MP Materials Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 13 speakers on the call.

Operator

Good afternoon. Thank you for attending today's MT Materials First Quarter Earnings Call. I would now like to pass the conference over to your host, Martin Sheehan with MP Materials. You may proceed.

Speaker 1

The call.

Speaker 2

Thank you, operator, and good afternoon, everyone. Welcome to the MP Materials First Quarter 2023 Earnings Conference Call. Call. With me today from MV Materials are Jim Lutinski, Founder, Chairman and Chief Executive Officer Michael Rosenthal, Founder and Chief Operating Officer the call. Brian Corbett, Chief Financial Officer.

Speaker 2

As a reminder, today's discussion will contain forward looking statements relating to future events and expectations that are subject to various assumptions and caveats.

Speaker 1

The call.

Speaker 2

Factors that may cause the company's actual results to differ materially from these statements are included in today's presentation, earnings release and in our SEC filings. The call. In addition, we have included some non GAAP financial measures in this presentation. Reconciliations to the most directly comparable GAAP financial measures call can be found in today's earnings release and the appendix to today's slide presentation. Any reference in our discussion today to EBITDA means adjusted EBITDA.

Speaker 2

The call. Finally, the earnings release and slide presentation are available on our website. With that, I'll turn the call over to Jim. Jim?

Speaker 3

Thanks, Martin, call. And thank you all for joining us today. Let me start with an overview of today's call. I will begin with the highlights of the quarter, including a Stage 3 update. The Ryan will then review our financials and KPIs.

Speaker 3

Michael will then provide an update on our Stage 2 optimization at Mountain Pass. The call. I will then return with closing comments and then open it up for Q and A. So let's get started on Slide 4. The We continue to execute well in our Stage 1 upstream business.

Speaker 3

For the 8th consecutive quarter, we produced more than 10,000 metric tons of rare earths the in concentrate. Sales volumes were similarly strong, allowing us to generate solid adjusted EBITDA and related margin, the quarter despite challenging realized price comparisons. I know pricing is a topic on the minds of investors and I will share some detailed perspective on that later in the call. The Moving on to stage 2. Commissioning has been making steady progress and we have begun to process a portion of our roasted concentrate through our leach circuits.

Speaker 3

The This means we are closing in on the even bigger milestone of recommissioning our light rare earth separation circuits. To reiterate what we have said on prior calls, the The commissioning process is painstaking with stops and starts, but we remain on track towards soon producing separated rare earths the quarter and reaching run rate production by year end. Michael will provide a more detailed update in a moment. The quarter. Another important development in the quarter relative to our midstream business was the signing of an additional tolling agreement to convert a portion the call.

Speaker 3

For those of you unfamiliar with tolling agreements, tolling is a process whereby a third party processes our materials the Q4 of 2018. In our case, turning our oxide into a metal for us. Producing and selling NDPR metal, the call. In addition to oxide, ultimately expands the market for our materials, supports our low cost production profile the quarter and expands the direct customer base for our products. Notably, Japan is the largest manufacturer of neodymium magnets outside of China, the call.

Speaker 3

The Japanese magnet makers have limited oxide to metal conversion capacity and have historically depended on facilities in China or Southeast Asia.

Speaker 1

The call.

Speaker 3

Combined with opportunities afforded by our Sumitomo relationship, this agreement will enable MP to maximize and extract more value the from our sales of NDPR products to customers in Japan and other global markets. Moving on to Stage 3, Downstream Magnetis. The process engineering and long lead procurement continues to rapidly advance. Our Fort Worth engineering and manufacturing team is gathering talent and getting stronger. The call.

Speaker 3

The internal structure of the factory is taking shape. We are preparing for the arrival of the first phase of electro winning and stripcasting equipment, the call, which will be needed to meet our goal of delivering Alloy Flake later this year. We are observing factory acceptance testing of this equipment at key vendors and are the quarter. So planning the final connections between this equipment and the building infrastructure. Importantly, our business development pipeline remains robust.

Speaker 3

The call. Therefore, to summarize, for what was within our control, execution, Q1 was a quarter of great success across all streams of our business at MB. In addition, in April, we surpassed 3 years without a lost day due to injury.

Speaker 1

The quarter.

Speaker 3

That's over 2,000,000 work hours. I am very proud of the team for this important achievement that we must continue. The call. I will come back for closing comments and address pricing and the marketplace. For now, let me turn it over to Ryan for the financial and operating metrics.

Speaker 3

The call.

Speaker 4

Ryan? Thanks, Jim. Turning to Slide 6 and starting on the left hand side of the page. You'll see the consistent level of production Jim mentioned the quarter both in our year over year and sequential comparisons with 10,671 metric tons of REO and concentrate produced in the quarter, plus or minus 1% or 2% of the comparable periods. In addition, we sold 10,215 metric tons of REO, the quarter, which was 13% below last year and 6% lower than the Q4.

Speaker 4

These variations are virtually all due to timing of deliveries. The call. As of Q1, we had consumed only a small portion of the nearly 2,000 metric tons of work in process inventory the call and will be used in commissioning of our refining circuits. With continued progress, we are preparing to feed material into additional refining circuits, which we're very excited about. The call.

Speaker 4

What that means is that starting in Q2, we would expect to process a significantly greater volume of our concentrate production through our refinery. The Some of this inventory build will be an investment in permanent work in process, while some will become separated rare earth oxides available for sale. The call. Meanwhile, as our commissioning teams work tirelessly, we are continuing to make progress improving the stability and performance of our drying and calcining circuits. The quarter.

