Thank you. Hey, good day, everyone. So I'm Ben Kallo. This is my partner, Davis Sutherland. We cover sustainable energy and mobility. Very happy to have the MP team here. We have the CFO, Ryan Corbett. Thank you, Ryan, for joining us. I think Ryan has a slide or two. Then we're going to jump straight into Q&A. Small room, so you can just raise your hand. You can also email session6@rwbaird.com if you have questions there. And thanks again, Ryan.
Absolutely. Thanks for having me. We'll just quickly set the scene for folks that are newer to the story and then just jump straight into Q&A. So this will be. I think I've got a total of two slides, one of which is the Safe Harbor, talking about how I might make forward-looking statements and refer to non-GAAP measures. So please take a look at our SEC filings for disclosures around all of these. And so just quick overview for those of you that don't know the story. MP Materials is the Western champion in rare earth materials.
We are America's only scaled producer of the foundational building blocks to rare earth permanent magnets, which power clean energy solutions like electric vehicle traction motors, robotics, wind turbines, things of that sort, things that are absolutely critical for the transition that we're going through, and something that is lacking at scale in the Western world. But we've been executing on a very methodical strategy to bring scale back to this industry over the last several years. Importantly, today, we stand as the second largest producer globally of rare earth materials. We've been in a transition phase in producing an upstream product, a rare earth concentrate that we've primarily shipped overseas for refining.
We've been ramping with a lot of recent success, and I'm sure we'll talk about in our midstream operation to produce a separated rare earth oxide, which is the fundamental building block of rare earth permanent magnets, where we also have a strategy which we call Stage 3, where we've built a facility in Dallas, Fort Worth, which we call Independence, where we will produce finished rare earth permanent magnets. Our foundational customer in that endeavor is General Motors, where we'll be providing the rare earth permanent magnets for the Ultium platform of vehicles. That's sort of the very quick background. I figured we'd leave most of the time for Q&A, so welcome to join in.
Maybe I'll kick it off. You guys used to call it Stage 1, Stage 2, Stage 3, like upstream. But let's just talk about on the upstream, you guys had record production, I think, in Q3. Can you talk about kind of what's led to your execution since you guys have owned Mountain Pass mine there in California, as well as the opportunity to expand that part of the operation?
Yeah, absolutely. In the quarter that we just reported last week, we produced over 13,700 tons of contained rare earth oxides and concentrate, which for context is over 15% higher than our best quarter ever. That puts us well on our way towards an initiative that we've dubbed Upstream 60K. So for context, historically, before this breakthrough, we were producing roughly 40,000 tons of contained rare earth oxides and concentrate pretty consistently. The last several years, we've produced that. And that, for context, is a breakthrough that was not achieved until MP Materials ownership of this asset. We bought this asset in 2017. The prior operator never made anywhere close to that. I think we were making, on average, when we were doing 40,000 tons, 3.5x their best quarter ever. And so this stems from a really methodical rewrite of the way to operate these assets.
Mountain Pass, undoubtedly, is one of the world's best sources for rare earth materials and just really required the right assets and the right operating framework to be able to sort of unlock the potential in the assets, and so what I think this last quarter represents is a real step forward in this Upstream 60K strategy. 60K standing for 60,000 tons of contained rare earth oxides and concentrate, which we talked about going from that 40 to 60 over a four-year period. Obviously, at 13.7 in a single quarter, you can do the math. We're well on our way. Of course, I'll channel our Chief Operating Officer, who's the one who actually has to go and execute on that out in the mill with his team, and certainly, we are cautioning, don't just annualize this. We do do semi-annual plant turnarounds every other quarter.
And so this was a quarter, of course, where we did not have any of that downtime. But I think it really does speak to the optimizations that the team has brought to bear. And I think the metallurgists and the operators, the engineers have done an unbelievable job optimizing assets that we've been running for many years now and finding opportunity to bring to bear improvements. And this is sort of the early stage of how we laid out the capital investment plan for Upstream 60K. We talked about less than $200 million would be invested in this initiative. We're very early in the investment cycle and have already been able to achieve, I think, pretty significant outcomes over time. And so we're excited about what this might unlock for us.
You already started to answer a few of my questions about Upstream 60K, just the incremental cost, the time in which you hope to realize the gains. But maybe last one, is there any impact to the mine life or the resource itself from what you're doing with that opportunity?
