Good afternoon. My name is Chantelle, and I'll be your conference operator today. At this time, I would like to welcome everyone to the MP Materials fourth quarter and full year 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. At this time, I'd like to turn the call over to Martin Sheehan, Head of Investor Relations. Martin, please go ahead.
Thank you, operator, and good day, everyone. Welcome to MP Materials' fourth quarter 2020 earnings call. With me today are James Litinsky, chairman and chief executive officer of MP Materials, Michael Rosenthal, chief operating officer, Ryan Corbett, chief financial officer, and Sheila Bangalore, chief strategy officer and general counsel. Before we get to James and Ryan's opening remarks, I'd like to remind you that during today's call, we will make certain forward-looking statements that do not constitute historical facts under the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements are predictions, projections, and other statements about future events that are based on current expectations and assumptions, and as a result, are subject to risks and uncertainties. Many factors could cause actual future events to differ materially from forward-looking statements in this communication.
For more information about factors that may cause actual results to materially differ from forward-looking statements, please refer to the cautionary language in the earnings release and in our filings with the SEC, including the Risk Factors section in our recent SEC filings. During the call, management will also discuss certain non-GAAP financial measures which we believe to be useful in evaluating MP Materials' operating performance. These measures should not be considered in isolation or as a substitute for MP Materials' financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measures is available in our current report on Form 8-K filed today and can be found on our website, investors.mpmaterials.com. With that, I'll turn the call over to Jim. Jim?
Thanks, Martin, and thanks everyone for joining us today. Welcome to our fourth quarter and full year 2020 call. I'm going to cover a few things today. First, I'll recap our strong fourth quarter results, capping a milestone year for MP. Second, I'll update you on our Stage II optimization plan at Mountain Pass. I'll turn it over to Ryan for some color on our performance. Lastly, I'll share some perspective on the current market environment and how we're positioned for it. Starting with the financial highlights. In the fourth quarter, we generated strong production volumes as well as records for both shipments and revenues. These results show that we are clearly enjoying the benefit of strong pricing, which has continued to rise post-year-end, but we are also demonstrating operating leverage on a unit production cost basis.
You can see the combined effect of these trends in the significant margin expansion we've reported for the fourth quarter. We believe the growth and cost improvement illustrate that we continue to operate our facility at best-in-class levels with both uptime and yields remaining at or near the record levels we've established since restarting Mountain Pass. All told, fourth quarter capped an awesome year from a performance standpoint, and we are continuing to execute at a high level. 2020 was also a milestone year in charting MP's future. As you know, we completed a go-public transaction in November, which gave us a fortress balance sheet as we execute on Stage II and beyond. We also took important steps to scale the company as we prepare to become a leading global producer of separated rare earths, both on-site and in building out our management team.
We currently have over 300 employees across our engineering and site personnel, as well as important public company functions across finance, legal, communications, and other key areas. Finally, we closed out the year by putting the final pieces in place to execute on our Stage II optimization plan. We have now implemented important design improvements that we believe will significantly de-risk Stage II. Essentially, we invested further in the front engineering stage of our Stage II project to improve our processes and circuit design. Through these efforts, we believe that our technical team identified ways to improve product yield, expected first pass on-spec production rates, and reagent usage efficiency, including recycling. Importantly, I'm very pleased to tell you that due to these achievements, we believe we no longer need to restart the chloralkali facility to achieve the 2023 expected operating model we outlined last year on an apples-to-apples basis.
This is because we believe we found ways to permanently reduce the reagent usage per ton of REO. We think this is a significant de-risking of our Stage II, though we still remain maniacally focused on the key work streams of commissioning the roasting circuit, product finishing assets, salt crystallizer, and other site upgrades. I will walk through more details on this in a moment. First, I'd like to cover our production metrics. The team is doing an outstanding job executing, illustrated by strong fourth quarter and 2020 year-over-year growth in production. Importantly, while we've increased shipment volumes by 20% in the quarter and 40% for the full year, concentrate pricing in the fourth quarter increased 70%, demonstrating that the demand for NdPr remains very strong. You can also see here the production cost improvement I highlighted a moment ago.
