Good afternoon, and welcome to the afternoon session of the Jefferies Industrials Conference, first day of the Industrials Conference. I'm Laurence Alexander with the Jefferies Chemicals team. Up next is MP Materials, and with us today is CEO, Founder, and Chairman James Litinsky. Thank you very much for joining us today.
Thanks. Good to be here.
Let's just jump straight in with the most recent milestones. Can you talk a little bit about the transformation path of MP from a concentrate producer to one shipping NdPr, particularly an update on where you are validating process steps?
Sure. So thanks, Laurence. Thanks, Jefferies. It's great to be here. The two major process steps, as many know, we were a rare earth concentrate producer from the time we went public for a few years. Last year, we began ramping what we call our Stage II or rare earth refining. And that ramp sort of despite a challenging market environment, pricing-wise, has been going very well. We said last quarter we produced 272 tons of refined rare earth of refined NdPr last quarter, and we said we were coming out of that quarter with on track, on pace of record levels of con production. Nothing has changed on that front, so we feel good about how things are trending.
As part of that, we've said that we expected this quarter, the one that we're currently in, to be at least a 50% growth quarter- over- quarter, so sequentially in NdPr production. So if you multiply that 272 x 1.5, that would suggest 400 and something plus tons of NdPr, which pushes us close to a 2,000-ton run rate, which is a pretty extraordinary achievement considering that we, you know, began commissioning last year. We have a ways to go on getting our cost structure down, but we feel like this ramp is happening, you know, really effectively, and so we're excited about that.
And then the other piece of our business is the what we call Stage III, our magnetics business, and that is a facility that, you know, when we went public in 2020, we didn't even have a single employee in our magnetics business. Our first hires were in early 2021. That business now has 90 people. We went from a bare field in April of 2022 to a built facility in Fort Worth. We expect to be making metal that we'll be selling to GM later this year. As part of that, we, you know, believe we'll be EBITDA positive.
I want to reiterate because I do think there's some confusion, and maybe we'll expand on this later, is that this business, the magnetics business, we've said sort of from the very beginning, before we had anyone in the business, that to the extent that we were to move downstream into this business, that we would do so assuming that we could earn, you know, attractive returns on capital, and that we would view it that the Stage II business I just discussed, the refined rare earth business, that that business would be viewed separately. In other words, we wouldn't rob Peter to pay Paul to invest in this new business. So it had to be totally accretive and that we would psychologically view the contribution of our material at market to determine whether or not the economics made sense.
And so as we look at our Stage III business today, as we're about to go literally from a bare, you know, field to bringing a 250,000 sq ft facility online, if you look back at our CapEx, kind of going back over the last few years, you could, and what we've said, and without getting into the minutiae of it, you could very easily deduce that we've spent hundreds of millions of dollars on this facility. We've said very clearly that we have contracted cash flows so that we're getting a return of that capital and on that capital on a go-forward basis. And so, assuming we execute, and again, we have to continue to execute and get that job done, but we have GM as a vast majority foundational customer.
And so if we just look at that on an undiscounted basis, there are, you know, there's a large amount of cash that should be coming to us, you know, over the coming years, if you will. And so we've kind of talked a bit about that on the last couple of calls and referenced some of those sources. But I just think that's so important to reiterate because, you know, sometimes there's some confusion around moving downstream. What does that mean for economics of the business? And, you know, the fact that there is this enormous amount of capital that, again, we must execute, that is coming towards us.
Right now, if you look at, you know, what the market is saying, the market is giving us a significant negative value to what our contracted cash flow is, which really doesn't make much sense.
Since you're basically dangling catnip before the cat, let's stick to that one. Can you talk a little bit about the IP landscape in magnetics?
Yes.
There's been a lot of skepticism. Do you have access to everything you need to reach commercial production?
Yes. And so IP, this was one on the list of the very first issues we discussed when we started this business within MP in early 2021. So we've been focused on IP for the last few years. When you think about there are a number of patents in the space that have expired, there are a number that are soon expiring, and then there's quite a bit of white space. We have spent the last few years maniacally focused on IP, and we are very confident that we have everything we need to move forward, execute, deliver for GM without any incremental additions of IP or licensing or whatnot.
What about product qualifications and warranties? Like, how long should a testing cycle be from mechanical completion to commercial sales?
Sure
... to you being able to report numbers on the business?
Sure. A couple things. In the magnetic space, where, you know, whether it's for, in this case, the, you know, our very large customer, GM, or any other party, but typically, you build, you make a magnet to a spec. So in the case of GM, we, you know, we've had a GM spec for quite some time. We'll make it to that spec. Outside of that spec to qualify, you don't. There's no, you're not submitting any kind of performance testing other than you deliver that spec, and it works, and then it's valid. You know, how they've designed it or how it works once it's in an auto or, you know, some other product is sort of the downstream party's business.