Speaker 4

As such, nearly 30% of our sales in the quarter were comprised of roasted concentrate. Moving on to realized pricing, and EPR recovered a bit from the 4th quarter, the quarter, resulting in a 10% sequential increase to $9,365 per metric ton of REO. The call. As you know, our realized pricing tends to follow the market price of NDPR oxide with an approximately 1 month lag. The So we benefited from the recovery in prices from December to February.

Speaker 4

Still compared to Q1 of last year, the Pricing was down 32%. Recall that NDPR prices hit recent highs in late February to early March of 2022, the quarter, which boosted both Q1 and Q2 twenty twenty two realized pricing. Since this most recent February, however, call. Jim will discuss our views on this in a moment, but expect at least a 35% sequential decline the quarter and realized pricing in Q2 given the recent softness, assuming current prices hold throughout the quarter. As always, the period of greater pricing volatility with our Fortress balance sheet, our low cost and cash generative upstream Stage 1 business the Q1 and an unwavering conviction in our downstream integration strategy.

Speaker 4

We have been strategic in how and when we raise capital call and we have remained committed to preserving our conservative balance sheet, specifically because of the leverage inherent in the business from commodity pricing. The call. With nearly $1,200,000,000 of gross cash and short term investments and the major lift and cost risk of stage 2 construction behind us, the quarter. Our position as a U. S.

Speaker 4

Champion in this critical industry is even more evident. Finishing on the far right of the slide, year over year production cost quarter totaled $19.78 per metric tonne of OREO in the quarter, up 24% from last year. The primary driver of the increase was the scale benefits the quarter. The increase was primarily due to higher sales volumes in last year's Q1 as well as higher headcount related to the ramp of Stage 2 headcount and to a much smaller extent the impact of cost of living adjustments made last year as well as higher materials and supplies costs. Sequentially, cost per metric tonne increased 3%.

Speaker 4

The presentation. As a reminder, as we move to the back half of the year and begin preparing to migrate to Stage 2 production,

Speaker 1

the quarter. Some of these

Speaker 4

stage 1 KPIs will become much less relevant. And as such, we expect to evolve the KPIs we report to you as we transition to separated products the Q1 and were earth metal sales. Moving to Slide 7, revenue of $95,700,000 in the quarter decreased 42% year over year, quarter, driven by the 32% decline in realized pricing and the 13% decline in sales volumes discussed on the previous slide. The quarter. Sequential revenue increased 3% as the 10% increase and quarter over quarter realized pricing was partially offset by the decline in sequential shipments.

Speaker 4

The Continued solid cost control allowed us to generate $58,700,000 of adjusted EBITDA and related margins of 61% in the quarter, the quarter, both slightly up from Q4, but down year over year due to last year's strong pricing environment. You can also see the flow through of last the strong pricing and the adjusted diluted EPS comparison where in last year's Q1 we earned $0.49 the quarter versus $0.27 in this year's Q1. And as you will recall that in the Q4, we had a large discrete tax benefit, quarter, which helped drive $0.42 of adjusted diluted EPS. Cash from operations in the quarter totaled about $55,000,000 the quarter. And our CapEx spend was nearly $75,000,000 Removing roughly $71,000,000 in growth CapEx, the quarter.

Speaker 4

Cash flow conversion remained very solid at $51,000,000 after maintenance CapEx. Similar to the Stage 1 operating KPIs that will be sunsetting, the call. We expect Stage 1 free cash flow to be less of a relevant factor in assessing our performance as we turn our production focus to Stage 2. The call. To that end, I would add that we remain on track to spend roughly $300,000,000 in CapEx this year, with the very tail end of Stage 2 spend the quarter and accelerating investments in our heavy separations and Stage 3 projects.

Speaker 4

I would add that in the last two quarters, we have put over $200,000,000 of assets into service. The call. And as such, we saw a $3,000,000 increase in depreciation compared to a year ago. As the remaining Stage 2 assets ramp, the quarter. You should see depreciation continue to increase as more capital assets are put into service throughout this year.

Speaker 4

The quarter. Lastly, we continue to expect to generate NDPR sales in the back half of the year with sales being quite back loaded the Q1, given our expectation on the ramp in production. I would also remind you that we expect a lower margin profile on these initial sales, as you'd expect, the quarter until we can scale to full run rate production and smooth out our operations. Before handing the call over to Michael,

Speaker 1

call. I'd just like to add a couple of thoughts

Speaker 4

on our tolling arrangement. Under this tolling arrangement with Vietnam Rare Roof Company, the MP will retain ownership of the product through the metallization process, paying a conversion fee for each metric ton of metal produced. The Therefore, as we ramp oxide production and utilize this channel, you can expect to see us report revenue generated from NDPR metal the call with the tolling fee included and our cost of goods sold for our metal products. Note that this sales channel will in the early stages

Speaker 5

the call. Come with

Speaker 4

a little longer working capital cycle as we invest in supply chain inventories in order to maintain stable metal reduction operations. The While the oxide material is in transit and being converted, it will remain in our work in process inventory a bit longer through the end to end process. With that, I'll turn it over to Michael to give you an update on operations and Stage 2 commissioning. Michael?

