Good afternoon. Thank you for attending today's MP Materials first- quarter earnings call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to queue for a question on today's call, you can do so by dialing star one. I would now like to pass the conference over to your host, Martin Sheehan, with MP Materials. You may proceed.
Thank you, operator, and good afternoon, everyone. Welcome to the MP Materials first- quarter 2023 earnings conference call. With me today from MP Materials are Jim Litinsky, Founder, Chairman, and Chief Executive Officer; Michael Rosenthal, Founder and Chief Operating Officer and Ryan Corbett, Chief Financial Officer. As a reminder, today's discussion will contain forward-looking statements relating to future events and expectations that are subject to various assumptions and caveats. Factors that may cause the company's actual results to differ materially from these statements are included in today's presentation, earnings release, and in our SEC filings. In addition, we have included some non-GAAP financial measures in this presentation. Reconciliations to the most directly comparable GAAP financial measures can be found in today's earnings release and the appendix to today's slide presentation. Any reference in our discussion today to EBITDA means adjusted EBITDA.
Finally, the earnings release and slide presentation are available on our website. With that, I'll turn the call over to Jim. Jim?
Thanks, Martin, and thank you all for joining us today. Let me start with an overview of today's call. I will begin with the highlights of the quarter, including a stage three update. Ryan will then review our financials and KPIs. Michael will then provide an update on our Stage II optimization at Mountain Pass. I will then return with closing comments and then open it up for Q&A. Let's get started on slide four. We continue to execute well in our Stage I upstream business. For the eighth consecutive quarter, we produced more than 10,000 metric tons of rare earths in concentrate. Sales volumes were similarly strong, allowing us to generate solid adjusted EBITDA and related margin despite challenging realized price comparisons. I know pricing is a topic on the minds of investors, and I will share some detailed perspective on that later in the call.
Moving on to Stage II, commissioning has been making steady progress. We have begun to process a portion of our roasted concentrate through our leach circuits. This means we are closing in on the even bigger milestone of recommissioning our light rare earth separation circuits. To reiterate what we have said on prior calls, the commissioning process is painstaking with stops and starts, but we remain on track towards soon producing separated rare earths and reaching run rate production by year-end. Michael will provide a more detailed update in a moment. Another important development in the quarter relative to our midstream business was the signing of an additional tolling agreement to convert a portion of our NdPr oxide into metal in Vietnam.
For those of you unfamiliar with tolling agreements, tolling is a process whereby a third party processes our materials for a fee, in our case, turning our oxide into a metal for us. Producing and selling NdPr metal in addition to oxide ultimately expands the market for our materials, supports our low-cost production profile, and expands the direct customer base for our products. Notably, Japan is the largest manufacturer of neodymium magnets outside of China, but Japanese magnet makers have limited oxide- to- metal conversion capacity and have historically depended on facilities in China or Southeast Asia. Combined with opportunities afforded by our Sumitomo relationship, this agreement will enable MP to maximize and extract more value from our sales of NdPr products to customers in Japan and other global markets. Moving on to stage three downstream magnetics. Process engineering and long lead procurement continues to rapidly advance.
Our Fort Worth engineering and manufacturing team is gathering talent and getting stronger. The internal structure of the factory is taking shape. We are preparing for the arrival of the first phase of electrowinning and strip casting equipment, which will be needed to meet our goal of delivering alloy flake later this year. We are observing factory acceptance testing of this equipment at key vendors and are also planning the final connections between this equipment and the building infrastructure. Importantly, our business development pipeline remains robust. Therefore, to summarize, for what was within our control, execution, Q1 was a quarter of great success across all streams of our business at MP. In addition, in April, we surpassed three years without a lost day due to injury. That's over 2 million work hours. I am very proud of the team for this important achievement that we must continue.
I will come back for closing comments and address pricing and the marketplace. For now, let me turn it over to Ryan for the financial and operating metrics. Ryan?
Thanks, Jim. Turning to slide six and starting on the left-hand side of the page, you'll see the consistent level of production Jim mentioned, both in our year-over-year and sequential comparisons, with 10,671 metric tons of REO and concentrate produced in the quarter, ±1% or 2% of the comparable periods. In addition, we sold 10,215 metric tons of REO, which was 13% below last year and 6% lower than the fourth quarter. These variations are virtually all due to timing of deliveries. As of Q1, we had consumed only a small portion of the nearly 2,000 metric tons of work in process inventory that will be used in commissioning of our refining circuits.
With continued progress, we are preparing to feed material into additional refining circuits, which we're very excited about. What that means is that starting in Q2, we would expect to process a significantly greater volume of our concentrate production through our refinery. Some of this inventory build will be in an investment in permanent work in process, while some will become separated rare earth oxides available for sale. Meanwhile, as our commissioning teams work tirelessly, we are continuing to make progress improving the stability and performance of our drying and calcining circuits. As such, nearly 30% of our sales in the quarter were comprised of roasted concentrate. Moving on to realized pricing, NdPr recovered a bit from the fourth quarter, resulting in a 10% sequential increase to $9,365 per metric ton of REO.