And so we have to deliver the spec and test that, and then that's a sellable product. One thing that's unique about Fort Worth is we will be making sellable precursor materials. So in really simple terms, when you make a magnet, you take the refined NdPr, you metallize it, you make an alloy, and then it turns into a magnet and a finished magnet. We will be selling precursor materials to GM along the way, and so that's why I go back to, you know, our expectation is by year-end, we'll be making metal, that...
So we said on the most recent call, we expect sort of between now and year-end 2025, when we will be, you know, making magnets, that we expect approximately $190 million in sources of capital, $100 million of which are magnet precursor material advance payments. The rest are tax credits, which we can certainly talk about. But we expect to be, and we've already collected $50 million for magnetic precursor materials, and so, you know, quite quickly, once we're ramping, we expect to be EBITDA positive in that facility.
Let's talk a little bit about the market dynamics. First, are you seeking, and do you have the bandwidth to handle, additional offtake agreements similar to the GM partnership?
In magnetics or in refine? Yeah. So this is a really interesting question. If you asked me this question two years ago, I would have said to you, "We're building Fort Worth, and then as soon as that's done or when that's underway, we're going to go out and we're going to build ten X because the world's electrifying. There's so much demand. China controls this entire market. There's clearly demand from customers to want to have alternatives in the supply chain as quickly as possible." Fast forward to today, obviously, the pendulum has swung, and although electrification is happening and hybrids are now accelerating, which is good for us, there's clearly been a hiccup in the perception around electrification.
But more specifically, now, none of that would impact the amount of demand that would come to us because we are a rounding error relative to the fact that China has 90%+ of the industry. But what is interesting is if I go back to the things we have originally said, which will always remain true, is that we are. You know, I'm the largest shareholder. I'm founder, Chairman, and CEO, largest shareholder of the company, and we are very focused on returns on capital. And right now, the market is telling us that our magnetics business has negative value. Bad for America. We, you know, we think that there should be, you know, substantial appreciation in the capital markets for the magnetics business.
But, and we can certainly go down the rabbit hole of why that's happened, but the capital markets are saying there's no value to an alternative supply chain. There's no value to the fact that there's a 25% tariff on magnetics. There's no value to the fact that magnetics are to robotics many multiples of importance than they are to EVs. And so there's really essentially to the point about, you know, I made earlier about the contracted cash flows, there's significant negative value assigned to our business, which leads to a different set of decision-making, which is for us to if we do nothing, if we just don't grow that business, we'll liquidate out the cash flows of our magnetics business, and we will. You know, that is, it's fully equitized. There's so there's no debt.
We'll collect hundreds of millions, plus you can deduce that from all of our public statements, and that's it. To the extent that there are opportunities to do something in a more capital-light way, a customer wants to put up capital or to the extent that we'll have significantly attractive continued contracted customers, we'll certainly entertain that. But right now, as the world stands today, which is a totally different answer than I would have given you two years ago, we probably won't, we will not make any incremental growth in our magnetics business, which I think is something where my guess is the world is going to change quite significantly to where that won't be the case a year from now.
But as it stands today, you know, there's not a dime of incremental capital going into that business.
I promise tangents. Can you? You mentioned healthy return on capital. Is that a significant double-digit premium to WACC? Or kind of like, what would be the point where it would be perfectly obvious that you shouldn't do another investment?
Sure. Well, you know, we don't necessarily just do a WACC model because obviously every cash flow has risk associated with it, so you always obviously want to earn a return relative to the risk. I certainly would assign a contracted cash flow, you know, from GM for a critical piece of their platform to have a different risk profile than, say, a speculative mine in, you know, Brazil or something like that. So those numbers differ, but what I would say is, usually, when you look at those things, they're somewhat no-brainers. So when I look at our business today, you know, we have roughly a little over a $2 billion market cap. The replacement cost at Mountain Pass is somewhere in the order of $4 billion-$5 billion.
It's pretty clear that there needs to be a lot more supply over the next decade or so, and there are significant national security and other implications for the supply chain. And so when I look at that, I certainly would want to buy back that or invest more in that than I would want to invest incremental capital in an industrial business downstream. But to the extent that I had a no-risk situation, I'd be willing to do that. So it's really a situation-dependent thing. But what I would say, again, I look at the two pieces of our business, and, you know, one has a significant amount of contracted cash flow...
