Ladies and gentlemen, the program is about to begin. Reminder that you can submit questions at any time via the Ask Questions tab on the webcast page. At this time, it is my pleasure to turn the program over to your host, Michael Widmer. Please go ahead.
Thank you very much, and good morning, good afternoon, everyone. Again, I'm Michael Widmer. I run the Metals Research at Bank of America. This is going to be a very compressed, high-intent session, actually. We have got 25-30 minutes to talk MP Materials and the rare earth. With me today, I've got Ryan Corbett, who is the Chief Financial Officer at MP Materials. Now, let's actually jump right in. We had a brief chat before about how the market got from not knowing the rare earth elements, rare earth materials, a few months ago to being an expert at the moment. I thought it would be still wise to maybe set the scene. A lot of talk at the moment about light rare earth, heavy rare earth, and then also the magnets. Ryan, what are those?
Yeah, Michael, thanks for having me, and thanks to the Bank of America team. Happy to be here today. Certainly easy to do it virtually, so pleasure to be here. You know, I think certainly over the last several months, and particularly since the beginning of April, there's been an unbelievable sort of crash course by the market in what are rare earths, mostly because the importance of both the rare earth commodity products and, most importantly, the finished products, finished engineered products, the rare earth permanent magnets that they go into have become so topical given the geopolitical situation between the U.S. and China in particular, and the export controls that the Chinese have put on these critical products. You know, it's important to think about permanent magnets as effectively one of the most important critical enablers of the modern economy.
I think the Chinese, you tend to refer to them as industrial vitamins, and they are what are needed to convert stored energy into motion in most use cases. There is a lot of focus on their use in electric vehicle traction motors, but we can't forget, and one of the reasons that these became so topical is put traction motors aside, put electric vehicles aside, think about the number of parts of a vehicle that move. Power seats, power steering, power windows, all of those actuators and motors tend to have rare earth permanent magnets in them because they are the best technology from a weight and power perspective.
You know, to your point, Michael, there is a lot of focus on trying to understand, you know, what are light rare earths, what are their importance, what are heavy rare earths, you know, why do those seem pretty important right now? To kind of set the scene, what we really care about at the end of the day is an ability for the United States and the Western world to have a secure supply of permanent magnets for industrial applications, for energy applications, you name it, for defense applications. You know, drones, robots, you know, are becoming much more important users of permanent magnets. The vast majority of the content of a rare earth permanent magnet is NdPr, neodymium praseodymium, which is, you know, by far the largest product that we produce at MP Materials.
There are small amounts of heavy rare earths that are added to certain magnets to maintain their performance at higher temperatures. These are the heavy rare earth elements, namely dysprosium and terbium. We also produce those at MP Materials and will be in production of refined heavy rare earths next year. But importantly, what matters is how do you get to the finished product to enable, you know, data centers, drones, robots, cars, et cetera? You know, I think the focus being oftentimes in sort of the market commentary on the heavy rare earth portion of the suite of 17 rare earth elements right now is because those are the ones that were used as sort of the way for the Chinese to put export restrictions on magnets. At the end of the day, the lights and the heavies are equally important.
I think the United States and the Western world have made more progress on the light rare earths, given the vast majority of the raw materials in a permanent magnet are the light rare earths, NdPr. And frankly, you know, from our perspective, we as a company and the industry writ large have made a tremendous amount of progress in lowering the heavy rare earth content for a given magnet use case. I think that that will continue over time. Really, the potential substitutions or other technologies for magnets that use less light rare earths have not proven to be particularly effective. At the end of the day, they're all important. I think we will play a role in critical enabling technologies, recycling, et cetera, that will allow us to drive more supply of these in the Western world.
That's sort of an attempt to set the scene of a very complex, you know, state of affairs right now.
You're focusing, as you mentioned right now, a little bit also more on the heavy rare earth side. But from all of your commentary, is it possible to say that which of those sectors, the light, the heavies, or the magnets, which one could see the strongest growth going forward, or are they growing all at the same pace?
I think they're all interlinked. I actually think, you know, despite all the focus on the heavies, the heavies will probably grow the slowest because what you'll see is the vast majority of the use case of NdPr is in permanent magnets. Permanent magnets, you know, you can pick your third-party research, almost everybody has them at a double-digit CAGR, which makes perfect sense given their end-use applications. Let's take that for what it is. There are various applications within that 10%+ CAGR that are growing very rapidly that either require fewer heavy rare earths at baseline because they're not operating at super high temperatures, or if they do require heavies, the focus of R&D has been on lowering the units of heavies per unit of magnet, for example. I think you'll see NdPr and magnets grow in lockstep at double-digit CAGRs.