As you know, our realized pricing tends to follow the market price of NdPr oxide with an approximately one-month lag. We benefited from the recovery in prices from December to February. Still, compared to Q1 of last year, pricing was down 32%. Recall that NdPr prices hit recent highs in late February to early March of 2022, which boosted both Q1 and Q2 2022 realized pricing. Since this most recent February, however, prices have continued a rapid pullback. Jim will discuss our views on this in a moment, expect at least a 35% sequential decline in realized pricing in Q2 , given the recent softness, assuming current prices hold throughout the quarter.
As always, we enter this period of greater pricing volatility with our fortress balance sheet, our low cost and cash generative Upstream Stage I business, and an unwavering conviction in our Downstream integration strategy. We have been strategic in how and when we raise capital, and we have remained committed to preserving our conservative balance sheet, specifically because of the leverage inherent in the business from commodity pricing. With nearly $1.2 billion of gross cash and short-term investments and the major lift and cost risk of Stage II construction behind us, our position as a U.S. champion in this critical industry is even more evident. Finishing on the far right of the slide, year-over-year production costs totaled $1,978 per metric ton of REO in the quarter, up 24% from last year.
The primary driver of the increase was the scale benefits of higher sales volumes in last year's first quarter, as well as higher headcount related to the ramp of Stage II headcount, and to a much smaller extent, the impact of cost of living adjustments made last year, as well as higher materials and supplies costs. Sequentially, cost per metric ton increased 3%. As a reminder, as we move to the back half of the year and begin preparing to migrate to Stage II production, some of these Stage I KPIs will become much less relevant. As such, we expect to evolve the KPIs we report to you as we transition to separated products and rare earth metal sales.
Moving to slide seven, revenue of $95.7 million in the quarter decreased 42% year-over-year, driven by the 32% decline in realized pricing and the 13% decline in sales volumes discussed on the previous slide. Sequential revenue increased 3% as the 10% increase in quarter-over-quarter realized pricing was partially offset by the decline in sequential shipments. Continued solid cost control allowed us to generate $58.7 million of adjusted EBITDA and related margins of 61% in the quarter, both slightly up from Q4, but down year-over-year due to last year's strong pricing environment. You can also see the flow through of last year's strong pricing in the adjusted diluted EPS comparison, where in last year's first quarter we earned $0.49 versus $0.27 in this year's first quarter.
As you will recall that in the fourth quarter, we had a large discrete tax benefit, which helped drive $0.42 of adjusted diluted EPS. Cash from operations in the quarter totaled about $55 million, and our CapEx spend was nearly $75 million. Removing roughly $71 million in growth CapEx, cash flow conversion remained very solid at $51 million after maintenance CapEx. Similar to the Stage I operating KPIs that we'll be sunsetting, we expect Stage I free cash flow to be less of a relevant factor in assessing our performance as we turn our production focus to Stage II. To that end, I would add that we remain on track to spend roughly $300 million in CapEx this year, with the very tail end of Stage II spend and accelerating investments in our heavy separations and Stage Three projects.
I would add that in the last two quarters, we have put over $200 million of assets into service, and as such, we saw a $3 million increase in depreciation compared to a year ago. As the remaining Stage II assets ramp, you should see depreciation continue to increase as more capital assets are put into service throughout this year. We continue to expect to generate NdPr sales in the back half of the year, with sales being quite back-loaded given our expectation on the ramp in production. I would also remind you that we expect a lower margin profile on these initial sales, as you'd expect, until we can scale to full run- rate production and smooth out our operations. Before handing the call over to Michael, I'd just like to add a couple of thoughts on our tolling arrangement.
Under this tolling arrangement with Vietnam Rare Earth Company, MP will retain ownership of the product through the metallization process, paying a conversion fee for each metric ton of metal produced. As we ramp oxide production and utilize this channel, you can expect to see us report revenue generated from NdPr metal with the tolling fee included in our cost of goods sold for our metal products.
Note that this sales channel will, in the early stages, come with a little longer working capital cycle as we invest in supply chain inventories in order to maintain stable metal reduction operations. While the oxide material is in transit and being converted, it will remain in our work in process inventory a bit longer through the end-to-end process. With that, I'll turn it over to Michael to give you an update on operations and Stage II commissioning. Michael?
Thanks, Ryan. It was a busy quarter for commissioning, and things have picked up steam into 2Q. Our commissioning operations and process engineering teams have taken an increasingly active role in checkouts and startup activities. In the first quarter, much of the focus was on completing the pre-commissioning of the remaining legacy and new circuits, including equipment checkouts, water runs, instrumentation calibration, tuning loops, and trial operations with critical equipment vendors, and addressing the findings from these exercises. At the same time, we continued to make progress on improving the consistency and throughput of the drying and roasting assets. During the quarter, we turned these assets over from the commissioning team to our operations team, freeing the former to focus their attention on the next circuits in the flowsheet.
