USA Rare Earth, Inc. (USAR) Earnings Call Transcript & Summary

Okay. Welcome back to the to the first day of our natural resource conference. My name is Bill Peterson, U.S. metals and mining analyst and really pleased to USA Rare Earth to come back. They actually joined the conference last year, but a lot has changed since that time frame. And Rob Steele is the CFO, who's going to walk us through a couple of slides here. I want to keep it interactive. I've definitely got a lot of questions and there's so much going on in the space. So I have no doubt we'll use all 30 minutes wisely. So Rob, maybe over to you to introduce the company and where the company fits in the rare earth and magnet value chain.

Great. Thanks a lot, Bill. Great to be here today. USA Rare Earths mission is to secure, reshore and grow the rare earth industry for the United States and our allies. We started really on our current journey about 14 months ago when we despacked and raised our initial slug of capital. And over the last 15 months, we've raised approximately $2 billion of equity capital and made 5 strategic transactions along the way. Our most recent transaction is the acquisition of Serra Verde, which we expect to close sometime this summer for $2.8 billion. Our goal is to lead at every step of the value chain. And that would be, if you look at upstream, that's mining and processing and separation, midstream, that's metal making and strip casting and downstream, that's magnet making. If you start with our capabilities on the mining side, we are making the acquisition of Serra Verde, which is a light and heavy rare earth mine. It is only 1 of 3 producing mines outside of China and the only 1 of the 3 that produces heavy rare earths. It's also unique because it's fully financed by the DFC and the Department of War into full production and has 100% offtake with an SPV that is backed by the U.S. government and Goldman Sachs. And that SPV will purchase 100% of the offtake of their Phase 1 Pela Ema mine. In addition to that, in downstream, we own the deposit called Round Top. And Round Top is purely a heavy rare earth deposit that we are currently developing. We expect to be through our definitive feasibility study by year-end and publish our S-K 1300 early next year. That asset will produce a range of products on heavy side, dysprosium terbium gadolinium, but also gallium, yttrium, hafnium zirconium, all of which go for price as well in excess of $200 a kilogram. So it is an extremely viable and economic mine. We will not produce lights or any products that are subeconomic at that facility. Alongside with these 2 developing mines and deposits, we are producing separation and processing capability. One of our lines will be at Round Top to exclusively process Round Top. In addition to that, we are creating what we call our third-party MREC line, that's mixed rare earth carbonate line, which is really designed to process ionic clays. And that facility will be used to process Serra Verde and other ionic clays. In addition, alongside that line, we will have a recycling line that is capable of processing or from our magnet making. So about, call it, 15% to 25% of our feedstock going forward will actually be our own recycled product. At the midstream, we acquired LCM last fall. LCM was the only commercial scale metal and alloy maker outside of Asia, and we're rapidly scaling that facility in the U.K. and bringing that capability to the United States and into Europe. In the United States, we'll be expanding their capability to 10,000 metric tons of strip cast equivalent. And we'll be expanding their capability in Europe with our French project. We'll be scaling approximately 3,750 metric tons per annum of strip caster. And that's part of our announced French project in working with the French government. On the magnet side, we are standing up 10,000 metric tons on the back of our metal making capability in the United States, and those facilities will be at Stillwater, Oklahoma, which produce approximately 3,600 metric tons of magnets in Blacksburg, South Carolina that will produce approximately 6,400 metric tons of magnets. And as you see at every step, this is a value chain. So each of these steps in the value chain not only will be vertically integrated, but we'll also have elements of each business that will sell to third parties. So at the mine, we'll be selling different products like gadolinium or gallium or yttrium into the market. At metal, we already service third-party customers more than half our business is with third parties right now. And then, of course, magnets will be 100% of third-party business. So that's what we mean when we say value chain. All of our businesses are intended to be economic and stand-alone. I think the last point I would make before we get into Q&A is that we have unmatched U.S. and alloy government support. So we are backed by the Department of Commerce. We completed our $1.6 billion DFA here recently in the last month or so. We're also backed by the Development Finance Corp. at Serra Verde fully fanned in production. We have a $19.3 million grant from the Department of Commerce -- sorry, Department of Energy. We have $14.2 million funds from the Texas Chips Act is what we call it. We have significant support from the French government. They're a partner investing in Keister currently, and they also have expressed interest in supporting our development in the South of France. And then we also have offtake agreements and price floors via the SPV. So significant funding and significant support going forward. And I'll just pause there and we can jump into questions.