Speaker 6

Thanks, Ryan. The It was a busy quarter for commissioning and things have picked up steam into 2Q. Our commissioning, operations the and process engineering teams have taken an increasingly active role in checkouts and start up activities. In the Q1, much of the focus was on completing the pre commissioning the call over the remaining legacy and new circuits, including equipment checkouts, water runs, instrumentation calibration, the tuning loops and trial operations with critical equipment vendors and addressing the findings from these exercises. The call.

Speaker 6

At the same time, we continued to make progress on improving the consistency and throughput of the drying and roasting assets. During the quarter, we turned these assets over from the commissioning team to our operations team, freeing the former to focus their attention on the next circuits in the flow sheet. The The remaining assets of our brine treatments and recycling circuit are in the final stage of commissioning before full commercial operations of the entire system begins. The Importantly, we are moving closer to producing finished MBPR oxide. As we enter 2Q, safely advancing through the start up of leaching and impurity removal and ensuring high purity rare earth solutions to feed separation circuits are our highest commissioning priorities.

Speaker 6

The After that, product finishing encompasses precipitation of purified rare earth from solution, filtration and conversion to oxide. The It's still difficult to predict the trajectory of our ramp, but there is no doubt we are now on it. I'd like to reiterate that startup will not be a linear process. The We expect a lot of ups and downs literally and figuratively. The trajectory of the curve will be determined at the equipment level by reliability and throughput.

Speaker 6

We expect certain operations to ramp throughput slowly but steadily, others to meet run rate quickly but struggle with reliability, the Others to operate reliably, but struggle with throughput. And occasionally, we will get lucky with a piece of equipment that operates to design on startup with no problems at all. The So we expect this to be the exception. I continue to be extremely impressed with the quality and dedication of our teams. The Experienced and new operators and maintenance staff, engineers and trainers are collaborating to speed our mastery of the new and legacy circuit.

Speaker 6

The So as long as we remain focused on the safety of our employees and on making decisions that are in the best long term interest of our operation, We are confident that we can achieve our planned run rate production by year end, while maintaining our low cost position and industry leading environmental sustainability. The Not to be overlooked and a key part of maintaining our low cost position, our Stage 1 operation continues to operate stably. The Behind the scenes, we are increasing our R and D to address low hanging fruits and longer term growth opportunities. The In the Q1, we began an in plant pilot of alternative flotation equipment. At the same time, we completed long lead procurement the and begin construction on a long awaited project to improve our grinding circuit.

Speaker 6

We expect this to increase throughput potential and mineral recovery. The call. As I've mentioned previously, we are extremely optimistic about the opportunity to improve the quality, quantity and cost structure of our concentrate production. The In addition to the tremendous job that the team is doing in terms of both stage 1 production and stage 2 commissioning, our focus on safety remains front and center for us. The As Jim mentioned, but I think it's important to reiterate, in April, we surpassed 3 years or over 2,000,000 work hours without a lost time injury.

Speaker 6

The I think this is a testament to our safety first owner operator culture. So I just want to thank the team for all their hard work and their focus on doing it safely. The call. With that, I'll turn it back to Jim. Jim?

Speaker 3

Thanks, Michael. Before Q and A, call. I would like to cover a few topics that are on the minds of many investors, including pricing trends, product substitution the and the potential for Chinese export restrictions around rare earth processing and magnet making technologies. On pricing, the NDPR began the year around 102, which was down from a 2022 peak of 175. The The declines continued throughout the Q1 with pricing now in the low 60s.

Speaker 3

To put it bluntly, the I'm surprised. I would say I'm actually very surprised, but not shocked. As you all have heard me say many times before, the quarter. Commodities do almost anything in the short run. After all, oil even traded to a negative price in 2020.

Speaker 3

The Some of the price action may be explained by recent economic woes for what I would call legacy sectors like hard disk drives or ICE autos. The call. Recall that nearly 80% of the market for rare earths today still comes from uses within these kinds of products. The Moreover, global EV sales for Q1 2023 were weaker than expected due to the expiration of certain subsidies in China the quarter and combined with higher interest rates likely had a significant impact. Sales in China appear to be rebounding strongly since March however.

Speaker 3

The Despite this recent blip, global EV sales penetration is still only in the low teens percentage, so the long term demand trend remains the explosive. We believe the compounding effect of high growth in electrification will far outweigh any legacy the call or other short term weakness and then some over even a moderate amount of time. What is interesting, the Perplexing and quite likely bullish for the medium to long term outlook is that with NDPR where it is now, the We believe that the Chinese rare earth industry will be unprofitable at current prices. Chinese data is admittedly quite opaque, the But our analysis as well as industry discussions suggest this to be the case. Moreover, at these price levels, the call.

Speaker 3

It is hard to see positive economics for any greenfield project in the West, and it is very likely that anything in progress now can expect significant the capital disruption. I would remind you of 2 important things to consider from MP's perspective. First, the From the beginning of our public life, we made clear that MP would have an owner operator culture where we would sacrifice near term opportunism the call. As I like to say, we want the leverage in the commodity price, not on our balance sheet. The call.

Speaker 3

A company's capital structure must reflect the underlying volatility of its industry. 2nd, the We believe that MP is on track to being the world's low cost producer of NDPR oxide. Our balance sheet, the operational execution and long term focus give us the runway to ride through pricing cycles. The I also want to reiterate the point about capital formation. In my estimation, with NDPR anywhere lower than around $120 per kilogram, the New projects with realistic assumptions are simply uneconomic, and that is before one considers the significant time, the Risk and human capital it requires to be successful.