The remaining assets of our brine treatment and recycling circuits are in the final stage of commissioning before full commercial operations of the entire system begins. Importantly, we are moving closer to producing finished NdPr oxide. As we enter 2Q, safely advancing through the startup of leaching and impurity removal and ensuring high purity rare earth solutions to feed separation circuits are our highest commissioning priorities. After that, product finishing encompasses precipitation of purified rare earth from solution filtration and conversion to oxide. It's still difficult to predict the trajectory of our ramp, but there is no doubt we are now on it. I'd like to reiterate that startup will not be a linear process. We expect a lot of ups and downs, literally and figuratively. The trajectory of the curve will be determined at the equipment level by reliability and throughput.
We expect certain operations to ramp throughput slowly but steadily, others to meet run rate quickly, but struggle with reliability, others to operate reliably, but struggle with throughput. Occasionally, we will get lucky with a piece of equipment that operates to design on startup with no problems at all, though we expect this to be the exception. I continue to be extremely impressed with the quality and dedication of our teams. Experienced and new operators and maintenance staff, engineers, and trainers are collaborating to speed our mastery of the new and legacy circuits. As long as we remain focused on the safety of our employees and on making decisions that are in the best long-term interest of our operation, we are confident that we can achieve our planned run rate production by year-end while maintaining our low cost position and industry-leading environmental sustainability.
Not to be overlooked and a key part of maintaining our low cost position, our Stage I operation continues to operate stably. Behind the scenes, we are increasing our R&D to address low-hanging fruit and longer term growth opportunities. In the first quarter, we began an pilot plant of alternative flotation equipment. At the same time, we completed long lead procurement and began construction on a long-awaited project to improve our grinding circuit. We expect this to increase throughput potential and mineral recovery. As I've mentioned previously, we are extremely optimistic about the opportunity to improve the quality, quantity, and cost structure of our concentrate production. In addition to the tremendous job that the team is doing in terms of both Stage I production and Stage II commissioning, our focus on safety remains front and center for us.
As Jim mentioned, I think it's important to reiterate, in April, we surpassed three years or over 2 million work hours without a lost time injury. I think this is a testament to our safety first owner operator culture. I just want to thank the team for all their hard work and their focus on doing it safely. With that, I'll turn it back to Jim. Jim?
Thanks, Michael. Before Q&A, I would like to cover a few topics that are on the minds of many investors, including pricing trends, product substitution, and the potential for Chinese export restrictions around rare earth processing and magnet-making technologies. On pricing, NdPr began the year around $102, which was down from a 2022 peak of $175. The declines continued throughout the first quarter, with pricing now in the low $60s. To put it bluntly, I'm surprised. I would say I'm actually very surprised, but not shocked. As you all have heard me say many times before, commodities do almost anything in the short run. After all, oil even traded to a negative price in 2020. Some of the price action may be explained by recent economic woes for what I would call legacy sectors like hard disk drives or ICE autos.
Recall that nearly 80% of the market for rare earths today still comes from uses within these kinds of products. Moreover, global EV sales for Q1 2023 were weaker than expected due to the expiration of certain subsidies in China and Europe, and combined with higher interest rates, likely had a significant impact. Sales in China appear to be rebounding strongly since March, however. Despite this recent blip, global EV sales penetration is still only in the low teens percentage, so the long-term demand trend remains explosive. We believe the compounding effect of high growth in electrification will far outweigh any legacy or other short-term weakness and then some over even a moderate amount of time.
What is interesting, perplexing, and quite likely bullish for the medium to long term outlook is that with NdPr where it is now, we believe that the Chinese rare earth industry will be unprofitable at current prices. Chinese data is admittedly quite opaque, but our analysis as well as industry discussions suggest this to be the case. Moreover, at these price levels, it is hard to see positive economics for any greenfield project in the West, and it is very likely that anything in progress now can expect significant capital destruction. I would remind you of two important things to consider from MP's perspective. First, from the beginning of our public life, we made clear that MP would have an owner-operator culture where we would sacrifice near-term opportunism to maintain a capital structure with a fortress balance sheet.
As I like to say, we want the leverage in the commodity price, not on our balance sheet. A company's capital structure must reflect the underlying volatility of its industry. Second, we believe that MP is on track to being the world's low cost producer of NdPr oxide. Our balance sheet, operational execution, and long term focus give us the runway to ride through pricing cycles. I also want to reiterate the point about capital formation. In my estimation, with NdPr anywhere lower than around $120 per kilogram, new projects with realistic assumptions are simply uneconomic. That is before one considers the significant time, risk, and human capital it requires to be successful. Put simply, our industry has a very high cost of capital for new entrants right now.
This means the long term upside volatility for MP to benefit from demand trends across the various electrification categories remains very significant. This leads me to my next topic, substitution. If you listened to our call a quarter ago, you heard me talk about NdPr supply-demand imbalance as the world electrifies. I cited estimates suggesting that the demand for NdPr potentially seeing a 200% increase over the next decade or so, or three times today's current demand. To meet that demand, I highlighted how that was the equivalent of needing 15 Mountain Passes to come online over that same time period. We know this is not going to happen. For all the reasons we previously outlined, we made clear it likely would not happen with NdPr at virtually any price. After all, even getting one new mine of globally relevant scale over a decade is no small task.