Yes. Thanks, Rob. Maybe I want to talk with some news -- that a couple of news items that came out in the last few days. One is around China and export restrictions. With these restrictions actually started last year. But now your company has actually been named as well as another U.S.-based rare earth company. What do you think are the key implications, I guess, both for you directly, but also indirectly, what is it signaling?

It proves the case. So the first question we normally get from investors is, do you think China is just going to reduce restrictions and we're going to go back to 2010? And our point is that we believe that there is going to be and there needs to be a bifurcated market going forward given the fact that China dominates well in excess of 90% of the market in fact, up to 99% of certain rare earth going forward. Rare earths contribute to about $10 trillion of our economy, and we can't have that be in the control of a third-party actor such as China. And this only proves the point that we need to stand up this capability outside the China.

Yes. And I guess the other piece of news as was from this morning where another peer that had been involved in kind of more in the midstream and a little bit of upstream is now moving into downstream space with magnets. Maybe you can take high-level view. What does this mean for the U.S. Magnet projects? There's been so many announcements? And how should investors consider the viability of all these projects as well as the competitive landscape next several years?

Well, first off, the transaction you're talking about is Energy Fuels acquisition of VAC, and we think this is a great transaction for them. In terms of magnet making capacity in the United States, we believe and as government believes that demand in the United States for rare earth magnets is approximately 50,000 metric tons plus or minus. In Europe, it's somewhere between 40,000 and 50,000 metric tons as well. The expectation is that this market is going to more than double over the next 10 years. What you have right now is USA rare earth, we've announced 10,000 metric tons by 2029/'30 that will be standing up. MP Materials has announced 10,000 metric tons and VAC has announced their initial phases of their facility, which is at 2,000 to 3,000 metric tons and there's another group, Novion at 2000 and Vulcan, which is trying to stand up a facility. All told, if all 5 of these facilities get up and running, there might be somewhere between 30,000 to 50,000 metric tons of magnet serving a 100,000 metric ton market over time. So we think there's more than enough room for all these facilities that come online. And it's also important to understand that there's a broad range of industries that are served by the magnet industry, everything from aerospace and defense to automotive, to industrial, to wind mills to all kinds of different things. Think of magnets as complex parts. Some companies will be better at producing block. Some companies will be better at producing small complex parts with advanced coatings. So there's going to be a range of opportunities for each of these companies to play a different role in the industry.

We'll get to your magnet business in a minute, but maybe just stick on the market environment. How should we frame the ex China market? You kind of gave some idea of how large it can be from a metric ton point of view? But I guess what's structurally the areas of growth especially in Western markets, what markets matter most for the Western players? And how should we think about future data or emerging demand, whether it be humanoid robots, drones or other applications?

Yes. So as I mentioned, 50,000 metric tons in the U.S., 40,000 to 50,000 metric tons in Europe, it's about 30,000 to 50,000 metric tons in Asia as well, non-China Asia. So you got some -- you've got some very, very large markets. If you were to do a breakdown of the industry about somewhere between -- and this is going to add up to like 120%, just so you know, because it's a bit murky. 30% to 40% are industrial motors, 30% to 40% are mobility, that's automobiles, EVs, heavy equipment and heavy equipment, this is where as of [indiscernible] overlaps a little bit with industrial. Then you've got about 10% of the industry is aerospace and defense. You've got windmills at 7% to 9%, you got health care at somewhere between 10% to 15%. And that's roughly what the industry looks like today. Over time, you have massive growth of certain industries. So when we think about things, we talk about humanized robots, but just look at industrial automation. Industrial automation is supposed to grow 45-fold. That's a lot of industrial robots. Those are industrial motors. And so those motors would fall in the industrial category. So that is just massive growth in that category. Then you have data centers. Each data center will go through 20,000 to 40,000 drives a month. Each of those drives will have a magnet in it. Each of those drivers will also have cooling, which involves motors, which involves magnets, you think about a lot of magnets coming in and out of the data center market. And then there's humanoid robots. If you listen to what Elon Musk says, he says they're going to be 1 billion of these things, take it with a grain of salt and let's say, there's 100 million of these things. That's a lot of metric tons of magnets going forward. And then we haven't even touched about aerospace and defense, which sort of the obvious one, look at Ukraine uses approximately 4 million drones a year for their limited war, I guess it's limited or it's a real war, but it's in a limited zone in the Ukraine. The United States only has plans for 100,000 or 200,000 right now, but clearly needs to send that up and they're aggressively doing that. So if the U.S. is going to produce millions and millions and millions of drones that means we need millions and millions and millions of magnets going forward. So a lot of opportunities for growth. We're working with all aspects of the industry right now. So we are working with drone companies. We are working with semiconductor companies. We are working with industrial motor companies, and we're working with mobility companies and heavy equipment companies, but we're working everywhere right now.

