What we're really working through at this point is the final stages of what's called PPAP, Production Part Approval Process, which is not just can you make the part to our specification. It's exactly how many are you making a day, how are we going to slot that into facility #1 with part #1 and what about facility 2 with part #1 and then part #2 with facility 1. It's really layering in and integrating into the supply chain for our core customer. And so those initiatives are underway. We're making really good progress, and we're super excited about where we are at this point. So more to come shortly.

And you alluded in your opening remarks to kind of the potential bottlenecks in NdPr. Can you elaborate on that and what that means for the NdPr oxide market, but also what you think about what that means for the magnet market?

Sure. Our fundamental view is that we've seen plenty of capacity announcements of potential magnet plants coming to the Western world. If you look at where the NdPr oxide supply picture sits today, there's effectively ex China, from a scaled production capacity perspective, there's MP and there's Lynas. You look at the current ex-China capacity for magnet manufacturing, and those are relatively balanced. You add in these announced new capacity addition in Magnetics, you would basically need to immediately double NdPr production just to meet what's already been announced. And then the projections, pick your analysts, I'm sure you have your own projections as well. The demand growth that we expect to see for Magnetics, whether it's robots, data centers, automotive, energy, you name it, is consumer electronics is incredibly significant. And so the reality is that the ability to add production of NdPr at that pace has never been seen before. And the structure -- the market structure here is one where it's always sort of been an oligopolistic market. You see where the major pieces of supply come from. It's because those are the very high-quality hard rock mines primarily that are supplying NdPr. I don't see another one of those on the horizon that makes a whole lot of sense at today's NdPr prices. And so one of two things has to be true, either commodity prices need to massively respond to the supply addition or we're going to be faced with capacity getting built into the market that doesn't have supply to fill it. And that's why I think our strategy is so critical as being really the only proven producer of NdPr oxide at scale with a real vertical integration strategy. When customers come to us, we can take them to Mountain Pass and show them exactly where the critical commodity is going to come from.

So can you also characterize your strategy for heavies? You recently had a gadolinium contract?

Yes.

Seems like that's probably the first of many rather than the one and done. So can you just talk about where you think this is going to take you over, say, 5 to 7 years? And what sort of capital investment you might need to build a franchise in that area?

Sure. Yes. So I think the great thing about our heavy strategy is that we've been on this journey to build out heavy rare separation capacity since 2021. We actually initially had an award from the Department of Defense at the time, focused on exactly that. We are in the process right now of commissioning the various circuits to do heavy rare separation with a target of having dysprosium and terbium production by the end of this year that we will use internally for our magnet business. And so again, coming full circle to the vertical integration strategy and being able to make the critical components of the underlying product. That is primarily where we focused was ensuring that we have our own supply to grow what is a very exciting downstream Magnetics business. The reality, though, there are 17 rare earth elements. And I guess there's an argument over whether yttrium counts or not. We say it does. It's not a lanthanide. But clearly, throughout all of these various individual elements, the use cases are pervasive. You think about turbines for power production, turbines for aerospace, often have coatings that have yttrium contained or gadolinium contained, lasers, optics, et cetera, all rely on these products, and we produce them at relatively significant scale at Mountain Pass. When we started NdPr production, the focus obviously was ensuring that we optimized that piece of the business first before we sort of diversified, which created a very significant stockpile of what we call SEG+,samarium, Europium, gadinium with the remainder heavy earth elements. And so we are using that now to feed our own heavy rare earth separation circuit. Like I said, first targets were dysprosium and terbium. We had committed in our partnership with the Department of War to also produce separated samarium, which is critical for a variety of use cases, particularly in the defense industrial base. And then to your point, we recently announced a long-term, very significant contract for gadolinium. And to your point, it really speaks to the value of this incredible asset that we have in Mountain Pass, where we continue to find opportunities to invest capital at very attractive returns. And the way we have always managed the business as a management team is ensuring that there's durability there, right? The world can change tomorrow. We doubt that it really will from a scarcity perspective of these commodities. But what you're seeing and to your question on how the supply chain is reacting is you are seeing users of these products willing to commit over the long term at attractive economics to ensure that we have this capability in the United States, which is so critical. And so we continue to look at opportunities to grow that franchise.