Consider all the human, financial, environmental, permitting, and political challenges to do so. That, of course, assumes as project table stakes the discovery of an economic ore body that would make all that worthwhile. The idea of that happening with 15 projects within 10 years is not realistic. We were not surprised when Tesla at their Investor Day highlighted their concern over rare earth supply and environmental challenges around mass market adoption of electric vehicles. It should not shock anyone that they aspire to produce a vehicle without a rare earth magnet motor. The issue has been and remains, what are the size, performance, efficiency, and pricing trade-offs of utilizing a rare earth magnet motor versus another solution?
For some applications, like an aspirational mass market EV priced under $30,000 that does not yet have a factory, substitution must occur because the math, particularly the supposed volumes, suggests it is likely not realistic otherwise. For most other EV applications, like those involving performance, luxury, SUVs, full-size sedans, or consumer trucks, and certainly with other electrified motion applications like robotics, offshore wind turbines, drones, or other military uses, there is virtually no way material substitution will occur at any price given the constraints. When you add all that up, we believe, as even Tesla and many others have pointed out, that the demand picture for rare earth magnets remains exceptional. I would also add that my team spent significant time with a number of OEMs as well as other producers of a variety of products that utilize rare earth magnets.
Virtually all have rare earth magnets on their production roadmaps for the foreseeable future, and production roadmaps are not easily changed overnight. With that, let me briefly touch on the recent news that the Chinese Commerce and Technology Ministries have drafted a list of amendments which would either ban or restrict exports of certain magnet manufacturing technology. We will see if these ultimately go into effect as they are evaluating comments from Chinese industry. Needless to say, we get questions about this potential change. As you can imagine, given that the Chinese dominate the magnetics industry, they similarly dominate magnetics tooling and equipment production. We have purposely avoided major buys of equipment and technology from China for our Texas facility for this express reason. We do not expect any issues from this. Additionally, NdFeB permanent magnets have been manufactured for roughly 40 years.
The process itself is well understood, and approximately 10% of world supply is made in Japan. Such limited Japanese share is not due to access to Chinese process technology or equipment. It is primarily due to challenged access to separated rare earth oxides and metals. Therefore, MP, with our upstream and midstream supply chain, is in a good position regardless.
The real bottom line of the potential Chinese ban on technology exports is that it further highlights the critical importance of the American magnetics champion we are building in MP, as well as the significant overall long-term value of our asset portfolio irrespective of spot prices. With that, let's open it up for questions. Operator?
Absolutely. We will now begin the Q&A session. If you would like to ask a question, please press star followed by one on your touch tone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking a question. We'll pause here briefly to allow questions to generate in queue. The first question is from the line of Corinne Blanchard with Deutsche Bank. You may proceed.
Hey, good afternoon. Thanks for taking my question. The first one would be maybe more on the financial side. There was few adjustments to the EBITDA this quarter. Is that a trend that we can expect in the coming quarter? The on that, you know, thematic as well, could you comment a little bit about the cost, like dollar per ton that we can expect around the next quarter?
Yeah. Hey, Corinne, it's Ryan. I can take that. Thanks for the question. In terms of the EBITDA adjustments, I assume primarily what you're looking at would be start-up costs, which is a category that we've had for the last couple of quarters as we've gotten into the depths of commissioning of Stage II. I would say as we get further, Michael gave some color on how that activity is picking up pretty rapidly in this quarter. I would expect to see those costs pick up a little bit, certainly in Q2. I'd expect them likely to start to come down over the course of the year as we move into what we'd call more run rate or commercial production of separated products.
In terms of your question on the cost per metric ton, as I talked about in my prepared remarks, the primary driver there is the continued growth in headcount as we get ready for these circuits to be in service. As you can imagine, we're going from operating, you know, effectively, a milling and flotation facility and, you know, ancillary support facilities to adding, you know, multiple more facilities into service. The burden from maintenance, you know, facilities, utilities, things like that, have started to pick up ahead of entering into commercial production of these products. That's primarily the items that you're seeing. Those items that are not specifically related to commissioning activities tend to flow through the cost of goods sold of our existing product.
Those items that are specifically related to commissioning and not related to a saleable product find their way into the start-up cost category. As we look out over the course of this year, I'd expect similar trend in cost per metric ton. As I mentioned on the start-up cost, you know, as we bring these things online, certainly there'll be an initial margin profile that'll certainly look a lot different than when we hit escape velocity and hit run rate production. Hopefully that gives you a sense.
Yeah. That's very good. Thanks. Maybe as a follow-up and shifting gears a little bit here more toward the broader market, but, any view on the current NdPr metal processing capacity that is in Southeast Asia, maybe outside of China and Japan, that would be helpful to get a view there.
Sure. Yes. You know, I think one of the items that we talked a bit about in the prepared remarks is, our tolling arrangement for, some metal capacity. There's a variety of potential options for metallization in Southeast Asia, maybe six or seven different facilities out there. You know, we're obviously very pleased with our ability to get dedicated capacity. As you can imagine, with the Japanese magnet industry and the growth that they expect, they are seeking the ability to purchase both metal and oxide. With the ability to do tolling, of oxide into metal, that just broadens our market opportunity for our products. I, I would expect that this announcement we had this quarter is hopefully the beginning of many.