Speaker 3

Put simply, our industry has a very high cost of capital for new entrants right now. The This means the long term upside volatility for MP to benefit from demand trends across the various electrification categories the This leads me to my next topic, substitution. The If you listened to our call a quarter ago, you heard me talk about NDPR supply demand imbalance as the world electrocods. The I cited estimates suggesting that the demand for NDPR potentially seeing a 200% increase over the next decade or so the

Operator

Q1 of 2019. To meet

Speaker 3

that demand, I highlighted how that was the equivalent of needing 15 mountain passes the call to come online over that same time period. We know this is not going to happen. For all the reasons we previously outlined, the call. We made clear it likely would not happen with NDPR at virtually any price. After all, even getting one new mine of globally relevant the quarter.

Speaker 3

Consider all the human, financial, environmental, permitting and political challenges to do so. The And that, of course, assumes as project table stakes, the discovery of an economic ore body that would make all that worthwhile. The The idea of that happening with 15 projects within 10 years is not realistic. So we were not surprised the quarter. When Tesla at their Investor Day highlighted their concern over rare earth supply and environmental challenges around mass market adoption of electric vehicles, the It should not shock anyone that they aspire to produce a vehicle without a rare earth magnet motor.

Speaker 3

The The issue has been and remains what are the size, performance, efficiency and pricing trade offs the call. For some applications like an the operational mass market EV priced under $30,000 that does not yet have a factory. Substitution must occur the Because the math, particularly the supposed volumes, suggests it is likely not realistic otherwise. For most other EV applications, the Like those involving performance, luxury, SUVs, full size sedans or consumer trucks the And certainly with other electrified motion applications like robotics, offshore wind turbines, drones or other military uses, the call. There is virtually no way material substitution will occur at any price given the constraints.

Speaker 3

When you add all that up, we believe, the As even Tesla and many others have pointed out that the demand picture for rare earth magnets remains exceptional. The I would also add that my team spent significant time with a number of OEMs as well as other producers of a variety of products that utilize rare earth magnets. The call and virtually all have rarer magnets on their production roadmaps for the foreseeable future and production roadmaps are not easily changed overnight. The With that, let me briefly touch on the recent news that the Chinese Commerce and Technology Ministries have drafted a list of amendments, the which would either ban or restrict exports of certain magnet manufacturing technology. We will see if these ultimately go into effect the call.

Speaker 3

As they are evaluating comments from Chinese industry. Needless to say, we get questions about this potential change. The call. As you can imagine, given that the Chinese dominate the magnetics industry, they similarly dominate magnetics tooling and equipment production, the call. But we have purposely avoided major buys of equipment and technology from China for our Texas facility for this express reason.

Speaker 3

The call. So we do not expect any issues from this. Additionally, NDFEB permanent magnets have been manufactured for roughly 40 years. The call. The process itself is well understood and approximately 10% of world supply is made in Japan.

Speaker 3

Such limited Japanese share is not the due to access to Chinese process technology or equipment. It is primarily due to challenged access to separated rare earth oxide and metals. The Therefore, MP with our upstream and midstream supply chain is in a good position regardless. The call. The real bottom line of the potential Chinese ban on technology exports is that it further highlights the critical importance the call.

Speaker 3

Of the American Magnetics Champion, we are building an MP as well as the significant overall long term value of our asset portfolio the Q and A session. With that, let's open it up for questions. Operator?

Speaker 1

The

Operator

call. The first question is from the line of Corinne Blanchard with Deutsche Bank. You may proceed.

Speaker 7

The Hey, good afternoon. Thanks for taking my question. The first one would be maybe more on the financial side. There was the Few adjustments to the EBITDA this quarter. Is that a trend that we can expect in the coming quarter?

Speaker 7

The And then on that, thematic as well, could you comment a little bit about the cost like dollar per ton that we can expect the next quarter.

Speaker 4

Yes. Hey, Corinne, it's Ryan. I can take that. Thanks for the question. The In terms of the EBITDA adjustments, I assume primarily what you're looking at would be, start up costs, which is a category that we've had for the last couple of quarters as we've gotten into the depths of commissioning of Stage 2.

Speaker 4

I would say as we get the quarter. And Michael gave some color on how that activity is picking up pretty rapidly in this quarter. I would expect to see the Those costs pick up a little bit certainly in Q2, and I'd expect them likely to start to come down over the course of the year as the move into what we call more run rate or commercial production of separated products. The In terms of your question on the cost per metric ton, as I talked about in my prepared remarks, the The primary driver there is the continued growth in headcount as we get ready for these circuits to be in service. The call.

Speaker 4

As you can imagine, we're going from operating effectively a milling and flotation facility and ancillary support facilities the to adding multiple more facilities into service. So the burden from maintenance the facilities, utilities, things like that have started to pick up ahead of entering into commercial production of these products. The And so that's primarily the items that you're seeing. And so those items that are not specifically related the Two commissioning activities tend to flow through the cost of goods sold of our existing product. Those items that are specifically related the to commissioning and not related to a salable product find their way into the start up cost category.

Speaker 4

As we look out over the course of this year, I'd expect the similar trend in cost per metric tonne as I mentioned on the start up cost. As we bring these things online, certainly there'll be an initial the margin profile that will certainly look a lot different than when we hit escape velocity and hit run rate production. So hopefully that gives you a sense.