Yeah, it's a great question. I think the thing that is so exciting about what we just reported is almost the entirety of the upside in production was from recovery. Recovery from a mine life perspective is free. And it's actually better than that because what it enables you to do is look at, if I'm able to recover several points above what my run rate was, where should the cutoff grade really be? So you actually bring more material into the mine life. Of course, over time, getting from 40 to 60, there are a lot of different levers that we intend to pull. Some of those, of course, may be increasing feed rate. That just was not the case in this last quarter. And so there will be a push and pull. I would caution, we report an S-K 1300 report with these details every single year.
Not all of the Upstream 60K initiatives will be in this year. We're sort of taking a piecemeal approach to this, and you can sort of imagine why. We also want to be thoughtful about growing with the market, and if we're able to achieve close to 60K of production with a lot less capital, amen. So we'll certainly take that in a piecemeal approach, but I think the important thing to think about from the perspective of the Mountain Pass mine and the mine life is there has not been a tremendous amount of capital invested in further drilling programs or anything like that in many, many years, and so we are operating off of assumptions that I think as we invest incremental dollars and time into that. I think suffice to say our assumptions for our mine life are extremely conservative.
Maybe taking a step back too, could you just talk about where rare earths come from outside of Mountain Pass and why that differentiates you as well there?
Sure. This is an industry that undoubtedly is dominated by China. China has something like 40% of the rare earth reserves, but 60% of the mining capacity, 85% of the refining capacity, and 90% of the magnet businesses in China. So China really dominates the space, and they've taken market share and driven their dominance from a very methodical approach to cornering this market over a multi-decade period. The rare earth business, in a lot of ways, was almost grandfathered and discovered from Mountain Pass when the mine was discovered in the late 1940s. But like many other industries, we had given up leadership in this space to the Chinese. There really are two ex-China producers right now of scale, including ourselves. There are other projects out there, hopeful projects that are looking to come into production.
But what we've seen, even with projects that have significant government funding, have stockpiles of materials already ready to be processed, this is not an easy business. We are leveraging billions, many billions of dollars of invested capital that had been invested at Mountain Pass before we took over the site and many hundreds of millions of incremental dollars that we've invested and many, many decades of know-how and process technology. And so that is something that is difficult to replicate in the Western world. And so with an industry like this, and certainly what we're seeing in geopolitics, it's critical that we have industry champions like MP to be able to provide Western companies with a source of these materials.
We'll come back to the geopolitics because I think that's super important, but maybe just moving from the next step downstream to Stage 2 operation, obviously a very strong Stage 1 quarter. But also, could you talk just a bit about the progress you made in Stage 2 during the quarter and how we should expect that to progress?
Absolutely. So for context, we have been on a journey of ramping our midstream operation, so our refinery facility at Mountain Pass to produce the separated rare earth oxides from the concentrate that we produce. Last quarter, we reported a 76% sequential growth in NdPr oxide production, which we were thrilled about that result. We had guided for about 50% sequential growth. And really, the Stage 2 journey of ramping up this refining facility, it's a typical story of a multi-billion-dollar refinery. It's a two steps forward, one step back. I think what we're seeing, though, are continued strong proof points that the foundation of what we've built, the changes to the process flow that we made that underpinned the entire strategy absolutely were the right choices. And now it's really a matter of just executing, frankly, more from a mechanical perspective than a chemistry perspective, right?
We are seeing the chemistry works. We are seeing that the changes that we made absolutely work and will enable us to be a globally low-cost producer of these materials, and so now it's really a story of taking those learnings and being able to drive within each individual circuit that gets us to finished oxide, increase the throughput, and then maintain uptime at that increased throughput and keep turning those dials to get that done. It's a lot easier said than done, for sure, but it is something that we've got a lot of confidence that we'll be able to continue to execute on, and I think the important thing is we've undertaken this journey in this ramp in the midst of a massive pullback in commodity prices, particularly our commodity, which makes things incrementally challenging.
When NdPr is $175, if I'm making it at $40 or $60, I don't care. I'm just going to make it. When NdPr is $40, I really care if I make it at $40 or $60, particularly when that molecule otherwise can be sold as a pretty high gross profit contributor as concentrate. And so we've been very clear that we are only going to ramp as it makes sense and as we hit these milestones in the ramp cycle from a cost of production standpoint. And so I think in the very early days, we made super clear we're not going to ramp for ramp's sake. We're not going to produce more oxide to say we've produced more oxide. We're going to ramp the plant in the most economically efficient way possible.