I think heavies will grow slightly slower, not to say they're less important. That's just the reality of the market.
Okay. When we look at kind of the last few weeks, China did put a temporary hold to its exports. How do you think that impacted the market? Also, like, was there any read-through to MP Materials, which I think there was, but I just thought I'd ask the questions on that.
Sure. Yeah, no, it's a great question. Look, I think, you know, it's fascinating to see how this export control mechanism was implemented. If you think about how the magnet market has developed over the last 20 plus years as the Chinese have gained increasing dominance and have continued to support their industry with a focused industrial policy and subsidy regime, what customers have been able to do is, you know, they can get whatever magnets they want at a very low price given the subsidized environment. It's one of those scenarios where if it's easily accessible and there's no real, you know, meaningful economic or sourcing impact for getting higher and higher and higher specifications, why not put the highest spec magnet into your application?
What you're seeing is with the Chinese basically taking what could have been a pretty narrow interpretation of heavy rare earth export controls, but applying them to magnets, and then looking at the fact that every customer really had no issue, well, I'll be able to put a few heavies in there because it lets us not really test how things go at 120 degrees Celsius, 150 degrees Celsius. You know, it made everyone realize how overspec'd their magnets were and how reliant they were on this magnet regime dominated by the Chinese.
The implication for us as a company and certainly us as an industry and a country is a real wake-up call to industry as to how they were lulled into the sense of security from this focused industrial policy over the last several decades and just how vulnerable we really are as a society to the ability for the Chinese to just turn the spigot off. I mean, if you think about what they could have done, they could have said, oh, we're just going to restrict heavy rare earths themselves. That would have impacted Japanese magnet makers, U.S. magnet makers perhaps that are fledgling, you know, European magnet makers.
It might not have really made the industry think about how important the magnets themselves are, but instead putting those export controls on the magnets, every major OEM, whether it's automotive, industrial, defense, aerospace, is sitting here saying, you know, I've got three weeks of inventory left for a piece of my supply chain that I never thought twice about. Now I'm recognizing I might not be able to get that over the next six weeks, the next six months. What happens if, you know, the geopolitical situation devolves further? It really is what we at MP Materials have been saying for the last seven to eight years of, again, this is not an anti-China thing. It's any country with the level of dominance in a critical enabler of the modern economy with such scale and dominance, it's untenable.
It could be, you know, you name the country and it still would not work. It just so happens to be, you know, one of our, you know, most critical geopolitical, you know, potential adversaries right now as we look at this trade war dynamic. You know, that is hugely supportive of what we are doing at MP Materials. You know, we talked on our last earnings call about the fact that, you know, and we sort of joke internally, like, I do not think anyone at this company has worked as hard as this, except for maybe like, you know, cramming for exams in college is what it feels like. It is absolutely nonstop.
I mean, it's a great opportunity for us, but it really gives you a sense for how behind the eight ball so many Western, you know, European, American, Asian manufacturers were in just relying on this single point of failure in the supply chain.
The big question here, looking at China's dominance at the moment, can we actually reduce the dominance? One question actually, if I may, we were always talking, there was always talk about how cost-efficient the Chinese can operate in some of those materials. What's the CapEx and the OpEx environment for you in the aspect ?
Sure. No, it's a great question. I think the important thing is to understand not all rare earth assets, you know, certainly mineral deposits and reserves are created equal. We are, you know, fundamentally in a great position because we have Mountain Pass, which is sort of a freak of nature, you know, from a mineralogical perspective. You know, what is needed to break the Chinese dominance in this space is a viable, dominant set of national champions that can benefit from the positive flywheel that the Chinese have, but do it in a way that is, you know, within the framework of the Western free market economy. I think that MP Materials is really at the forefront of that and leading that charge as a national champion in the space.
It is why we have been so aggressively investing in our vertical integration strategy, you know, for the last several years. We started to see this flywheel start to turn in a positive direction in 2021. You know, we took the company public in 2020 with a mission to go from producing a rare earth concentrate, where we actually believe, you know, to your point on, you know, cost competitiveness, we think we are the lowest cost producer of mixed rare earth concentrate in the world, including the Chinese, you know, depending on how maybe Baotou allocates their cost between iron ore and rare earths, you know, maybe they are a close second or maybe we are a close second. Regardless, where we sit on the cost curve is tier one without a doubt. We have been able to leverage that.