For the full year, we've reduced production costs on a per metric ton basis by nearly 28%. As we move through our Stage II and contemplate future initiatives, including evaluating heavy rare earths, moving downstream into magnets and other potential initiatives, we believe the progress and rapid learning we're achieving today will lead to significant additional opportunities to increase profitability and cash flows. As we've said to many of you, 2021 is about execution on Stage II. For those who aren't as familiar with our strategy, Stage II is our plan to move from today's profitable concentrate production to separating rare earth oxides, thereby restoring downstream production of these critical elements to the United States of America. Upon expected completion of this project in 2022, we will be scaling toward full annual run rate production of more than 6,000 metric tons of NdPr.
As we stated during the going public process last year, we expect 2023 will be the first full year of production at these levels. Keep in mind, though, that the 2023 target of $250 million in normalized EBITDA that we outlined last year assumed a spot NdPr price of $70 per kilo. NdPr spot today is actually roughly $88. With that background, I'm pleased to report that Stage II remains on track. Long lead equipment is arriving on site. Our fixed price engineering and procurement contract is signed and construction is underway. That said, with our unwavering owner/operator mentality, we do not rest. In recent months, our team made important design improvements that we believe significantly de-risk the project, enhance our potential long-term operating model, and reduce our environmental footprint. For those of you who followed us, we originally announced estimated Stage II project costs back in July.
They consisted of a total of $200 million in two primary parts. The first $170 million related to mainly reinstituting the roasting step and adding a salt crystallizer, which is intended to restore the separations process flow to how it worked successfully for decades at Mountain Pass. As the chart here indicates, this capital outlay has not changed since we first announced those plans. We also had a Stage IIB, which was focused on the restart of the chloralkali facility for managing reagents used in the refining process. This project was to consume the remaining $30 million of the Stage II capital costs. The successful completion of Stage II construction and chloralkali were the execution drivers needed for us to achieve the normalized 2023 EBITDA target that we shared with you. We've been busy.
We believe that what is now underway on an apples-to-apples basis versus July should have lower structural costs per REO metric ton produced, as well as improve upon our already strong environmental profile. We no longer need to restart chloralkali in the near term to achieve those previously disclosed targets. Let me be specific. The redesign will significantly reduce the amount of reagents used per ton of REO processed in our refining process, in some cases by over 10%, reducing our original expectations for operating costs in Stage II. Restarting the chloralkali facility in the future remains an option for us, but one might now analyze it as a separate and new incremental potential high return investment opportunity that could further enhance shareholder value. Restarting this facility in the future means we could potentially have more excess reagents to sell into the open market, driving an improved ROI.
Therefore, we now have a contracted Stage II underway with a net capital cost consistent with prior estimates, despite what we believe are significant design improvements for all of the reasons I've outlined. Moreover, I believe this is a pretty remarkable achievement for our team when you consider the rapid cost inflation that we are seeing throughout the economy. This is particularly acute for infrastructure materials like steel, lumber, and concrete. In fact, since our July 2020 estimate, steel prices are up 150%, lumber prices are up 130%, and concrete is up 30%. As we execute, we hope to experience the upside leverage that could come from rising commodity prices against an in-place multi-billion dollar and difficult to replace asset base. I would also add that this is particularly powerful to consider in light of what we believe is the beginning stages of a demand-driven commodity cycle.
Whatever the markets thought new supply would cost, I think it is fair to say it has recently gone up a lot. Now, I will turn it over to Ryan to talk through financial highlights.
Thanks, Jim, and hello, everyone. Jim already covered a few of the financial headlines, and we have all of the details in our press release. I'll give an overview of how we think about our financial results and share some thoughts on how we're looking at 2021. We delivered impressive growth in Q4 and for the full fiscal year. Jim spoke about the strong demand and pricing environment, which drove the doubling of our revenues in the quarter and the 83% growth for the full year. The lifting of import duties in China has also contributed to higher realized prices. The headline for us is that demand is strong, and although we can't predict pricing or shipping schedules quarter to quarter, we expect to continue to sell through all of our production.
In addition to the price and sales side of the equation, our adjusted EBITDA benefited from the continued excellent work Michael and his team are doing to improve our processes, reduce risk, and ultimately increase the productivity of Stage I. Unit costs were down year-over-year, mainly due to these process improvements, which drove a higher average concentrate grade and higher mineral recoveries compared to last year. Put another way, our improvements are generating higher percentages of rare earth oxides and concentrate, and we continue to achieve higher productivity per ton of ore fed. As we continue to effectively manage our per unit production costs, you can see the leverage that exists in this model when demand and pricing are strong. This combination caused our margins to triple in Q4 compared to last year's fourth quarter and was the driver of our roughly 300% increase in EBITDA.