Before diving into your business, I want to talk a little bit about policy support and this slide summarizes various jurisdictions, but -- and you clearly benefited as this slide points out, but how do you see further policy support evolving in the U.S. as well as Western allies. And I guess we're also aware that there's bipartisan house selecting committee on China introduced for additional magnet metal and production tax credits. How important is this legislation and what can it mean for USA Rare Earth specifically?

I mean I think all the support is really important for an industry that is not only completely dominated by China, but is also heavily subsidized by China and also uses industrial practices, which are far from adequate in the Western world. So when you have a significant price advantage and control advantage with an actor that will use this as political leverage. It's going to be really important that we similarly have some available tools to help us stand out this capability outside of China. I mean there's talk not only of the legislation on tax credits, they're project Vault which is going to allow companies like ours to sell metal or potentially magnets into the vault or raretoxides and rare earths into the vault. There's talk of consortiums forming with Western nations for not only price support, but market prices and/or different types of mechanisms to be able to support and/or invest in the market going forward. One of our best partners right now is France. They're one of the most forward leaning alongside Japan with investing in the rare earth industry right now. And we're hearing talk of other governments beginning to come online as well to be able to support their industries, which are also dependent on rare earth and rare earth magnets.

And coming to your strategy, maybe starting with the upstream, first at Round Top. So you have the PFS expected to be published around the end of the third quarter and I think DFS soon after. What are the gating items that can move the PFS and DFS time lines? How is the sheet progressing? And what is the -- how should we think about the potential of the project?

Yes. So just to correct that a little bit, our plan is currently to finish the DFS by year-end and publish our S-K 1300 next year. So that's our target plan. We do have an interim step internally that will be working through in Q3. The key there is really working through our flow sheet with our Hydromet facility and gathering the data necessary support our DFS going forward and proving that we can make various forms of oxides using our separation process. And so as you think about standing up, which you should be expecting from us is to be -- us to be able to talk about some of these progress throughout the year, which is what we're going to be doing going forward.

And then in Serra Verde, which you point out is a producing mine, pretty rich and heavies. You spoke to the rationale, but I guess there has been some news about the Brazilian government maybe taking action. I don't know. How would you respond? And how do you see this project evolving longer term?

Yes. So Serra Verde is currently owned by a holding company that sits outside of Brazil. That holding company is currently owned 2/3 by American private equity funds and 1/3 by a British basically family office, private equity fund backed by Ceramic Davis. So Serra Verde is already foreign owned even before this transaction is taking place. Because this entity is owned outside of Brazil, there's actually no transaction happening in Brazil so there's no change in control. What that means structurally is that the Brazilian government technically does not have jurisdiction over the mechanics of the transaction because there is no change in control. I would also say that Brazil does not have a history of nationalizing any assets in any industry at all, even though it views to be important such as mining. Moreover, in the mining industry, in particular, there are several mines that are already foreign owned, such as ours, Anglo American own several mines in Brazil right now. What we see is that in Brazil, there are elections going on right now going into the fall, and this is basically a result of the election process.

Yes. Maybe touch on the midstream and some of your slides kind of point out with the acquisition of LCM, you've taken a stake in Carester. How do these fit in the portfolio? And I guess, how would you characterize your expertise across separation, refining, strip casting and metallization?