Speaker 7

The Yes, that's very good. Thanks. And maybe as a follow-up and shifting gears a little bit here, mostly the broader market, but the Any view on the current NDPR metal processing capacity that is in Southeast Asia, maybe outside of China and Japan, the That would be helpful to get a view there.

Speaker 4

Sure. I think one of the items that we talked a bit about in prepared remarks is, our tolling arrangement for, some metal capacity. There's a variety of potential options forward metallization in Southeast Asia, maybe 6 or 7 different facilities out there. We're obviously very pleased with our ability to get dedicated the Q1. As you can imagine, with the Japanese magnet industry and the growth that they expect, the They are seeking the ability to purchase both metal and oxide.

Speaker 4

So with the ability to do tolling the of oxide into metal that just broadens our market opportunity for our products. And so I would expect that this the announcement we had this quarter is hopefully the beginning of many. We continue to evaluate other metal tolling facilities through our Sumitomo relationship and otherwise. The And of course, this is in addition to our downstream strategy in the United States. And so putting all of that together, the call.

Speaker 4

We're excited about the potential for a significant amount of our oxide to make its way through that sales channel, which again It's just a great way for us to continue to broaden our market opportunity.

Speaker 7

All right. Thank you, Orion. I will jump back in the queue.

Operator

The Thanks, Graham. Thank you, Ms. Blanchard. The next question is from the line of Carlos De Alba with Morgan Stanley. You may proceed.

Speaker 8

Yes. Thank you very much, gentlemen. So the Just in terms of the headcount ramp up as you expand the operations and Stage 2 and Stage 3, the call. Where are you on that process? You're maybe trying to calibrate from the prior question also the quarter.

Speaker 8

What the calls will look like in the coming quarters? That will be my first question. And then my second question is just coming back a little bit to the prepared market inventories. I just wanted to make sure the That I understood. Two thirds of your sales will comprise of raw steel concentrate in the second quarter already or more like in the second half of the year?

Speaker 8

The And then the level of inventories that you currently have is around 2,000 tons the of inventories that will be consumed in the coming quarters in the separation circuit.

Speaker 4

Okay, Carlos. It's Ryan. Let me take the second part of that first and then I'll flip it to Michael to talk about staffing. The quarter and thinking about how we consume our current products into the downstream circuits. The I note that the point we're trying to make is this quarter you did not see a significant departure of production versus sales.

Speaker 4

The call. As we move into Q2 and into Q3, we'll see an increasing amount of our the production of Oreo being consumed into the downstream circuit. I think the other question that you asked the Is that is about the amount of roasted concentrate that's going to get sold or was sold. And just to clarify, I think you might have had the numbers backwards. It the About 30% of our sales this quarter was of roasted concentrate.

Speaker 4

The rest was of our standard concentrate product. The As you know, what we plan to feed the downstream circuits with is the roasted concentrate. And so the I think the two things to keep in mind that we wanted everyone to be sure to understand as they model the business over the rest of this year is the You will start to see that detachment of Oreo sold versus Oreo produced as we consume that over the next couple of quarters and we flag the up to about 2,000 metric tons of REO that will find its way into the downstream circuits. And certainly, that the 2,000 tonnes will be made up of roasted concentrate. Hopefully that answers your question.

Speaker 4

Mike, do

Speaker 5

you want to jump in on staffing?

Speaker 6

The Thanks, Ryan. We've had a significant number of the Stage 2 staff the on our payroll already for several months or for more than several months in training, in cross training, probably through at least 3 quarters of the total hiring, perhaps even a little bit more. We will see a slight increase in some of those staff over the next quarter or 2. The That may be offset by some third party contractors, which will be not including the construction, but third party contractors, which will come off. So I think overall, the cost the structure already includes a significant portion of that burden.

Speaker 1

All

Speaker 8

right. Excellent. Thank you, Michael and Ryan.

Speaker 4

The Thanks, Carlos.

Operator

Thank you. The next question is from the line of Matt Summerville with D. A. Davidson.

Speaker 1

Call.

Speaker 5

Hi, good afternoon. This is Will Jellison on for Matt Summerville. I wanted to start out by asking you about stage 3. The Looking a bit further into the future, do you expect to use a building block approach to further capacity utilization beyond the Texas or will the success build out potentially be considerably larger than what you're starting out with in Fort Worth today?

Speaker 1

The Sure.

Speaker 3

I'll take that. So as you know with Fort Worth, Fort Worth really represents below 10% of our current expected output out of Mountain Pass. The And so we really view that as the initial Magnetics facility. We're obviously working. We've made clear from the beginning that the We're really taking a buy build and or JV approach here.

Speaker 3

We're maniacally thinking about return on capital and the most creative, thoughtful, the lowest risk ways we can build out that business. And so that's a long winded way of saying that anything and everything is on the table as we build out that business. The But the you can certainly expect that that business should grow substantially because the current Fort Worth facility will really only represent the A small percentage of our upstream output. And we obviously want to make sure that we focus in the near term on executing that well, and we do expect to have some good lessons from that experience that will the help dictate how we pursue the continued downstream build out.

Speaker 5

The Understood. Thank you, Jim. And then as a follow-up, I wanted to ask about capital deployment. The To the extent that there is capital available to do so, and I certainly understood if there isn't, but given the stock where it is today, I'm wondering how you think about the potential for share buybacks as being an opportunity to deploy capital for shareholders. Just curious about that given where the stock is today.