And so we've continued to do that, and I think we'll continue to do that over the next several quarters.
Maybe on that note, just with the NdPr pricing, taking another step back on just end markets, when you guys went public, we talked lots about permanent magnet motors for electric vehicles. But could you talk about other end markets and where you see some of the pressure on pricing potentially coming from?
Yeah, absolutely. I think the thing, certainly when we went public in the early years, there was so much focus on the growth of the electric vehicle, wind energy, all these things that require magnets. And rightly so, it is absolutely, despite all the sort of malaise on Wall Street about the electric vehicle, it is still growing pretty rapidly. We're getting close to almost double digits penetration in the United States, which, across all xEVs, which I think is pretty remarkable. We can talk about what that might look like over the next coming years or so. But the thing to remember is that even with this exciting growth, wind, which is a big use case that gets a lot of focus, and EVs are less than a third of current demand.
The other two thirds, nearly 75%, are all of these other use cases that right now tend to be dominated by GDP-ish types of applications. HVAC is a big use case. Elevators, escalators, happens to be a lot of things that make their way into real estate, and with a market that is dominated by China, it's no wonder we've had some softness. Certainly, what we've seen from the economic perspective in China, I think, has been a major contributor to what we've seen on the pricing side with the recent pullback in NdPr prices, and so remains to be seen what the latest measures will do. We've certainly seen pricing come back up a little bit and has remained stable for a while here. There's always this adage that NdPr prices are either going up or going down.
And that's been the case for the last several years, except for maybe the last several months where they've been pretty steady. And so perhaps our hope and view is that maybe we've sort of found a consolidation point here as we're seeing some incentives be rolled out by the Chinese government to stimulate that economy.
My next question, also just following on that, was going to be about visibility, and it's a question that we get, and of course, pricing is tough to predict given that it is a commodity, but what kind of visibility do you have into demand for some of these end markets, specifically the ones that are maybe a bit more GDP or less thematic, EVs or wind?
Sure. As an upstream and midstream producer, direct visibility is often difficult. What I would say is, on top of that, being able to predict commodity prices based on any visibility, particularly in the short term generally, is a fool's errand. And so even if I had better visibility, I don't know that it would give me any more actionable information on what that means for prices. So I think that it is fair to say with economic stimulus coming for these GDP-ish types of use cases, it does seem like in terms of the conversations we have with customers, with other refiners, with distributors, et cetera, things feel like they are getting better, but it is just so difficult to really predict exactly what that means in the short term.
I think importantly, the thing that started to get some real attention, particularly as we think about development of Western industry, is we talk about EVs all the time, but one of the use cases that we find is really relevant and will become increasingly so is robotics. There was a great podcast the other day with Marc Andreessen sort of talking about the supply chain for robotics and what that looks like and how right now the supply chain for some of these critical national security-related industrial robotics applications is the same supply chain that sort of makes the $15 robot dog that you buy at a kid's toy store. That's not going to work, certainly over the medium and long term.
And so I think that is a tremendous opportunity for us where magnetics, I think, sit at a crossroads of commercial national security and true defense national security. And as these types of use cases continue to grow and as we look at what does the EV transition mean for our automotive industry, which is such a big employer in this country, what does that mean for commercial national security? It's a fascinating industry to be in and a really important one that underpins a lot of these really, really important transitions that we're seeing in the economy.
Maybe coming back to the upstream and midstream and having the flexibility there, a lot of times we get questions like, well, they ship to China and it gets processed there and refined there. Could you just talk about the progress you've made about expanding other relationships outside of China for both the upstream and then now that you have the midstream up and ramping what that does as well?
Yeah, I think it's absolutely, particularly in the world we're in today, the midstream business, being able to do refining on site at Mountain Pass enables us to really broaden our geographic reach in our various markets. And so certainly the Japanese have a very strong magnetics business. Much of the magnet technology that's deployed globally started from many of these strong Japanese magnet producers. And so we've seen real progress in selling into the Japanese market and broader Southeast Asian market now that we've got that ability to do on-site refining. I think the thing that we've talked about recently, too, is with the criticality of magnetics for things like electric vehicles, you're seeing automotive OEMs reach all the way upstream in a way that we've never seen before.