The goal when we went public is leverage that into building out our refining capability at scale, where we have a lot of benefits and competitive advantages versus the Chinese and a lot of disadvantages. At the end of the day, we do believe that they all will come out in the wash, where we will continue from a vertically integrated perspective through to separated rare earth oxides, be competitive with the best Chinese producers. We have seen, you know, if you just look at, you know, the public Chinese producers out there and their reporting, you know, at $40, you know, mid-$40 NdPr prices, none of them are making money. That tells you where the cost curve sits.
You know, we spoke on our last earnings call about our view of getting from sort of the 60s where we sit today, given our underutilization of our asset as we ramp, you know, into a very similar cost position. We feel good about that. What is important to actually be able to produce scaled magnets is that full vertical integration, which frankly, you do not even really see completely in Chinese industry, you know, because there will be 20% ownership here and 60% ownership there.
What we are building is full soup to nuts from the mining all the way through to the engineered finished product, and then tacking on the recycling piece of that where, for example, anyone setting up a magnet manufacturing capability, you know, outside of China needs to contend with the fact that going from a magnet block to a finished magnet that's going to go into a traction motor, you may lose 30%-40% of your material from cutting, slicing, and grinding of that magnet to a final shape. You have to do something with that. You know, Mountain Pass is positioned as, you know, the scale leader in being able to take that type of material, what's called swarf, and bring it back into the front end of the process and turn it back into a usable product in sort of a closed loop.
You know, there's a lot of discussion about recycling, end-of-life recycling, and things like that. Fundamentally, you have to have that vertical integration to be able to be cost- competitive with the industrial heft that the Chinese have created.
Let's actually just stick with that vertically integrated. It came up a few times now. I think you have got disagreement with Maaden as well, where you're looking to build a fully integrated supply chain as well. Could you talk a little bit about that agreement? Because that would actually, I think, not really be focused on the U.S.
Sure. No, you know, it's interesting. We tend to be a company that does not announce MOUs. We're sort of allergic to doing that just because, you know, you're probably well aware of the space we operate in that's riddled with, you know, MOU press releases that do not mean much. We tend to execute first and then announce it later. We thought that this was such a critically important acknowledgement of how the United States and its allies globally can work together to continue to diversify the supply chain. You know, what we see as a pretty significant opportunity over time for MP Materials. Again, we've got such an amazing set of investment opportunities in the United States right now.
You know, this is one where, you know, certainly, you know, Maaden will be a big contributor here and, you know, we can provide our technical expertise, you know, to them and work together with them. It is to be able to create a counterweight to everything I just talked about in terms of the way the Chinese dominate. You know, for example, the refining capacity in the Chinese market is significantly greater than their upstream, you know, mining market share. They import a significant amount of raw materials.
What they've been able to do is set up, you know, an industry structure where they are the refiner of choice for projects in Africa, projects in South America, projects elsewhere in the world that can't support the cost of building out a full refinery, but can get to some sort of mixed unrefined product and then need an outlet to sell it. What we are doing at, you know, ourselves at Mountain Pass is our heavy rare separation capability is set up to take 30 feet stock to be able to play a role there. What Maaden, you know, understanding is looking at is the opportunity to build out a very scaled, you know, refiner to the world. Certainly, you know, you think about Saudi Arabia.
They have plenty of expertise in, you know, oil and gas and refining, large scale industrial manufacturing, and, you know, the ability to be able to bring to bear a refining, you know, framework where, you know, what matters is access to commodity chemicals, excellence in the kingdom, you know, cost of power, cost of construction, skilled workforce, you know, those sorts of things where they have a lot of advantages that would allow us to work together to build something very meaningful. You know, more to come there over time.
It's an example of the way that I believe, you know, to my point earlier on needing to build scaled national champions, you know, we're very pleased that this is a real validation from, you know, a very skilled operator in the space like Maaden as to MP's position as a player that now has built out capabilities across the suite of necessary capabilities, upstream, midstream, downstream, including magnets. And so something that, you know, we're excited about over time.
When you look at it in retrospect, how much have you invested so far already? What are you planning to invest? Where is your production volume right now?