I mean expertise is the key thing. These are industries that almost disappeared entirely outside of China. I mean it's literally -- you sort of have the last company standing in the industry right now. And what's important is basically as best you can, getting the capacity and the capability, the intellectual property and the knowledge base of what is here and making sure you have access to the best of the best. And so we are standing up our own processing capability with super highly qualified people here in the United States. But we also recognize it's important to support our processing capability, our metal processing and a potential in the south of France. That's why we invested in Carester to be able to help there. But that deal also gives us access to their intellectual property is one of the very few processors outside of China and probably the best known heavy rare earth processor outside of China as Frederic Carencotte.

I guess can you speak maybe a little bit more detail on the synergies there, right? You have Carester in France and maybe that flow sheet can be replicated somewhere else from your ability to handle the various kinds of feedstock. You mentioned MREC for example. There's -- feedstock is so important and it needs to be pretty fine-tuned as far as I understand.

And that's why this is really cool with Carester and their capability and our capability. So the lines we're standing up in separation in the United States are bespoke lines, meaning the separation line for round top is really designed for round top. So it's going to be optimized for that, which means it will be the lowest cost of separation for Round Top. Similarly, our third-party MREC line, which will process ionic clays is being optimized for Latin American ionic deposits. So it's going to be really, really good at that. Similarly, our store facility is designed for that. Carester alternatively has taken a different approach, which is pretty awesome. Their approach has been, hey, let's work with a broad range of feedstock providers and mines, have them -- help them process their ore into an intermediate product that's somewhat similar, so a similar product across different mines that we in turn at Carester can process into the finished product. What's key there is because France has limitations on radio nucleide, it does have to be radionucleide-free, whereas our third-party MREC line does not. But it is a really interesting way of processing. And so you can imagine that we have access to that capability in the south of France. And as you think about growth in the space, which is substantial. So there's going to have to be a lot more processing capability, separation capabilities stood up. We have access to the Carester technology to be able to assist with anything we're doing globally.

Great. Maybe moving a little bit further downstream to the magnet business. I guess, maybe first, if you could set the stage, how is the Stillwater plant progressing on, I guess, in terms of Phase 1a?

Yes, it's early. So we just commissioned Phase 1a here this spring, and we're currently in the process of specking commercial-grade magnets for our customers. The process of signing up a customer is multifold. The first thing we do is provide them with lab samples, which they in turn test. And once we get through initial testing, then we start producing the grade that they're looking for, and we have the capability to produce on a commercial grade line. And then from there, they test and we rework the product until we get into in the order. So we're in that phase of producing more advanced formulas at commercial scale and working with our potential customers to get to a product that we can ultimately sell under a purchase order or a supply agreement.

Can you -- I guess, can you speak a little bit with more granularity on what type of customers you're working with today and how that should evolve? I mean I think last year, it was more like electric tools and small-scale things. Now maybe EVs and we've mentioned earlier about the markets...

A little bit more electric tools. I mean the way we think about -- you have to think about your customers over time in the context also of your magent grades. So when you start with are the simplest magnet grades using heavies, and then you work your way up, up the chain, and there's over 40 general grades of magnet types. The customers that we're working is we are working with power tool customers. But we're also working with drone companies. We're working with automotive parts companies. We're working with aerospace and defense companies of different types. We're working with energy companies. Most of our products are going to go into motors right now. So there are a lot of products that go into motors or different types of actuators going forward.

And I guess how should we think about the evolution beyond Phase 1a and to reach your ultimate, I guess, I don't know, it's an ultimate goal...

Yes. So we're going to be scaling Stillwater at 3,600 metric tons, line 1b, which is our next 600, getting us to 1,200 metric tons will come online in Q1 of next year. And then really, the acceleration of our lines really happens when we start scaling up Blacksburg, which is going to be in the first quarter of 2028. That's when that facility starts having equipment installed, and we start going through our commissioning process in the second half of '28.

In terms of, I guess, downstream of that, we can think of actuator companies. Obviously, you've been pretty acquisitive would there be appetite to even go further downstream into the actuator or other down the motor side or...

Yes. I mean there's -- people talk about it. I think it's too soon. right now. I think we really need to -- for me, I would focus on making sure we can do the basics here, which is let's get some magnet customers, let's get up and running there. But going forward, you can easily see how we would get into the more complex builds for our customers going forward, or work with somebody more closely that's doing that, and we can bring that capability back to the United States.