We continue to evaluate other metal tolling facilities through our Sumitomo relationship and otherwise, of course, this is in addition to our downstream strategy in the United States. Putting all of that together, you know, we're excited about the potential for a significant amount of our oxide to make its way through that sales channel, which again, is just a great way for us to continue to broaden our market opportunity.
All right. Thank you, Ryan. I would jump back in the queue.
Thanks, Corinne.
Thank you, Ms. Blanchard. The next question is from the line of Carlos de Alba with Morgan Stanley. You may proceed.
Thank you very much, gentlemen. In terms of the headcount ramp up as you expand the operations and, you know, Stage II and stage three, where are you on that process? You're maybe trying to calibrate, you know, from the prior question also what the cost will look like in the coming quarters. That'll be my first question. My second question is just coming back a little bit to the prepared market inventory. Just wanted to make sure that I understood. 2/3 of your sales will comprise of roasted concentrate in the second quarter already or more like in the second half of the year?
The level of inventories that you currently have, is around 2,000 tons of inventories that will be consumed in the coming quarters in the separation circuit.
Carlos, it's Ryan. Let me take the second part of that first, and then I'll flip it to Michael to talk about staffing. What we mentioned on the inventory and thinking about how we consume our current product into the downstream circuits. I'd note that the point we're trying to make is this quarter you did not see a significant departure of production versus sales. We move into Q2 and into Q3, we'll see an increasing amount of our production of REO being consumed into the downstream circuit. I think the other question that you asked is about the amount of roasted concentrate that's going to get sold or was sold. Just to clarify, I think you might have had the numbers backwards.
It was about 30% of our sales this quarter was of roasted concentrate. The rest was of our standard concentrate product. As you know, what we plan to feed the downstream circuits with is the roasted concentrate. I think the two things to keep in mind that we wanted everyone to be sure to understand as they model the business over the rest of this year is you will start to see that detachment of REO sold versus REO produced as we consume that over the next couple of quarters, and we flag up to about 2,000 metric tons of REO that will find its way into the downstream circuits. Certainly that 2,000 tons will be made up of roasted concentrate. Hopefully that answers your question. Mike, you wanna jump in on staffing?
Thanks, Ryan. Well, we've had a significant number of the Stage II staff on our payroll already for several months or for more than several months in training, in cross-training, in cleaning up, working on commissioning activities, recommissioning activities. We've gotten probably through at least three-quarters of the total hiring, perhaps even a little bit more. We will see a slight increase in some of those staff over the next quarter or two that may be offset by some third-party contractors, which will be not including the construction, but third-party contractors, which will come off. I think overall, the cost structure already includes a significant portion of that burden.
All right. Excellent. Thank you, Michael and Ryan.
Thanks, Carlos.
Thank you. The next question is from the line of Matt Summerville with D.A. Davidson. You may proceed.
Hi. Good afternoon. This is Will Jellison on for Matt Summerville. I wanted to start out by asking you about Stage three. Looking a bit further into the future, do you expect to use a building block approach to further capacitization beyond Texas, or will the success of build-out potentially be considerably larger than what you're starting out with in Fort Worth today?
Sure. I'll take that. As you know, with Fort Worth, Fort Worth really represents below 10% of our current expected output out of Mountain Pass. We really view that as the initial magnetics facility. We're obviously working. We've made clear from the beginning that we're really taking a buy, build and/or JV approach here. We're maniacally thinking about return on capital and the most, you know, creative, thoughtful, lowest risk ways we can build out that business. That's a long-winded way of saying that, you know, anything and everything is on the table as we build out that business. You can certainly expect that that business should grow substantially because the current Fort Worth facility will really only represent, you know, a small percentage of our upstream output.
You know, we obviously wanna make sure that we focus in the near term on executing that well, and we do expect to have some good lessons from that experience that, you know, will help dictate how we, you know, pursue the continued, downstream, build-out.
Understood. Thank you, Jim. As a follow-up.
Sure.
I wanted to ask about capital deployment. You know, to the extent that there is capital available to do so, and I certainly understood if there isn't, but given the stock, you know, where it is today, I'm wondering how you think about potential for share buybacks as being an opportunity to deploy capital for shareholders? Just curious about that given where the stock is today.
Sure. I thought I might get that question. Well, I'll give you the really short version, but then I'll give you a longer expanded version. You know, I'm the largest shareholder of the company. You know, we have set up an owner-operator culture. We're very focused on creating value for shareholders. It's in our DNA. You know, we think about return on capital and capital allocation. I mean, that really drives everything that we do in the business. You can imagine that, you know, I'm spending pretty much every waking hour thinking about that. When and if we do something, we'll certainly, you know, do it. We wouldn't telegraph it.