Keep in mind that this EBITDA growth includes about six weeks of the impact of public company costs following our listing. While we'll be seeing the full quarter impact of these costs moving forward, we feel good about production costs and our margin outlook. Lastly, on production costs, although down year-over-year, the sequential increase is partly due to typical seasonality with our planned year-end plant turnaround. Results were also impacted by a project to diversify our reagent supply chain and ensure a sustainable U.S.-based source of these critical materials. We embarked on a full-scale reagent pilot from mid-October into late January of the first quarter, and it took a lot of hard work from the team. Ultimately, we were successful in this full-scale test, and it was an important achievement for the company.
Given the supply chain issues we have all seen in industries like semiconductors, proving out a suitable alternative for our reagents was critical. As you would expect with a limited volume commitment for a trial, pricing for these reagents was slightly higher per unit of contained REO. The tremendous success of the pilot, as evidenced in our record production, gives us confidence that we now have supply redundancy that would come at a similar or better per unit cost of our current reagent scheme. Although costs were up slightly from Q3 on a per unit basis, the reduction in risk to our Stage I process was well worth the investment.
On the next slide, I thought it would be useful to dig into our reported cash flow and provide some context so that you can see how our Stage I process is generating free cash flow for the business. In the appendix section of the slides, you'll see a detailed walk of how we get from adjusted EBITDA to our reported operating cash flow and then our reported free cash flow. Looking at slide nine specifically, on the left side of the chart, you see our free cash flow for the year was -$19 million. If we adjust for our offtake paydown, the CapEx spent on our Stage II optimization and related projects, as well as deal expenses and one-time items, our Stage I process generated approximately $34 million of normalized free cash flow in 2020.
That's a very strong 25% free cash flow margin for the year. Keep in mind that the offtake balance is essentially debt. Per US GAAP, the impact of the paydown of that agreement, because our offtake partner retains a portion of the cash from sales to pay down the obligation, that runs through our operating cash flow instead of financing in the cash flow statement as might be expected, which is why we believe it's relevant to add back to our free cash flow for our comparable metric. Moving to slide 10, a quick balance sheet update. As we discussed last quarter, our business combination resulted in gross proceeds of $545 million to fund our growth. We reported a net cash balance at year-end of nearly $520 million, positioning us very well as we ramp up work on Stage II.
The balance on our offtake agreement was reduced to $71 million in the quarter. Regarding our share count, the earn-out vesting shares from our business combination all vested in the quarter, resulting in approximately 171 million shares outstanding at the end of Q4. Approximately 11.5 million warrants remain outstanding and will become exercisable on May 4th, on the one-year anniversary of the Fortress Value IPO. We've illustrated our fully diluted share count with the warrant impact captured via the treasury stock method on the table on slide 10. We feel very good about where we stand financially as we embark on Stage II, which as Jim noted, will now be a $210 million net headline cost with the design improvements built in. We are more than adequately funded for Stage II, while also generating strong implied free cash flow from Stage I.
All that said, with our markets developing rapidly, we will be opportunistic with respect to how we manage our financial capacity and flexibility, particularly as we see opportunities to pursue our mission of fully restoring the supply chain to the United States. Shifting to the next slide on our fiscal year 2021 operating framework. We currently anticipate modest production and shipping volume growth for the full year, and should pricing hold, we are set up for a very good 2021. We continue to produce at near record levels, and our Q1 is shaping up to be a solid quarter with improved sequential revenues and EBITDA. Moving to the cost side, as we continually optimize our Stage I process, we expect to continue our trend of per unit cost improvement, but expect to reinvest those gains in headcount growth as we prepare for Stage II and grow our corporate functions.
Some of you might also be wondering about shipping, given reports of congestion at the Los Angeles and Long Beach ports. I'd remind you there that we are an outbound shipper, so we do not believe we will see any material cost impact from what you're reading about, though general lumpiness in shipment timing is always possible given the overall congestion at the port. As for the Stage II capital spend, the ramp in capital cost is essentially beginning now, with the majority of that $210 million spend occurring in late 2021. Now I'd like to turn it back to Jim to wrap up.