The other is a highly cyclical business that, if you look at what we were doing in 2022, where prices were more normalized, and what you know, obviously today, we don't make money in that business because prices have collapsed. Ultimately, that's you know, that's gonna change. That's highly cyclical. And so, to the extent that we can take advantage of that environment, for those who don't know, year to date, we've actually repurchased 8.6% of the company, which is, I think, an extraordinarily unique thing in the mining and materials space.
Usually, you get companies that are, like, hyper cyclical, where, you know, they're buying, buying, buying stock, doing M&A, investing at the peak of the cycle, and then down at the bottom of the cycle, they're raising capital, selling off things, trying to survive. We have, since inception, believed that we should have a fortress balance sheet that reflects the business that we're in. We did so. As we come into this down cycle, we've positioned the business both from a balance sheet and a structural standpoint where, you know, we're positioned where we can be opportunistic in an environment like now, and obviously, we're doing that.
So, while we're touching on the cycle, can you just touch on how you're thinking about NdPr market dynamics? Are you seeing any signs of demand improvement?
Sure, so lots of thoughts on that. By the way, for those who don't follow us on X, I highly recommend because we, we do tweet out stuff, and this past week we tweeted. I recommend people take a look, not to plug a competitor, we, we love your work, but, but Adamas Research, which focuses in rare earths, put out a pretty comprehensive report on the supply and demand in the rare earth space, going out to 2040. And one of the big things that they said in that report, again, this is their report, but, but I fully agree with it, is they looked at the things that are happening in robotics and the amount of content per humanoid bot, et cetera, and kind of extrapolated that out to 2040.
The concept is that the robotic space will likely eventually be bigger than the EV space with respect to magnets, but that the robotic space alone, a decade or so from now, will be substantially larger than the existing NdPr market today. In the early pages of the report, it talked about China, which dominates 90% of the magnetics business today, you know, has a... You know, China, we think about the next election here in America, but you know, China tends to plan 10, 20 years out.
And if you look at Chinese reserves, they are somewhat limited, and that if you do believe that, and maybe you're off by three or five or seven years, but if you do believe what Musk and many others are saying about robotics, physical AI, that could lead to a scenario where the Chinese will completely draw down their reserves over the next 20-something years.
And so the concept is that if you are a 10 or 20-year planner, and frankly, these are the statements that Xi has made about robotics in recent months, that they are starting to anticipate this next demand curve, and therefore, if you look at the recent quota and where pricing has gone, where essentially the four major producers of rare earths in the world, the two in China, the two non-U.S. and Lynas in Australia, pretty much everybody loses money at these prices. And so we have seen the inklings of what you know could be some green shoots, where NdPr is now at the highest levels it has been year- to- date.
And there's a thought that, you know, given what they have been saying, that the expectation is prices need to be significantly higher to start to incentivize supply, because everything that has been done in the Western world is a washout. Like, there's just no equity value in any projects outside of MP and Lynas at this point, particularly at this pricing. And so, I do also think the last point on that, and we could go lots of directions, we could talk about how supply and demand works in rare earths, but unlike some of the other EV materials, you know, lithium, for example, and you could be bullish or bearish, you're not picking on lithium, but that is heavily levered to EVs.
To the extent that hybrids displace EVs and the penetration over time before EVs ultimately penetrate, you know, that's net bearish relative to kind of what they need with the supply coming. For NdPr, hybrid is still extraordinarily accretive. It's, you know, e-mobility is roughly 28% of global demand in our space right now, so there's still a lot of traditional GDP, industrial, HVAC, some of these other verticals where hybrids are still gonna be very attractive for us relative to existing supply as far as moving pricing. Then obviously, this entire robotics, you know, slash physical AI, which again, could be, you know. I'm not in any way saying this is like a near-term thing. It's a number of years down the line.
But when it comes to mining, you know, and then ultimately materials and magnetics, these are multi-year projects, and so if something is a decade out, you know, the capital markets can start to move and anticipate supply that needs to come. And so that could be tomorrow, it could be five years from now, but that's something that I think separates out our space versus sort of some of the other EV materials where, you know, we're in this sort of ugly side of the pendulum swing where we just don't know where we are.
And so just a few threads to pull on that. First, in terms of where you see investment economics re-- or, or investment incentive levels to be-
Yeah.
I mean, there's certainly a swath of projects in early development across-
Yeah
... North America. You know, I hear from quite a few of them.
Yeah.
You clearly have no appetite to co-invest, given you have Mountain Pass to deal with.