Let me give you sort of a longer view into my psychology, which is, you know, we really believe that. You know, I really think of the world in probabilistic terms. I think it's pretty clear if you look at the enterprise value of our business and what we expect to be doing over the next decade that, you know, it wouldn't shock me if our business is, you know, earning more than our enterprise value today in a, you know, handful of years out there. Certainly there's an enormous amount of value. That said, it's also a probabilistic world. You know, I've made clear that the capital structure really has to reflect the underlying volatility of the business as well as the stage of the business.
You know, we are in the early growth stage. Lastly, you know, lastly, and I think we've made this clear, so I don't think this will surprise any shareholders, and certainly for our long-term shareholders, they should think of it this way, or we're not the right company for you. You know, we're really country-first capitalists. This is a very unique set of assets. We think there's an enormous opportunity. There's, you know, this is also something important that has to happen. We really wanna make sure that we take a conservative and thoughtful approach to make sure that this platform has the firepower, to do the variety of things that we wanna do over time.
When you add all of that up, that's kind of what's, you know, going on, you know, in our heads as we think about these things. You know, it doesn't necessarily serve us to do something small that creates some signal value. We're long-term focused folks around here, When we do something, we're gonna, you know, we wanna think about it, as you've heard me say on these calls before, we really wanna take a Henry Singleton-type approach here. You know, hopefully, that gives you kind of some window into how I'm thinking about it.
No, that's certainly very helpful. Thank you, Jim.
Sure.
Thank you. The next question is from the line of George Gianarikas with Canaccord Genuity. You may proceed.
Hey, good afternoon, everyone, and thank you for taking my questions. I'd like to start.
Hey, George.
Maybe just focusing on Fort, I guess, focusing on Fort Worth and just trying to understand any update there. You know, you're due to start production there by the end of the year. Wondering how the hiring is going, you know, how the, you know, early indications on production are going and any kinks you need to continue to work out of the system to get to production by the end of 2023.
Sure. Well, I think George, hopefully you saw the, we recently tweeted a picture of the facility, you know, the sort of the April 2022 versus April 2023, where, you know, we essentially broke ground there. I mean, this was a bare piece of land a little over a year ago, and now the shell of the factory's done, and we're already, you know, at work on the inside. I would say that, you know, in this past quarter, there's been a lot of work not just in the facility, but also with the team. I mean, I have a really impressive team, and that team continues to grow by the day. We've, you know, we've made a lot of progress on that front.
I would say that it continues to go really well. This is not easy stuff. I mean, we are building a magnet-making business from scratch, so, you know, I certainly don't want to downplay the scale of the challenge that we've taken on. You know, certainly we have an incredible foundational customer in GM, and we continue to have a lot of great customer conversations and we're hopefully taking a methodical risk-managed approach to this process. You know, I guess that's a lot of qualitative ways of telling you that, you know, it, we, you know, we continue to work really well on that front and we're, we, you know, we think we're on track and, you know, just continuing to execute.
As an, as a follow-up, you know, you're going through this transition this year moving to Stage II, just as luck would have it, we've seen a massive reduction in the spot price. You talked about allocating some of your production to inventory to Stage II. How do you manage profitability in that scenario? You know, I guess my question also is, we're getting close to a point, I think, you know, where you might be hitting the edge of being, you know, dipping into EBITDA negativity as opposed to profitability. How do you manage, you know, that scenario? Is it your goal to stay EBITDA positive even if the spot price reduces further, and you maybe don't allocate some of your volume to inventory?
Do you just kind of focus on the task at hand and continue to move to Stage II throughout the year despite what's going on at spot?
Sure. Well, first and foremost, we wake up and pray for higher prices every morning. No, I'm kidding. It is, it's a challenge. We're, you know, we are, you know, as we've sort of the theme of this call, as you know, in, we believe in both fronts of our business on. Well, in Stage I, certainly in all Stages two and three we're executing really well. Those are the things that we can control. You know, it's tough being in a commodity business, unlike some other businesses where you can, you know, make a lot of great progress and, it, you know, maybe 80% of that converts into the financial result.
Whereas in a commodity business, you can do an incredible job and maybe 20% converts, and the rest is sort of the inherent volatility of prices that, you know, maybe make you look not so smart in down price times and probably much smarter than you deserve in up price times. But the reality is that we, there really is not much change in the sense that we're always focused on capital allocation. I mean, we're thinking about, you know, we're thinking about these things, every step of the way. When prices are high or higher than here, not necessarily as high as we think they're going, you know, we're always aware that prices could be much lower, right? That's why we set up the capital structure the way we did. When prices are very low, we're...
You know, if you look back to some of the comments that I made, I mean, we, you know, that of course, plants the seeds for the next huge price spike. We try not to be too impacted by that volatility and just focus on the things that we can control. Michael, if you want to touch on any aspects of what you see out at Mountain Pass and kind of how you're thinking about commissioning, you know, if you want to chime in here, fire away.