Thanks, Ryan. I would like to take a moment to remind everyone of the extraordinary opportunity unfolding for MP. When we founded the company in 2017, we saw tremendous potential in Mountain Pass given the incredibly unique nature of the asset and its importance to electrification and supply chain reliability. We were fortunate, though, to have a few tough years to help us build confidence in our mission and to put in place an owner-operator culture focused on execution. We are now in the early innings of a multi-trillion dollar industrial transformation of the global economy. MP will be a part of shaping this future. Just since our listing on the NYSE in November, it feels like the theme of electrification and decarbonization has accelerated even faster than most people expected.
We see global OEMs, including Ford and GM, along with their Chinese, Japanese, and German counterparts, announcing plans to accelerate the transition away from combustion engines. Maybe it can be best summed up by a quote the other day from Herbert Diess, the CEO of Volkswagen, who said, "Our transformation will be fast. It will be unprecedented. E-mobility has become core business for us." Here at home, more and more states have adopted California's aggressive clean vehicle standards, with several more expected to follow. Of course, I could just remind you about what's happening in the capital markets. From cars and trucks to planes and air taxis, or from multiple battery technology plays, massive amounts of capital are going into SPACs and IPOs to fund electrification.
The enterprise value of companies focused around auto electrification now exceeds $1 trillion. That doesn't even include the other trillion plus from the legacy OEMs. We see a pathway of literally hundreds of billions invested globally over the next five or so years, then likely into the trillions beyond that. Like any great boom, whether it was the railroads, the ICE automobile, or the internet, youthful industrial excitement and unending possibility eventually seasons into maturity, competition, consolidation, and failure for some. Every great American Gold Rush era needs its picks and shovels or blue jeans plays. This one is no different. We believe MP serves that kind of role. Speaking of blue jeans, there are few areas of overwhelming bipartisan consensus in America right now. Supporting resilient domestic supply chains is certainly one of them.
Our mission is to restore the full rare earth supply chain to the U.S. and to do so sustainably. We believe Washington, D.C., is getting focused on stimulating much more success for companies like ours. We won't hold our breath. Right now, we are focused on the relentless execution that I've outlined. We are moving forward, improving our Stage I operations and implementing our Stage II optimization. In fact, a key third-party industry research firm recently published that MP is expected to be the world's lowest cost rare earth producer when we complete Stage II. We tweeted their chart last month. Please check that out. While we do all this, we are working in parallel on our longer-term approach for Stage III. Ultimately, the main use case for rare earths is for magnets. The size of that opportunity is enormous.
We are profitable with a strong balance sheet. We are the most environmentally responsible company in the rare earth industry, evidenced by our modern facility and location in California. We believe we are on track to being the world's lowest cost producer, and we are the only scaled Western supplier of a precious commodity that is critical to electrification, decarbonization, and national security. Thank you all again for joining today. Let's now have the operator begin the Q&A session.
At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Carlos de Alba with Morgan Stanley. Your line is open.
Thank you. Good afternoon, everyone. A couple of questions, if I may. The first one is, you expect basically modest volume growth this year with a stable unit cost. Do you foresee any seasonality, especially seasonality throughout the quarters? Maybe as you ramp up more production in the second half or fourth quarter, the unit cost will be lower then than they will be in the first half? That would be the first question. The second one is if you could comment, please, on the rebates that you are getting from the change in the tariff rebate. If you can comment, when do you see that finalizing? In terms of the stockpile sales, also how you see that throughout 2021. Thank you very much.
Sure. Hey, Carlos. Hey, Ryan, why don't you take both those?
Sure. Hey, Carlos. I'd start on your first one in terms of seasonality. I wouldn't expect there to be significant seasonality from a production basis. I think your view is probably correct in terms of the modest volume growth really taking place in the back half of the year. From a shipment standpoint, as I mentioned, that can be lumpy quarter to quarter, and so it's tough to give any great color there. I think over the course of the year, we certainly intend to be selling through 100% of our production. The individual shipments over the course of each quarter can move around a bit. On the tariff question, the tariff rebate in 2020 was really a one-time item.