We are completely flexible and opportunistic, so we have an appetite to do anything thoughtful. So we could change our mind on a project tomorrow to the extent that something changed. But, rare earths, you know, there's a few thoughts that I think, 'cause people see a lot of headlines, and there's not a lot of depth of knowledge, you know. Rare earth projects are not rare. What is very rare is economic ones. So we hear. It's funny because anytime there's something geopolitically happening, you know, like Turkey's having issues with NATO, all of a sudden, Turkey makes an announcement, about a rare earth find. Rare earth, you know, NATO having, discussions around this, Scandinavian countries, all of a sudden, there's rare earths.
You know, in other parts of the U.S., there are projects that say they have billions of dollars. Rare earths are ubiquitous. They're everywhere. So if you take any swath of land, you can say there's 0.001% rare earth and multiply that by a number, and if you have a big enough piece of land, you have a multi-billion-dollar project. You could have, you know, a piece of land outside of New York City that has $100 billion of rare earths in it, but it would cost you $200 billion or more to make. So it means nothing. It's useless. And so when we think about what is economic, that is really hard.
Outside of the two super majors in China and then us and Lynas, they're unfortunately, and, you know, I hope people take this constructively, but every other project in the world at today's prices has zero equity value. And so what is that incentive price? And the reason we know that is look at MP. You know, we trade at thirty cents on the dollar of replacement costs, and we are by far more economic than any of the other projects. So, what is that incentive price? I don't know, but it's materially higher. I...
You know, if I were knowing what I know, putting new capital to work in, like, a brand-new greenfield project, I'd want to see NdPr well above 150 to 200 and feel like it was going to stay there before I would think, "Yeah, gee, I want to go risk the capital on a multi-year project," and that's before you get into sort of jurisdiction and cost of capital and all the other challenges that you'd think about in a particular project.
I want to come back to something else you talked about, about bringing down the cost of phase II. Can you just walk through kind of the path there and how quickly that should happen?
Sure, and so importantly, the capital spent from Stage II is behind us, so we are now refining that, you know, and that as we ramp that up, just giving people some background. Prices have been low in our space for the last year to 18 months, and so we've been very methodical in this ramp. Our view was if prices were where they were in 2022, I think we would have been much more aggressive in our ramp because, if you step back, we have a Stage I product where we mine and then we concentrate the material. That is a very high margin. Even at today's very low prices, we could just sell that on a standalone basis very profitably.
If you then move downstream to the Stage II, at today's low prices, there's not much – when we're normalized, there's not much incremental pickup of profit at today's prices. As prices go higher, there's an enormous amount of dollars of pickup. It's not as high margin as going from a mine to a concentrated product, but it's still total dollars, very attractive and a very attractive return. The key is to get to that fully ramp state, which we're not at, without, you know, burning cash in the period that you're doing. I think ramping up any kind of, you know, large physical asset is always a journey and challenging, but I think it's actually a really extraordinary achievement of our team.
I think I can say this as the leader, that I don't think our team, and I mean at Mountain Pass and at Fort Worth, gets enough credit when you think about we have. You know, ordinarily, you'd see a company would be ramping up a project. There'd be a bunch of capital spend, a bunch of losses for a number of years. It would come online and, you know, there'd be cash flow, everyone would be happy. We have a business where we're an existing operating business, and we're ramping up two enormous projects. We're absorbing all of those costs, and we're still. Last quarter, we had a tough quarter due to a shutdown for a few weeks.
But other than that, we've been navigating this period, where, in, as we're doing that, as we're through most of the spend, we have the firepower to have bought back north of 8% of the company. And we're, you know, we've kind of talked about our sources and uses of cash. I just think it's an, you know, extraordinary achievement of execution by our teams across the board. Now we've got to continue to execute, so, you know, no major- you can't pat yourself on the back too much. But I really do think it's remarkable that we've had sort of these two very scaled projects, that are in the process of ramping up, and we're able to be sort of thoughtful and opportunistic about capital structure as we're doing it.
You know, previously, you were also talking about investing in the ability to process heavies and, you know, help the industry that way. Can you just clarify your thoughts and on where that fits in your hierarchy now?
Yeah. Well, from a heavies standpoint, we have enough heavies upstream to satisfy the magnetics related to our contract with GM to satisfy our Fort Worth facility. Any incremental investment or thought beyond that, unfortunately, as we look at it today, particularly after, you know, the U.S. government is trying to incentivize another heavy facility, the economics are just extraordinarily tough. Given where prices are, a large amount of spend does not make sense. And so we are not going to undertake new growth projects, but for those, if there are things that have a very quick payback, a year or two, you know, that is one thing that if it's just so obvious, sure, we'll, you know, we have the firepower to do that.