Speaker 3

The Sure. I thought I might get that question. Well, I'll give you the really short version, but then I'll give you a longer expanded version. The I'm the largest shareholder of the company. We have set up an owner operator culture.

Speaker 3

We're very focused on creating value for shareholders. It's the quarter. In our DNA, we think about return on capital and capital allocation. I mean, that really drives everything that we do in the business. So you can imagine that the I'm spending pretty much every waking hour thinking about that.

Speaker 3

So if when and if we do something, we'll certainly the We wouldn't telegraph it, but let me give you sort of a longer view into my psychology, the Which is we really believe that I really think of the world in probabilistic terms. The I think it's pretty clear if you look at the enterprise value of our business and what we expect to be doing over the next decade that the It wouldn't shock me if our business is earning more than our enterprise value today in a handful of years out there. So Certainly, there's an enormous amount of value. That said, it's also a probabilistic world. The I've made clear that the capital structure really has to reflect the underlying volatility of the business the As well as the stage of the business, we are in the early growth stage.

Speaker 3

And the Lastly, we really and I think we've made this clear, so I don't think this will surprise any shareholders. And certainly for our long term shareholders, they should Think of it this way or we're not the right company for you, but we're really country first capitalist. This is a very unique set of assets. The We think there's an enormous opportunity. There's this is also something important that has to happen.

Speaker 3

And so we really want to make sure that the We take a conservative and thoughtful approach to make sure that this platform has the firepower to do the variety of things that we want to do over time. And the And so when you add all of that up, that's kind of what's going on in our heads as we think about these things. The It doesn't necessarily serve us to do something small that creates some single value. We're long term focused the folks around here. And so when we do something, we're going to we want to think about it.

Speaker 3

As you've heard me say on these calls before, we really Want to take a Henry Singleton type approach here. And so hopefully that gives you kind of some window into how I'm thinking about it.

Operator

The call. Thank you. The next question is from the line of George Giannakoulis with Canaccord Genuity. You may proceed.

Speaker 9

The Hey, good afternoon, everyone, and thank you for taking my questions. I'd like to start off maybe just focusing on Fort the I guess, focusing on Fort Worth and just trying to understand any update there. You're due to start production there by the end of the year. The Wondering how the hiring is going, how the early indications on production are going the And any kinks you need to continue to work out of the system to get to production by the end of 2023?

Speaker 3

The Sure. Well, I think if George, hopefully you saw the we recently tweeted a picture of the facility, the sort of the April 2020 the Q2 versus April 2023, where we essentially broke ground there. I mean, this was a bare the piece of land a little over a year ago and now the shell of the factory is done and we're already at work on the inside. I would say that the In this past quarter, there's been a lot of work, not just in the facility, but also with the team. I mean, We have a really impressive team and that team continues to grow by the day.

Speaker 3

The We've made a lot of progress on that front. And so I would say that it continues to go really well. This is not easy stuff. I mean, we are building a the Magna Making business from scratch. So I certainly don't want to downplay the scale of the challenge that we've taken on.

Speaker 3

The But certainly we have an incredible foundational customer in GM, and we continue to have a lot of great customer conversations and we're the Hopefully taking a methodical risk managed approach to this process. And I guess that's a lot of the qualitative ways of telling you that we continue to work really well on that front and we think we're on track and the just continuing to execute.

Speaker 9

Thanks. And as a follow-up, you're going through this transition this year, Moving to Stage 2 and just as luck would have it, we've seen a massive reduction in the spot price. The And you talked about allocating some of your production to inventory to Stage 2. The But how do you manage profitability in that scenario? I guess my question also is we're getting close to a point, I think, where you might be the Hitting the edge of being dipping into EBITDA negativity as opposed to profitability.

Speaker 9

So how do you manage that scenario. Is it your goal to stay EBITDA positive even if the spot price reduces further? And you maybe don't allocate the Some of that some of your volume to inventory or do you just kind of focus on the task at hand and continue to move to Stage 2 throughout the year despite what's going on at spot?

Speaker 8

Sure.

Speaker 3

The Well, 1st and foremost, we wake up and pray for higher prices every morning.

Speaker 6

The No, I'm

Speaker 3

kidding, but it's a challenge. We are as we've sort of the theme of this this call. As you know, we believe in both fronts of our business on well, in stage 1, certainly in all stages 2 and 3. The We're executing really well. Those are the things that we can control.

Speaker 3

It's tough being in a commodity business, unlike some other businesses where the You can make a lot of great progress and it maybe 80% of that converts into the financial result, whereas in the commodity business, the You can do an incredible job and maybe 20% converts and the rest is sort of the inherent volatility of prices that the Maybe make you look not so smart in down price times and probably much smarter than you deserve in up price times. But the The reality is that we there really is not much change in the sense that we're always focused on capital allocation. I mean, the We're thinking about these things every step of the way. And when prices are high or higher than here, not necessarily as high as we think they're going, the We're always aware that prices could be much lower, right? That's why we set up the capital structure the way we did.

Speaker 3

And when prices are very low, we're if you look back to some of the comments the that I made. I mean, we that of course plants the seeds for the next huge price spike. And so we try not to be the impacted by that volatility and just focus on the things that we can control. But Michael, if you the Want to touch on any aspects of what you see out at Mountain Pass and kind of how you're thinking about commissioning, if you want to chime in here, fire away.