Well, thanks, Jim, and thanks for the question. Yeah, I think we're very prudent in how we're going about commissioning, and we always have been thinking of this as a, you know, maximizing value to shareholders as well as our long-term success of our operation and our ore body. You know, particularly in this period of time with lower prices, we want to be especially careful to avoid any, you know, major mistakes, obviously, any safety issues. But also think about, you know, how and when we optimize the ramp for, you know, maximizing efficiency, obviously, of circuits as we commission them versus the speed of commissioning. We'll probably be a little bit more, even more thoughtful about that as we proceed.
Obviously, our Stage I business still is very low cost producer, and we'll look to keep that stable and profitable and see where we can eke out additional, you know, profitability from that.
Next. Is that it? Next question.
Thank you. The next question is from the line of David Deckelbaum with Cowen. You may proceed.
Hey, Jim, Michael, and Ryan. Thanks for the questions this evening.
Hey, David.
Hey. I was curious, just one on the tolling arrangement with the Vietnamese rare earth toller. I guess Sumitomo was responsible for negotiating some of this. I guess in terms of qualifying your own NdPr oxide, should we think about it? I suppose they haven't had any of your NdPr oxide to work with yet or qualify. Is the assumption that that would be like a fairly seamless process to convert the oxide to the metal?
Yeah. Hey, David, it's Ryan. Just to clarify, this opportunity with Vietnam Rare Earth Company is separate from our Sumitomo relationship. You know, we certainly view Sumitomo as an incremental outlet where we expect to do very similar things. This is just a further broadening of our, of our market opportunity. In terms of qualification, I think certainly we feel very confident in what our, what our specifications of our product will be in order to, you know, properly convert them in an efficient way in electrowinning for metal making. I think importantly in this tolling arrangement, we will maintain title to the product throughout the process. You know, through that, we will, you know, maintain responsibility, frankly, for the quality of the end product as we interface directly with our end customers.
We're, you know, we're deeply involved in the requisite conversations to ensure that we're making a quality product at this tolling facility. You know, we feel good about that.
I appreciate that. Jim, to go back to the, you know, one of the conversations earlier about substitute products. You know, you raised obviously this, the conversation around Tesla's aspirations for building a non-rare earth magnet. You know, in your conversations with other OEMs, you know, we read it too as this sort of like ringing the alarm for a constrained supply chain. You know, are you seeing the same sort of concerns from some of the other domestic OEMs? Obviously, you have a partnership or arrangement or customer arrangement already. But is there a palpable concern around the supply chain for installing rare earth magnets in EV deliveries in the future?
Yeah, David. Well, you hit a really good point about ringing the alarm. It was, in a sense, kind of like a commercial for this issue to a very broad audience of just sort of the, you know, the scale of what is unfolding here and how much more material is gonna be needed. As far as sort of sense of urgency, I would tell you that we've really sensed a sense of urgency with the OEMs at least going back a couple years. This, you know, if you kind of rewind probably pre-COVID, there was less of a sense of urgency. It, you know, everything was sort of theoretical.
You know, when people saw the, you know, the healthcare stuff and the semis, and that was like sort of the big wake-up call where all of a sudden this became, you know, sort of something down the road to existential. I would say that that's maintained. I don't think I've seen that much different. Although what's interesting, I mean, there's, you know, here and there, we still hear of these supply chain things that pop up. I think Ford had an issue the other day. I would say that across industry, and it's not just the autos, I mean, it's in other areas, you know, sort of other standard industry areas that people focus on this. I wouldn't necessarily say it's increased or decreased in the last couple months.
It's been, you know, pretty intense for the last sort of two year, you know, almost three years now. The one thing I would say though is, you know, you probably over the next year or two as a lot more, in at least in the EV space, a lot more models are coming onto market. Even though the planning has happened, the physical builds haven't yet happened, right? I think you're gonna see. Then again, I think that goes back to kind of, you know, this past quarter with Spot. You know, anything can happen in the very short term, but as this stuff really starts to come online, you know, maybe there'll be a sense of urgency.
You've heard, David, you've heard me say this a bunch going back a couple of years now. You know, I still believe, I think we will see, you know, at least one, but probably a number of, you know, household name global OEMs fail or need a bailout due to supply chain issues, you know, around critical materials or critical items. I still think that that is all ahead of us, you know. Admittedly, the last quarter or so, you know, China has been a lot weaker than I think people expected, and so that sort of works its way through the system. The macro trends remain, you know, very strongly intact on that front.
I appreciate the color on that, Jim.
Is that good?
Just the last one.
Sure. Hope that was helpful. Yeah.
Maybe on...
Yeah. Go ahead, David.
I'm just curious, have you guys tested the functionality of every part of the separation circuit or the Stage II circuits at this point? I know, like, as you described the commissioning process, we're moving from one part of the flow sheet to the next. I guess, are there still elements that have not been tested to date?
The vast majority have been tested in one way or another. Certainly, they've all been touched in some sort of pre-commissioning. Not all of them have flown a material through them. You know, that answer will change quite quickly.
Thanks, Michael. Thanks for the responses, guys.
Thanks. Sure. Thanks, David. Next question.
The next question is from the line of Lawson Winder with Bank of America. You may proceed.
Hey, good evening, gentlemen. Thanks for fitting me in. I wanted to ask about.