This reflected a rebate from the tariffs that were in place, the Chinese import duties on our product up until March of 2020 and related to sales in the first quarter and in prior years. There may be some small amount of remaining rebate left, but not material and not anything that we could predict with certainty coming into 2021. The last piece on stockpile sales, you'll see those are incredibly small, a couple hundred thousand dollars a year, and relate to legacy stockpiles, as you mentioned. I think we'll probably continue to sell out that inventory over time, but not a material driver for us.
Perfect. Thank you very much, Jim and Ryan. Maybe if I could add one more. On the royalty expense to SNR. If I understood correctly from what I read in the release, the amount of around 450,000, 440,000 tons that we saw in the fourth quarter, that was the last sort of payment before the transaction was completed and the combination was done, and the business combination was concluded, and therefore we should not be seeing this any further or any more in the results, right, from the first quarter on?
Yeah, Carlos, that's right. There was no payment from the company to SNR in closing the combination. That just reflects bringing the SNR mineral royalty interest onto the balance sheet of the combined company. Going forward, since both SNR and MP Mine Operations are operating business or wholly owned subsidiaries of MP Materials Corp, you will not see any royalty expense or intercompany going forward.
All right. Excellent. Thank you very much, guys.
Thank you.
Thanks. Next question.
Your next question comes from the line of David Deckelbaum with Cowen. Your line is open.
Good afternoon, Jim and Ryan. Thanks for the time today.
Of course.
Afternoon.
I was hoping that you highlighted the fact that a third-party research firm points to MP and Mountain Pass as the lowest cost producer of NdPr in the world. Could you share what you expect your targeted production cost to be on a per kilo basis once you're at run rate in 2023?
Well, I'll make a quick comment on that question, which is, remember that obviously today we sell a Stage I product. We don't currently produce NdPr. The research was saying that when we're complete with Stage II, that's when we're actually selling NdPr. Ryan, do you want to comment on the model and anything you want to say on that front?
Sure. Yeah. I'd say the right way to think about it is, we highlighted, we think with the plan that we laid out from the design improvements today, we stand behind our view of the EBITDA guidance we provided for 2023. If you just do the math on sort of what we had provided during our go public transaction and just divide that cost structure, the implied cost structure by the total NdPr we expect to produce, that's in the very high $20s per kg. I think that's the right way to think about it.
Appreciate that. Then maybe if you could just clarify a bit, you talked about getting to that run rate of just over 6,000 tons per annum once Stage II is up and running, and that would be the full run rate achieved in 2023. How long do you expect it take to ramp up the capacity from sort of first separation in terms of months or quarters?
We haven't said anything specifically about what that ramp is going to look like. What we've said is that assume that 2022 will be a year that consists of that completion, the ramp, et cetera. Really the best way to view it is normalize 2023. I'd love to help you, but we just really haven't said anything about how that ramp will go, other than obviously we will try to get it done as quickly as we possibly can.
The one other thing I'd add there, David, is obviously we'll continue to sell our concentrate product that is not being consumed by the Stage II ramp up process. Obviously, you see the results this quarter, and our expectation for the year, from a revenue and cash generation standpoint for the Stage I business. That will continue as we ramp Stage II.
I appreciate that. The last ones for me is just, you highlighted the chloralkali sort of capital opportunity. When do you think that you'll have a decision around whether you want to pursue that facility or not in terms of a business opportunity?
Yeah. We don't have a timetable on that. I think the important thing to realize is the substantial progress that we've made with respect to these design improvements, where basically we believe that we can deliver on the 2023 operating model improved obviously relative on, and obviously we're staying on an apples to apples basis relative to before. We think that that's a pretty exciting achievement. With that, we preserve our ability to ramp up chloralkali, but we haven't obviously, we're just announcing this today, so we haven't stated any public view as to when and how we would do that other than to say that the way you should think about that is it is now a separate, potentially high return on capital event that we'll analyze like any investment opportunity.
Absolutely. Appreciate the time, guys. I'll get back to you.
Yeah, of course. Thank you.
Your next question comes from the line of Chris Terry with Deutsche Bank. Your line is open.
Thank you. Hi, Jim
Hi, Chris.
Ryan, Michael. Hey there, hope you're all well. I have a few questions. I'll just maybe do them one at a time. First one, just on the reagents. Sounds like an exciting opportunity you have there. Just wondering if you could talk a little bit to how you're doing that. Is that the process itself is the same as it was, and you just save on the reagents? Or have you slightly modified the way that you do the separation, and that's where the actual savings in the reagents come about?