Speaker 6

Thanks, Jim, and thanks for the question. The Yes. I think we're very prudent in how we're going about commissioning and we always have been thinking of this as a the maximizing value to shareholders as well as our long term success of our operation and our ore body. The Particularly in this period of time with lower prices, we want to be especially careful to avoid any major mistakes, obviously any safety issues. The Also think about how and when we optimize the ramp for maximizing efficiency the of circuits as we commission them versus the speed of commissioning.

Speaker 6

And so we'll probably be

Speaker 1

a little

Speaker 6

bit more even more thoughtful about that the as we proceed. So obviously, our Stage 1 business still is very low cost producer and we'll look to keep that stable and the Profitable and see where we can eke out additional profitability from that.

Speaker 3

The Next question.

Operator

The Thank you. The next question is from the line of David Deckelbaum with Cowen. You may proceed.

Speaker 10

The Hey, Jim, Michael and Ryan. Thanks for the questions this evening. Hey, David.

Speaker 11

I was curious just one on the tolling arrangement with the Vietnamese rare earth toller. I guess Sumitomo, I guess, was the responsible for negotiating some of this. But I guess in terms of qualifying your own MDPR oxide, should we think about it as the the I suppose they haven't had any of your NDPR oxide to work with yet they're qualified. But is the assumption that that would be like the A fairly seamless process to convert the oxide to the metal.

Speaker 4

Yes. Hey, David, it's Ryan. Just to clarify, this opportunity with Vietnam Barrera Company is separate from our Sumitomo relationship, but we certainly view the Sumitomo as an incremental outlet where we expect to do very similar things. So this is just a further broadening of our market opportunity. The In terms of qualification, I think certainly we feel very confident in the what our specifications of our product will be, in order to properly convert them in an efficient way in the quarter.

Speaker 4

I think importantly, in this tolling arrangement, we will maintain title to the product throughout the process. The And so through that, we will maintain responsibility frankly for the quality of the end product as we interface directly with our end customers. The And so we're deeply involved in the requisite conversations to ensure that we're making a quality product the at this tolling facility. So we feel good about that.

Speaker 11

I appreciate that. The call. Jim, to go back to one of the conversations earlier about substitute products, you raised obviously the conversation around Tesla's aspirations for building a non rare earth magnet. In your conversations with other OEMs, the We read it too as sort of like ringing the alarm for a constrained supply chain. Are you seeing the same sort of concerns from some of the other domestic the call.

Speaker 11

OEMs obviously have a partnership or arrangement or customer arrangement already. But is there a palpable concern around the supply chain the For installing rare earth magnets and EV deliveries in the future.

Speaker 3

Yes, David. Well, you hit a really good point about ringing the alarm. The was in a sense kind of like a commercial for this issue to a very broad audience of just sort of the scale of the What is unfolding here and how much more material is going to be needed? As far as sort of sense of urgency, the I would tell you that we've really sensed a sense of urgency with the OEMs at least going back a couple of years. The If you kind of rewind probably pre COVID, there was less of a sense of urgency.

Speaker 3

Everything was sort of theoretical. And the When people saw the healthcare stuff and the semis and that was like sort of the big wake up call where the All of a sudden this became sort of something down the road to existential. And I would say that that's maintained. I don't think I've seen that much the Different, although what's interesting, I mean, there's here and there, we still hear of these supply chain things that pop up. I think Ford had an issue the other day.

Speaker 3

The And so I would say that across industry and it's not just the autos, I mean it's in other areas, sort of other standard the industry areas that people focus on this. So I would say, I wouldn't necessarily say it's increased or decreased in the last couple of months. It's the pretty intense, for the last sort of 2 years, almost 3 years now. It's really just the one thing I would say though is, the You probably over the next year or 2 as a lot more at least in the EV space, a lot more models are coming on the market. And so even though the planning has happened, the physical the Bill, haven't yet happened, right?

Speaker 3

And so I think you're going to see and then again, I think that goes back to kind of this past quarter with spot. The Anything can happen in the very short term, but as these not as this stuff really starts to come online, maybe there'll be a sense of urgency. And again, you've heard David, you've heard me say this the Going back a couple of years now, I still believe I think we will see at least one, but probably a number of household the global OEMs, fail or meet a bailout due to supply chain issues around critical materials or critical items. The And so I still think that that is all ahead of us. But admittedly, the last quarter or so, China has been a lot weaker the than I think people expected and so that sort of works its way through the system, but the macro trends remain very strongly intact on that front.

Speaker 11

I appreciate the color on that, Jim. And then just the last one. Sure. That was helpful.

Speaker 6

Yes.

Speaker 4

Maybe on Michael. Yes. Go ahead, David. I'm just curious, the

Speaker 11

Have you guys tested the functionality of every part of the separation circuit or the Stage 2 circuits at this point? The I know like as you described the commissioning process, we're moving from one part of the flow sheet to the next. But I guess, are there still elements that have not been tested to date?

Speaker 6

The The vast majority have been tested in one way or another. Certainly, they've all been touched the In some sort of pre commissioning, not all of them have flown a material through them, the But that answer will change quite quickly.

Speaker 11

Thanks, Michael. Thanks for the responses, guys.

Speaker 3

The Sure. Thanks, David. Next question?