So even if these are not magnet customers of ours, we're selling into, in some way, shape, or form, product-wise, three of the top five global automotive OEMs. We could not say that two years ago. And so you're seeing some of these OEMs really want to understand, okay, I may have my magnets made in Japan or Korea or a combination of that in China, but I need to know that those magnet makers have access to NdPr oxide to make those magnets. And so you're seeing OEMs actually interact directly with a miner refiner and provide that product to a magnet maker to ensure that they've got traceability, security of supply, et cetera, et cetera. And so that is something that is new, right? We just launched production of refined products about a year ago. And so we're continuing to ramp that facility.
And so I think that that's something that we're excited about that really changes the dynamics of who our customers are and where the product goes.
Maybe shifting focus a little bit to the last step in Stage 3. We have a question from the audience for Ryan. How much permanent magnet motor capacity can Independence handle and can the current footprint scale to convert all of your upstream NdPr capacity into magnets, or would you need to significantly expand the footprint? So maybe a couple in there.
All good questions. The targeted initial capacity of Independence is 1,000 tons of magnets. The interesting thing is measuring magnets in tons is somewhat misleading. It's not a commodity, right? And so if you're looking at an electric vehicle, and a lot of times most of the research out there starts to talk about, oh, there's two or three kilos. Well, two or three kilos might be in 300 magnet pieces within the traction motor. And so it really depends, right? So if you told me, oh, you're going to sell the entirety of that 1,000 tons as wind turbine magnets, the math would be a lot different than my number of pieces that I can make to go into traction motors. However, assuming we're making all traction motors in that facility, all magnets for traction motors, it's about north of 500,000 cars.
And that's with a lot of assumptions on are there two motors in the car all we're driving, et cetera, et cetera, but in rough order of magnitude. When you do the math on that, in terms of our full targeted eventual capacity of the upstream is 6,000 tons of NdPr oxide of midstream, excuse me, we would be selling a single-digit % of that 6,000 tons into Independence to make 1,000 tons of magnets. So absolutely, we cannot handle all 6,000 tons of oxide in Independence. We would scale that much more significantly. I do think that the nice thing about the way we constructed Independence is there absolutely is the ability to expand. We've got a state-of-the-art greenfield facility where the ability to add capacity for a lower capital intensity per incremental unit of production is absolutely there.
I think the thing that we think about a lot, though, is we don't view right now that, and look, we're just going to be getting into production of metal at the end of this year. We'll be getting into production of magnets at the end of next year. But we have what I believe is a strong foundational customer in General Motors. We have a lot of exciting capabilities. We have nearly 100 people working in this business. We're not getting any credit in terms of our valuation at this point. You compare the way our business is trading from a valuation perspective to other midstream players out there.
It's difficult to say, hey, we're going to commit a bunch of incremental capital to a business that, frankly, you've seen us act pretty aggressively in being opportunistic on repurchasing shares of the business where if I can buy back Independence at pennies on the dollar, I'd rather buy back Independence on pennies on the dollar.
Just maybe sticking to the downstream, just could you refresh us about what the GM agreement was, how it was structured, and then different payments you'll receive from them and the capacity they committed to?
Sure. There's a lot that obviously I'm not going to get into specifics of a particular customer contract. And so what we have said is that we're thrilled with the partnership with General Motors. We think that one of the important things for us as we're scaling a business from scratch like this and talking about how finished magnets are a pretty unique custom-engineered product is being able to have a partner in this where we've got a limited number of SKUs and very significant volume at each SKU allows us to come up the curve from a manufacturing perspective really quickly. Whereas if you look at if we were to target semicap equipment or something like that, within one $250 million piece of equipment, there's probably 50 magnet SKUs. That's a lot more difficult to tackle in the early days. In medium to long term, absolutely.
Particularly what we're seeing geopolitically, that's a market that we would like to serve and we absolutely will serve over time, I think. With GM and with the downstream business broadly, what we have talked about is certainly in Q2, we received a $50 million prepayment into that business. We expect another $100 million of prepayments coming in the relatively near future. We've laid out from a sources of capital perspective about $170 million of incremental capital coming in the door, at least all of it earned and the vast majority of it received within the next five quarters. That's a combination of the prepayments as well as various tax credits, both 48C and 45X.
You've mentioned it a few times now. Maybe a good time to step back and just talk about the geopolitical implications of maybe the most recent big event in the U.S., which was the election. How do you guys see that playing out over the next year and the direct and maybe indirect impacts that you foresee?
Yeah, look, I think that what we take away from Trump's recent win is a mandate for.
Sorry to interrupt, but you sounded very happy on the conference call.