Of course.
I have a couple questions on costs. One, you spoke to costs during your prepared remarks, and I wanted to get your view on where you think the global cost curve is relative to the pricing now in the low $60. Like, what percentage of NdPr oxide production now is underwater?
Well, the data in China is really tough. And remember that the industry, you know, it's not necessarily consolidated. You can have, you know, miners, refiners. A lot of them are affiliate. They're all affiliated. You know, depending on the month, the money can move around to different buckets. You know, as I said in the prepared remarks, every indication that we see, I think it's fair to say that at these prices, I think we'll see Chinese industry is just not profitable. You know, I think that that's obviously is something that we view to be a bullish dynamic at current prices.
Yeah. So my question gets to the fact, do you mean, like, the entire industry?
Pretty much. I mean, the, you know, the industry, it's, you know, Maybe I can expand on it. Again, this is just, you know, our guess from reading the tea leaves. The data is always opaque. I mean, I'm trying to be, you know, caveat this as much as I possibly can. Remember that this is all consolidated ultimately into a couple players. Certainly money can move from, you know, various buckets of the, of the up and downstream, if you will, and things can show, you know, profitability or losses or whatnot. You know, that's kind of roughly what we believe.
Okay. Well, that's a big statement and, very helpful color.
Yeah.
Thank you for that. I wanted to ask about.
We're, we're wowed too. We're, we're surprised we're here.
Yeah. Yeah, thanks a lot for that color. It's very helpful. I wanted to ask about one cost item of yours, and that would be nat gas. To start off with, could you remind us just what percentage of your overall cost is nat gas? Then, have your nat gas costs fallen in line with Henry Hub, or is there still a pretty significant premium for West Coast nat gas? Then, thinking about the hedges that you guys put on, how effective have those been? Then, for how long are those still gonna be in place before they roll off? Thanks very much.
Sure. What I'd note is certainly, and this is Ryan, by the way. The proportion of our cost structure that's natural gas is going to change as we bring the rest of the circuits online and obviously have an incremental power draw from our CHP. I'd say, you know, we haven't given specifics on exactly the percentages, but, you know, let's call it, you know, single digits. We have seen certainly our hedges that we've put in place be quite effective this quarter. You can actually see that manifest, Lawson, in, when you look at the proportion of the cost that we call out specifically related to incremental Stage II costs in our cost per metric ton framework in and KPI in the deck. You can see that that went down sequentially.
That's primarily due to effective hedging. We have hedges, you know, to similar levels, that start to roll off in 12 months and then four roll off in 24 months. We're constantly sort of looking at, you know, potential opportunities to continue to lock that in. Given where we are in California, we don't very closely follow Henry Hub. There are very specific transportation dynamics in terms of where we sit. I would say NYMEX or Henry Hub is probably not a great proxy for us. I would be looking at, you know, the California delivery points certainly to give you a sense.
You know, you see when certain storms happen or, you know, certain parts of the transportation infrastructure are offline, that tends to get quite volatile, which is, you know, why in certain just like our commodity price, you know, on the revenue side, in certain quarters we're gonna feel like geniuses, in certain quarters we won't feel quite as smart. Overall, we're trying to approach this very methodically to minimize volatility in our cost structure.
That is fantastic. Thank you very much.
Thank you.
Sure.
The final question is from the line of Abhishek Sinha with Northland Capital Markets. You may proceed.
Hey, this is Kailash, heading in for Abi. I was just wondering about your-.
Hello
Outlook for permanent magnet generators in wind turbines. Since Tesla's recent announcement on EVs not requiring rare earth metals, I was just wondering about your outlook on wind turbines and where you see that going.
Sure. We covered quite a bit of that on the call. You know, but I'll just maybe I'll to again on the first part of the question, you know, we're very confident in the demand outlook for our industry for, you know, for our products that. I mean, it's, you know, rare magnet motors will continue to be the most powerful and efficient option. In a variety. Kailash, you asked about wind turbines, specifically offshore wind turbines?
Yes
Everything that we see, you know, remains extraordinarily intact. I mean, there's really been no change. The key thing with offshore turbines, you know, if you, if you go with an alternative option, there's a dramatic change in your maintenance because you might have to replace earlier. When people look at the total cost of ownership of an offshore wind turbine, the math of, you know, a big difference in your maintenance cycle is enormous relative to the cost of a permanent magnet. I don't have the exact number in front of me, but it's above, you know, just like EVs, it's above 90% for offshore.
You know, we've seen no indication other than, you know, that remaining intact and, you know, those are very long lead, long lead production items. Even if you saw something change, it would probably wouldn't impact demand for several years. We've seen nothing but increased demand on that front.
Sure. Thank you.
Sure.
Thank you. That concludes our Q&A session. I'd like to turn the call back over to James Litinsky, CEO, for concluding remarks.
Well, thank you, everyone, for the call today, and we will get back to work and look forward to seeing you next quarter. Have a good night.
This concludes today's MP Materials first- quarter earnings call. Thank you for your participation. You may now disconnect your lines.