Yeah. Chris, thank you. You're giving Michael a chance to chime in here. Michael, why don't you take that one?
Thank you, Chris.
Yeah.
It's a good question. I guess we mentioned in previous presentations that we saw that there are areas for continued improvement in how we operated some of the existing assets that are to be recommissioned, and optimization of the new assets that we plan to acquire. These opportunities rose from our deep understanding of the previous generations of Mountain Pass operations, as well as certain industry best practices, particularly in China. Earlier last year, we decided to extend the front-end engineering schedule in order to spend more time on R&D and pilot work before finalizing our process flow and equipment list. Ultimately, we developed enough confidence in some of these developments to incorporate that into some design changes in our final process and equipment list.
Some examples of that are on the roasting and leaching processes, we worked to optimize the roasting and leaching conditions to improve the NdPr recovery, maximize cerium removal, and minimize reagent usage. On the leach side itself, we made adjustments to the leach processes to minimize the entrainment of NdPr in the removed leach solids to minimize the amount of RO water we had to use, and minimize the amount of reagents to use through improved recycling. On the extraction side, we made certain improvements to the processes to reduce reagent use and maximize the production of saleable products, including non-NdPr products. On the finishing, we improved reagent handling to reduce the stoichiometric excess reagent usage relative to our previous model, and improved the recycling of materials to improve the yields. We also made improvements to the finishing process to increase first-pass on-spec production rates.
This includes enhanced blending capability to blend at various stages of production, as well as increased storage to enable greater resiliency and flexibility of production. All these things contributed to what Jim said about reducing reagent usage, which also reduces the amount of spent brine that is produced, some of which would have to otherwise be neutralized, which further reduces the amount of reagents consumed. Those are the types of things that we engaged in that we thought generate very high return and make us very confident in those long-term savings.
Thanks, Michael. Appreciate the extra color. A couple of others I just wanted to ask. Do you think maybe by the middle of the year or some point early in the second half of the year, you'll be in a position to maybe give more specific timing about the startup of Stage II in 2022? How are you thinking about when you'll provide that update?
Great question. We totally understand that people obviously want to get as updated as they possibly can throughout the way. We're going to do our best throughout this year to be transparent, let people know what's going on. Hopefully, we'll try to have some visits later in the year, so people can see for themselves. We will look to do that. As far as the specific timetable, it's hard to give you something specific other than to say that I understand it's top of mind and investors want to know how we're progressing. We certainly, as a team, we are execution-focused. We recognize that people want to judge us and measure us against what we say. Obviously, we want to do that as well. That might not be a satisfying answer.
We'll do our best to tell you as much as we can throughout the year to keep you aware.
Okay. Just moving down a stage to Stage III, just wondering if you can give an update on how you're thinking about that. It's obviously an exciting opportunity if you can do that. Are you thinking about that still, you'll chip away at it while Stage II is going through, or you get Stage II up and running and then look at it? Just trying to work out the sequence of events and how Stage III might ultimately fit in.
Chris, I'm going to give you a really unsatisfying answer, unfortunately, which is, we don't have any Stage III updates today. You can expect us to be very opportunistic. I will leave it at that, and we've publicly stated, obviously, we have a team working on Stage III. We have a number of people, and we will be opportunistic.
Okay. The last one from me just relates to the market. I guess, just keen to hear your views on the recent price moves in NdPr that we've seen since the start of the year, the update from the China production quotas and just any color you can provide in general, particularly on the NdPr side. Thanks.
Maybe everyone can chime in here because obviously when it comes to commodities prices, who knows? What I would say is that our belief is that this is demand-driven. I think everyone can see the headlines around and the growth in the EV space, and that is certainly our interpretation of what we're seeing on the ground, so to speak. There were also, around that same time of the close you referenced, there were also some headlines of very senior Chinese rare earth officials talking about how they believe prices to be too low, given the environmental impact of processing and, I believe the exact words were, "Prices reflected the price of rare earth," not their rarity or something. I'm messing up the paraphrasing. We, again, as I've very clearly stated, who knows what the next month or two will look like in the near term.