Operator

The next question is from the line of Lawson Winder with Bank of America. You may proceed.

Speaker 12

The Hey, good evening, gentlemen. Thanks for fitting me in. I wanted to ask about I have a couple of questions on costs. The One, you spoke to costs during your prepared remarks, and I wanted to get your view on where you think the The global cost curve is relative to the pricing now in the low $60 like what percentage of NDPR oxide production now is underwater?

Speaker 3

The Well, the data in China is really tough. So and remember that the industry, the It's not necessarily consolidated. You can have miners, refiners. And so depending on the And a lot of them are affiliated. They're all affiliated.

Speaker 3

So depending on the month, the money can move around to different buckets. But the As I said in the prepared remarks, I every indication that we see, I think it's fair to say that at these prices, I think we'll see Chinese industry is just not profitable. And so I think that that's obviously It's something that we view to be a bullish dynamic at current prices.

Speaker 12

The Yes. And so my question gets to the fact, do you mean like the entire industry?

Speaker 3

The Pretty much. I mean, the industry is maybe I can expand on. And again, this is just the Our guests from reading the tea leaves, the data is always opaque. So I mean, I'm trying to be the Caveat this as much as I possibly can, but, and remember that this is all consolidated ultimately into a couple of players. The And so certainly money can move from various buckets of the up and downstream, if you will, and things can the show profitability or losses or whatnot.

Speaker 3

But that's kind of roughly what we believe. The Okay. Well,

Speaker 12

that's a big statement and very helpful color. Thank you for that. I wanted to ask the

Speaker 8

We're well too.

Speaker 3

We're surprised we're here.

Speaker 12

The Yes, thanks a lot for that color. It's very helpful. And I wanted to ask about one cost item of yours and that would be nat gas. The And to start off with, could you remind us just what percentage of your overall cost is natgas? And then have your the nat gas costs fallen in line with Henry Hub or is there still a pretty significant premium for West Coast natgas?

Speaker 12

And then the Thinking about the hedges that you guys put on, how effective have those been and then for how long are those still going to be in place before they roll off? Thanks very much.

Speaker 4

The Sure. What I'd note is certainly the proportion and this is Ryan, by the way. The proportion the of our cost structure that's natural gas is going to change as we bring the rest of the circuits online and obviously have an incremental power draw from the Our CHP, but I'd say we haven't given specifics on exactly the percentages, but let's call it the Single digits. We have seen certainly our hedges the that we've put in place be quite effective this quarter. You can actually see that manifest Lawson in the When you look at the proportion of the costs that we call out specifically related to incremental Stage 2 costs in our cost per metric ton framework in KPI the In the deck, you can see that that went down sequentially.

Speaker 4

That's primarily due to effective hedging. We have the Hedges close to similar levels that start to roll off in 12 months and then for a roll off in 24 months. The And we're constantly sort of looking at potential opportunities to continue to lock that in. Given where we are in California, we don't the Very closely follow Henry Hub. There are very specific transportation dynamics in terms of where we sit.

Speaker 4

The And so I would say NYMEX or Henry Hub is probably not a great proxy for us. I would be looking at the California delivery points certainly to give you a sense. And you see when certain storms happen or certain parts of the transportation infrastructure offline. That tends to get quite volatile, which is why in certain the Just like our commodity price, on the revenue side, in certain quarters, we're going to feel like geniuses. In certain quarters, we won't feel quite as smart.

Speaker 4

But overall, we're trying to approach this very the call to minimize volatility in our cost structure.

Speaker 12

That is fantastic. Thank you very much.

Operator

The thank you. The final question is from the line of Abhishek Sinha with Northland Capital Markets. You may proceed.

Speaker 10

The Hey, this is Kailash, filling in for Ravi. I was just wondering about your outlook for permanent magnet I was just wondering about your outlook for permanent magnet generators in wind turbines. Since Tesla's recent announcement the presentation on EVs not requiring Red Earth Metals. I was just wondering about your outlook on wind turbines and where you see that going?

Speaker 3

The Sure. So we covered quite a bit of that on the call. So, but I'll just the Maybe I'll again, on the first part of the question, we're very confident in the demand outlook the Q1. For our industry, for our products that I mean, it's rare earth magnet motors will continue to be the most powerful and efficient the option. So, in the variety of categories, you asked about wind turbines specifically, offshore wind turbines?

Speaker 3

The Everything that we see remains extraordinarily intact. I mean there's really been the No change. The key thing with offshore turbines, if you go with an alternative option, the There's a dramatic change in your maintenance because you might have to replace earlier. And so when people look at the total cost of the ownership of an offshore wind turbine. The math of a big difference in your maintenance cycle is the Enormous relative to the cost of a permanent magnet.

Speaker 3

So, I don't have the exact number in front of me, but the It's above just like EVs, it's above 90% for offshore and we've seen no indication other than that remaining intact. And the Those are very long lead production items. So even if you saw something change, the It probably wouldn't impact demand for several years, but we've seen nothing but increased demand on that front.

Operator

The call. Thank you. That concludes our Q and A session. I would like to turn the call back over to Jim Lutinski, CEO, for concluding remarks.

Speaker 3

The Well, thank you everyone for the call today and we will get back to work and look forward to seeing you next quarter. Have a good night. The This concludes today's

Operator

MP Materials First Quarter Earnings Call. Thank you for your participation. You may now disconnect your lines.

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MP Materials Q1 2023
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