Sure.
Where would you like to take that going forward?
Yeah. To give some context here, you know, we took the company public in 2020. Since then, we've invested nearly $1 billion of private capital into this supply chain across upstream, midstream, and downstream in the United States. You know, that's more than probably adding up anybody else in the space and putting a factor on it. That is because we do have, you know, such a tremendous asset in Mountain Pass that is, you know, so fortunately placed on the cost curve to enable us to generate cash flow to reinvest downstream, which we have done. I think it's brought us to a point where, you know, aside from what has happened starting in April, we as a company, we're somewhat at a place where, you know, we were looking at being in almost in harvest mode from all of this exceptional investment we've made.
You know, the world has changed slightly since these export controls have been put in place. I think customers have really come to recognize that this capability needs to exist now, not in five or 10 years. And so, you know, we are certainly working on opportunities to heed that call. You know, today we've set up a business that will produce about 6,000 tons of NdPr oxide in our midstream business, which, rough rule of thumb, you double that number to get to the quantity of finished magnets you could make with that NdPr. So that's enough to make, let's call it 12,000 tons of magnets over time. Our Independence facility in Texas is initially equipped to produce 1,000 tons of finished magnets.
It gives you a sense of the ability for us to continue to grow our business, you know, at what we see particularly now in this market environment, attractive returns on capital. You know, we are working with a wide variety of end customers and other stakeholders, including government, on what is the most thoughtful way to get from A to B. You know, I think the important thing for us is seeing a real pull from industry and government to create the, you know, heft and scale that's required to have a vibrant downstream market. You know, there is a world where, you know, we were a big midstream producer and had a, you know, a nice sort of attractive small downstream business attached to it.
I think the world has changed in the sense that, you know, I think there is much more focus on getting the end product in country for country. You know, we'll see where that takes us. Regardless of how this shakes out, we're extremely well positioned to be able to grow the business over time. You know, we'll just follow the market and be thoughtful.
You just mentioned government as well. I think let me ask you actually one question there because President Trump kickstarted a Section 232 on process critical raw materials and derivative products. What's your views on that initiative?
Sure. You know, it's interesting. There was, you know, an early investigation into, you know, the national security implications of rare earth permanent magnets in the first Trump administration. And, you know, certainly we provided our views and comments there. In the first Trump administration, we were so much earlier in our maturity. It's amazing actually to think about how much has happened, you know, through that period of time. Our view was undoubtedly these are critical for national security, but putting a tariff on magnets before there is any domestic production of magnets is just a tax. It's not really changing things. What you've seen is going from Trump 1.0 into the Biden administration, there was another reevaluation of these.
Mind you, first Trump administration, their finding was absolutely a national security implication, absolutely dumping going on, but not sure that tariffs are the right answer right now. We agreed with that assessment at the time. You know, when, you know, Biden undertook another review of this, particularly in the context of the threat posed by Chinese electric vehicles and what that would do to our automotive industry, w hen 100% tariffs were put on under the Biden administration onto Chinese electric vehicles, a 25% tariff was put on specifically onto rare earth permanent magnets. That is at a time when a 25% tariff was viewed as like huge. These days, you know, 25% tariff is sort of, you know, nothing. Now we've got, you know, a 232 investigation into understanding, let's understand full soup to nuts, you know, the raw materials, the finished products.
At the end of the day, the United States now has a capability. The United States is scaling that capability. MP is leading that effort. Undoubtedly, there are, you know, artificial subsidies and market structures in place in China that allow them to exert the influence that they have. Certainly, we think it's an important tool in the toolbox for the administration. I think it's one tool of many though. We're hopeful that, you know, as we've heard so far, there's been a desire to approach this from a whole- of- government perspective. We hope and expect that that remains the case. You know, I think this will be one of many levers that the government can and should pull. It's not just our government.
I think all Western governments need to be looking at these issues to be able to foster a critical capability in the Western world where, you know, the pure economics of it make it very challenging without combating, you know, the mercantilist approach that the Chinese have taken.
Interesting message. Thank you. Thank you very much. Look, I promised you it's going to be intense and short. That's what it was. I promised also to keep it to 25 minutes. We are now at 26. Let me say thank you very much for taking the time today. It was very interesting chatting. Yeah, wish you all the best.
Absolutely. Thanks, Michael. Appreciate the time.
Thank you.
All righty.