But as far as incremental projects, and I do think it's a real challenge because this is a, it, it's a supply chain issue, as is this whole space. And I think we've made a lot of progress. There's no question that the U.S. government, and we have programs with DoD, and we're very grateful for all of that. But I do think that we have, you know, not had a focused enough industrial policy to really come at this issue in a way that is, is, you know, going to position us to not be very vulnerable on this front. And so I think about that a lot. That said, like, we're not going to destroy shareholder capital over it. We are, you know, we're a proud American company, but first and foremost, we've got to deliver for shareholders.
So we're not gonna incrementally invest in that space until things change significantly.
You mentioned that, you know, the magnet facility will be 250,000 sq ft. Can you translate that into other capacity metrics?
Oh, sure.
Also just put in context, is that capacity fully utilized or is there room to expand within that space?
Sure. So and that square footage includes, we have about 30,000 sq ft of office space. It's gonna be the headquarters, our R&D headquarters, and we've got labs and some other cool space that our team. We have 90 people on that team now, and I think we'll try to, in the coming six months or a year, try to set up a visit for analysts because I think people will be blown away by what we've built. And again, we gotta keep building it, but we're very excited about it. This stated nameplate capacity is 1,000 tons of magnets, which is, you know, of a scale that has not been done in the West. Yeah, this is 90% done in China. There's a little bit done in Japan.
A thousand tons is a big number. We have said very clearly, we have the ability to expand that quite significantly. We haven't said how significantly, but I cannot stress enough that an expansion will have to make sense from a, you know, a return on capital standpoint. And as it stands today, the world has changed, and frankly, you, the investors, the market has changed to such a large degree that, unless things change from here, there's an enormous amount of capital that we'll just collect, you know, over the coming five, seven, whatever number of years it is, and then revisit. And so there is an opportunity to scale, I think. You know, again, I think that something will happen that will change that, that will be attractive for us, and we'll do it.
But, as it stands today, we have no intention of doing that.
And then just lastly, in the time we have left, in terms of policy, U.S. policy, first, the IRA, also any potential shifts after the election, is there anything coming with a lag that you see as highly likely to change this demand equation side or the supply incentives?
Sure. By the way, recently, I don't know if people saw this, there is now a 25% tariff on Chinese magnets, and so that does- that is very helpful. And there are, from a policy standpoint, we benefit from, in the IRA, we benefit from 45X, which will give us a tax credit on production of critical materials. And we talked about that on calls. And then we also got a $58.5 million 48C tax credit, so that is also cash that will come to us as we bring the magnetics facility online.
And so there are a number of things where, you know, whether it's tax policy, or you know, or things like that, tariffs, that are benefiting us, and that we expect to continue to benefit us, and so I think it is ultimately good for us. I do think longer term, what I think the missed opportunity is, that we need a more focused industrial policy. The Chinese industry has two super majors in rare earths, and then they effectively dominate magnetics. We tend to want to spread a lot of things around, whether it's tax credits or grants to a particular producer to bring up a facility, but they think in terms of of champions. And so until...
If you have two national champions on one side, you better at least have one or two or more national champions on the other side, companies that are of scale, that can absorb volatility, that can build large projects. So I do worry that, you know, and you're seeing this somewhat in semiconductors, you're seeing this across the board with respect to IRA, and this has nothing to do with your view on green or politics. I do worry that bets are have been spread around enough with too much politics mixed in, that we sort of have the potential to create a bunch of Solyndras versus getting things done so that we can properly compete in a world where you have, you know, sort of the Chinese champions that have very low costs or no costs of capital.
I think that we have missed it on that front. Fortunately for us at MP, like we, we've from the beginning, have been thoughtful about our balance sheets. We'll survive and thrive one way or another. My guess is that because of everything I just said, in the new administration, whatever it is, there's no question that this is an area that needs help. I hope they ask our opinion, whoever it is that is in there, and that there is more done.
I expect that there will be, because, again, it's not just about EVs anymore, but as we look around the world and we think about what's happening, you know, in Ukraine or in the Middle East, certainly defense spending is going up, and this concept of robotics and what that means is even that much more important than EVs. And magnetics is super important to that. And so when we think about what's happening in the world and this idea that we don't have an American champion in magnetics, and that we would potentially be relying on a single supply chain, that just doesn't foot to, certainly not, I think, what anyone wants.
And so one way or another, I hope that, you know, I hope that there are major things that happen incrementally beyond what we've gotten to date, which is great and helpful, and we appreciate it, but we need to do more.
Okay. And on that note, thank you very much for the discussion today, and thank you, everybody, for listening.