I am fundamentally of the belief that if you look around the world and see that we're 3% penetrated just in electric vehicles and we are going to 90+% over the next few decades, maybe we're going to get there pretty fast given the amount of capital that will be forming in the space. You can do the math on the demand. I think that the other incremental piece here that we tried to touch upon this during the prepared remarks is just, I don't think that there's a full appreciation for the true replacement cost of getting these assets online. To do this right, to be an economically viable participant in this space, it's a multi-billion dollar investment, and that's if you have the ore body.
As you know, we have a 7+% ore body, relative to some of these other projects you might see out there in some of the junior mining or other spaces. They're typically around 1% or 2%, if that. Again, it's just a look through across, if you had unlimited capital and you had a permit and a plan, and a viable ore body, none of which really exists today in the Western world, but if you had that, you then have to build a separation facility.
This is a massive investment, and again, I think given what we're seeing in materials costs and given the expertise required, I do think that people are going to find that the ability to bring new supply online is going to end up being more challenging and more expensive than they might otherwise think by just sort of throwing a number out there. That will be something that we will see prove out over time in the coming years. It certainly is nothing that will be playing out in the next month or two. Hopefully, that's sort of a long-winded way of giving you our perspective on it. I don't know if Ryan or Michael want to chime in, but that's our house view.
Thank you. Yep.
Yeah, of course.
That's helpful. I think that's it from me. Thanks, guys. All the best.
Thank you, Chris. Yep.
We will take one more set of questions from Ben Kallo with Baird. Your line is open.
Hey, James. Hey, Ryan, Mike, and Martin. Thanks for taking my questions. Maybe when's Stage II going to be finished? I'm just joking.
I was going to make some joke like, "I haven't seen you in ages, Ben.
No, can you talk about the downstream, I think, because I think that maybe it would be helpful to figure out how fragmented the market is, and what that really means, and then how close to the customer that is, and then how you think that that could help maybe mitigate price fluctuations in rare earths as you move downstream.
When you say the downstream, you're referring to separated, so Stage II, right?
Stage III.
Yeah. Oh, Stage III. Well, I'm going to give you the same unsatisfying answer that I gave Chris. Maybe I'll say it with a little more gusto. We don't have any Stage III updates at this time, but you can expect us to be extremely opportunistic. I'll leave it at that on Stage III.
Well, I was asking about the market, like how fragmented it is or just in general, and what that does for pricing.
Oh, I see. Yeah. Well, I think here's the answer to what you're asking, even if you're not specifically asking it, which is that we have to remember, again, that this is a total transformation of the supply chain, right? We've never had an electrification of the OEM market, let alone the global economy, right? When we think about what the downstream looks like, certainly the downstream today, the magnet industry is controlled in China. The reality is that as we evolve globally into You heard me quote the CEO of Volkswagen. You certainly see what's going on globally with investment. It's unlikely that there's going to continue to be a single point of failure in the supply chain in areas where there are viable alternatives. We believe that we're positioned really well to provide that.
The reality is that the magnet business today is mainly concentrated in China. There's a little bit in Japan. Our belief is that That's obviously core to our mission, is that we will be part of the shaping of that as this whole world evolves. Again, this is just such a huge opportunity when you think about, just do the math, and we've obviously put out slides on this, of what you think the magnet business is today for EVs. If it's 3% penetrated and it goes to 30%, that's a 10-bagger, roughly. Maybe obviously there'll be some scaling, still, it's a huge opportunity. We plan on being part of that solution. The other thing I would say is, as far as the magnets, there's a variety of customers as the industry stands today.
The OEMs can be involved, the motor makers can be involved, or the magnet producers. This downstream supply chain, there are different parties involved in it, but we certainly know who the players are. We don't need a huge sales force to go out and talk to these folks. They know who we are, we know who they are. I think that it's just another one of these things. Right now if you think about the legacy OEMs, they're thinking about evolving their business. They haven't gotten to some of these other issues because they're literally drinking from a fire hose. There are so many issues when you're talking about this scale of GDP that is transforming. There are just so many issues, and it creates chaos, right?
You see capital formation in many companies, and the good news is that there's going to be some winners, there's going to be some losers. We don't need to take an extraordinary amount of risk, and we don't need to take over the entire industry. All we need to do is be thoughtful about how we invest and execute, and it's just a pretty extraordinary business opportunity. Again, I know it's not a super satisfying answer, but the truth is that it's a supply chain that doesn't exist yet, and we believe we're going to be part of creating it.
Thank you.
Ben, this is-
Go ahead.