No, no, no. Look, we sort of joke about this. We're as bipartisan as apple pie, right? What we are happy about is having clarity, and certainly that one thing that we think this result indicates is a focus on the physical economy, people that make stuff, and we make stuff at MP, and I think that there's a real focus and will be a continued real focus on creating a level playing field for critical physical economy sectors like mining, like rares. We've enjoyed incredibly strong bipartisan support, and so from that perspective, blue, red, our main asset is in the state of California. Our Independence facility is in Texas, and our corporate headquarters is in the purple state of Nevada, and so absolutely, we do engage and look forward to engaging across the board.
But I think that what we will likely see, what this result means, is a continued focus on the types of industries that are critical, like rare earths, and ensuring that there's a level playing field for this type of industry to really get the scale that's necessary. And our hope is that the way that's done is by supporting industry champions like MP that are the ones that can actually get this done on a time scale that's relevant.
Sorry, can I just ask about that point? Could you just put questions as to what the situation now is today in terms of American companies sourcing products? I mean, can they source from China or is that not the case, and just a general sort of update and then see how that could change under Trump.
Sure. Yeah, look, we operate in a global business. The magnetic space is a global business. I think certainly if you think about the current size of the magnetics industry, it's still dominated by China. 90% of magnets are made in China. And so it depends on the type of product, on whether magnets themselves are actually being imported into the United States or our entire drive units being imported into the United States. Are they being sent to Mexico and assembled into a motor unit in Mexico and then shipped to the United States? So it's hard to pinpoint exactly how the supply chain looks, but suffice to say, until MP was on the scene with Independence, there was no presence of any significant scale for finished NdFeB magnets in the U.S.
To sort of hit on your question, can companies buy from China? Of course, they can buy from wherever they want to buy from. However, under the Biden administration, there was just a 25% tariff put on NdFeB finished magnets coming into the United States from China. We'll see how that develops over time.
Importantly, when we talked about sort of not just commercial national security, but defense applications, one element that doesn't get a lot of attention, but I think is critically important to think about for the development of the magnetics business in the United States is there's something called DFARS requirements for sourcing requirements for the national security supply chain for the Lockheed Martin of the world, where those magnets, both samarium cobalt, which is not a supply chain that we're in right now, and neodymium -iron -boron magnets must be sourced from domestic magnet, effectively from the United States or allied countries. And so that is something that takes effect at the end of 2026 going into 2027. And that's something that absolutely I think a lot of the defense industrial base was starting to gear up to make sure they've got a plan to handle that.
That's something that we hope to play a real part in helping them achieve.
You mentioned the robotics opportunity. And you mentioned OEMs coming upstream and talking to you. Have you had any kind of conversations with robotics companies that are that far along, or is it still too early in the development?
Yeah, I think Jim, our Chairman and CEO, hinted at this on the call where that industry is still pretty nascent, but we absolutely have conversations. It's one of those things where you look at the robotics bill of materials versus an EV bill of materials. An EV is sort of like a giant battery with your magnets scattered around, and then a robot is sort of the opposite. And so we're starting to see those that are getting ready to build, whether it's humanoid robots or other industrial robots at scale, start to wrap their arms around what it would look like to really source individual piece parts as opposed to trying to buy off-the-shelf actuators and things like that.
And so that journey of, hey, we're buying a solution, but now I need to understand who makes this actuator, and then I need to understand who makes that magnet in the actuator is earlier on the robotics side than it is now, certainly on the automotive side. But I'd say the automotive manufacturers went from kind of zero to 100 pretty fast over the last couple of years. So our hope is that that happens as well in robotics.
Maybe the last question just on capital allocation. You talked about the share repurchase. Is that you continue to do it that way or acquisitions you're looking at or expansion, or how do you rate those?
I think our mantra has always been when we do something, we're not going to tell you we're going to do it first. We're going to do something that is meaningful and of scale. I mean, to date for this year, we've bought back 8.6% of the company, and so I'm not going to break any news here, but we continue to be very focused on return on invested capital and then making sure that we are both positioned thoughtfully for future growth. I think if you put everything in perspective, we've been hitting on some really exciting operational milestones, and we're coming out of a really significant investment program over the last couple of years, and we're at the very tail end of that, and so certainly a lot of this being in a commodity business depends on commodity prices.
But continuing to execute operationally, coming out of this investment cycle, prices starting to peak back up, I think all told, we're pretty excited about the next couple of years.
Thank you, Ryan.