Yes. we've been -- again, we hosted the team last year, and things have dramatically changed in terms of what you've acquired and what's yet to come. So it feels like there's a lot on the plate. How should investors think about the execution in terms of what's in your control? What's not? What what should be -- is there things that we should be worried about that just not obvious?

Yes. I mean I think it's -- there's -- I mean things that aren't under control or how other elements of the industry could stop, how governments react, those types of things. Right now, in that regard, everything has been extremely straightforward and positive. I mean, I think, frankly, there are always the unknowns, like you worry about like what extraneous could happen that we should be worried about. I would tell you that most of our focus right now is mostly on execution. So I mean that's what the worry is. Let's execute.

And I guess how do you is this higher in the right people? How is that?

It's hiring the right people, which is extremely important for a company like ours. So the screening process is really critical because this is hard work, and we expect a lot of our people. Our people are awesome. They work really, really hard and they're extremely driven. If you were to see our team in Wheatridge Colorado developing the mine, it looks more like a silicon valley software shop than it does an industrial facility because these people are working 24/7. 24/7 is our labs. So certainly having the right people is critical. And it's the thing to have the right people on our factory floor. It's also the reason why we have 2 facilities, we diversified our facilities across Stillwater and Blacksburg to make sure we had access to the right talent going forward and didn't oversaturate any given market.

Yes. And maybe kind of moving on the sources of cash. So the $2.7 billion in committed and proposed, just can you remind us of how much that actually has been committed thus far and what is yet to be, I guess, inked and what are the key milestones to secure the additional [indiscernible]?

Yes. I mean, so of this $1.6 billion, $565 million, $19.3 million, $14.2 million have all been committed. The offtake has been committed. The Carester investment has still not been finalized yet, but that's going to happen here in the next few weeks. The French incentives have not been committed yet. Those are under intent. So they intend to help us out. And there's also other things we're doing right now that could augment this.

I want to stop and see if there's any questions before moving on. Any questions? Okay. Maybe in terms of uses of cash, how should we think about the CapEx profile for this year and over the next few years?

Yes. I mean, so I mean the CapEx profile for the business we've talked about, it's about all of our projects from the start of this year, so excluding everything we spent so far this year, it's going to be about $4 billion going into 2030. Our sources of cash right now are -- you think about those sources, we've got about $1.75 billion of cash on our balance sheet. We've got all these different funding sources going forward. We have Serra Verde, which is going to be throwing off significant cash as it ramps into its into its capacity, which not only gives you cash flow, but you think about debt capacity of a flywheel business that's selling into a government-backed SPV, there's significant leverage, so we have a number of different options in front of us. And obviously, we have our common stock. And as you've seen, we've raised $2 billion in equity so far and have been judicious and smart in how we do that, and we would expect to be going forward.

How does acquisitions at this -- I mean I mentioned actuators, but I mean, is your portfolio pretty well set at this point is about execution? Or is there other parts of the portfolio you would think about augmenting?

Yes. I mean -- so I think for us, as you see, what's really important to us is acquiring capacity. It's acquiring operations in the space. It's acquiring the right people. and also intellectual access to intellectual property. We believe all of these things are extremely important. We also believe that those things are resident in other companies and other opportunities out there. Now we can have access to them through supply agreements, investments, JVs, partnerships and acquisitions. And we're looking at all of the above because we really believe there's additional opportunities to augment what we're doing.

I guess as we wrap up, you mentioned that Round Top is one milestone. What are the additional milestones that investors should be looking out for, for the balance of this year as well as next year?

Yes. I mean the first thing is capability. look for us announcing additional capability. And that capability could be things we're doing and progress we're making in Round Top. It could be progress we're making with metal making capability recently. We announced the ability to make yttrium metal. We're the only company outside China that can make yttrium metal. It's things like that. It's capacity, standing up additional capacity as we come online. At magnets, it's going to be additional capabilities like additional magnet grades, additional types of technologies that we are currently working on that we hope to be able to announce. And then ultimately, across the value chain, its customers. So look to customer announcements along the way to the extent that our customers will allow us to now some of our customers who source from China currently are reticent to let us announce their names, but there are some that are, and you'll be seeing those as we go forward.

Well, Rob, 30 minutes is up but I really appreciate you sharing your insights, and we look forward to following the progress. Thank you.

Thank you.