This is Ryan. I'd just add real quick on that, a couple of thoughts. Adding to what Jim was saying in terms of we don't need to take a ton of share. We get asked a lot about the magnet intensity per electric vehicle and all those things, certainly you see in our materials, we think that the EV piece of the market is growing incredibly fast. Take the entire magnet market, we think capacity between now and 2030 has to double in this industry. I think the other thing that's really playing into our favor in a market that already we think needs to double is, I think what a key differentiator will be is access to raw materials.
Since we've been at this and had conversations with customers, the thing that has surprised me is the amount of time that we have very, very downstream customers all the way down to the OEMs of various types of things, not just electric vehicles, now coming hand in hand with magnet makers to us, trying to understand, "Hey, if I sign this contract for magnets, is there going to be NdPr there to back it up?" I think it's a really critical differentiator being vertically integrated and something that really no one else can do. I think that will be the secret sauce, if you will.
To your point on volatility in rare earth prices, I think you've seen if you sort of model over time what margins in the magnet business have done versus rare earth prices, magnet makers have pretty consistently been able to pass through with some lag, for sure. I think our fundamental view as well, though, is we certainly are not going to subsidize one piece of our business for the benefit of the other. I think we feel very strongly that they need to stand alone and have their own economic returns, and we'll proceed with that view.
The reason we feel good and are interested in the Stage III opportunity is the staying power of those margins, and given our view of the scarcity, if rare earth prices continue to go up, our Stage II business will continue to benefit, and we do not think that will come at the expense of a potential Stage III. I'd say that at a high level is sort of just how we think about that market.
Thank you. That's very good. Ben, two questions, and one for you, Ryan, first. Just the leverage ratio that you're comfortable with going down, and the structure. Then James, for you, one of the benefits, you have many employees that have been working at the mine for a long time that are there and making sure that you guys are very successful, and I think it's a huge benefit. How do you make them feel okay to just be, I mean, I'm kind of crude, but just make them feel okay because the mine's been in the hands of a few different people over the years? I'll stop there. Thanks, guys.
Sure. I can probably take both of those, but Ryan, you can chime in after. On leverage, I feel very strongly that the capital structure of a company needs to be appropriate for the business that you're in. Certainly, we are very mindful of that. We obviously are mindful of the history, and as you've probably heard me say ad nauseam, we want the leverage to be in the price
Not from the balance sheet, so to speak. I would say, though, that remember that our Stage I business is generating cash. We obviously believe that our Stage II business will then be a significant uplift. There's no doubt that we have made a lot of progress in the business over the last few years. The power of an owner-operator culture is that we are large shareholders ourselves. We care, and we want to make sure that we create long-term value. We're not looking to do anything too shortsighted. Again, the capital structure needs to be appropriate for the business, hopefully that helps you on the leverage front. On the employee front, it's a great question, and actually it's an extension of what I just said, which is our owner-operator culture.
One thing, and that people might not be aware, but as part of our public transaction in November, we gave every single non-executive employee of the company a $3,000 bonus. That didn't matter your title or whatever, just every employee that's non-executive. As well as we recently provided the opportunity for every single employee to be an owner. Everyone got granted 100 shares across. Again, it doesn't matter your job, whether you're a mine worker, a maintenance, a receptionist, doesn't matter. Our intention as a company, as a culture, is to be an owner-operator culture. I think we've delivered on our promises to the base out there of making sure that we were going to share in the good fortune when it comes, and we've been through a number of tough years, and I think we've certainly delivered, so far, an outstanding result.
We are going to continue to work the way we always have to create a lot of value here. Our employees, we expect to all participate in that and hopefully increasingly over time. It's top of mind. It's really important, and I think particularly when you have an industrial enterprise that's so reliant on your human capital, you need to treat them like owners. You need to treat them and make sure that they care. I think that that really pays dividends for shareholders because you have everybody of like mind that the goal is to create value here. There's no sort of distinction or pointing fingers, or us versus them kind of mentality. Hopefully we will continue to get that piece of it right.
I think that as far as we can tell, everybody is very happy that we've been so successful, and we think we have a long way to go and much success ahead, and they'll participate in that upside.
Good stuff. Thank you very much.
Mm-hmm. Of course.
Okay.
This concludes today's conference call. Thank you for attending. You may now disconnect.
Okay. Thank you, everyone.