Hello, welcome to the MP Materials Q1 2026 earnings call. We ask that you please hold all questions until the completion of the formal remarks, at which time you'll be given instructions for the question and answer session. As a reminder, this conference is being recorded. If you have any objections, please disconnect at this time. With that, I would like to turn the call over to Martin Sheehan, Head of Investor Relations. Mr. Sheehan, you may begin.
Thank you, operator, and good afternoon, everyone. Welcome to the MP Materials first quarter 2026 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 presentation. Any reference in our discussion to EBITDA means adjusted EBITDA and tons means metric tons. Finally, the earnings release and the slide presentation are available on our website. With that, I'll turn the call over to Jim. Jim?
Thank you, Martin, and thank you all for joining us today. Building on a very strong 2025, we carried that momentum into 2026, delivering solid operational and financial performance across our platform in the quarter. We continue to scale and execute with discipline. In our materials segment, the team produced a record 917 metric tons of NdPr oxide, up 63% year-over-year and 28% sequentially.
We also began initial shipments to our newest U.S. customer, referenced last quarter, driving total NdPr oxide sales of 1,006 metric tons, more than double prior year levels and 79% higher than Q4. We also delivered one of our strongest concentrate quarters, producing just under 13,000 metric tons of REO, a 6% year-over-year increase and our highest first quarter output to date.
Importantly, Michael and the team continue to make meaningful progress on the heavy rare earth separation circuit, which we expect to begin commissioning here in the second quarter. In parallel, we meaningfully advanced the engineering design of the recycling circuit underpinning our agreement with Apple, another critical step in building a differentiated closed loop supply chain. Michael will provide additional details on these and other projects shortly.
Strong sales volumes, improved market pricing, and the PPA agreement combined to generate $114.5 million of material segment revenue and PPA income, approximately double last year's first quarter, and generated $36.7 million of segment adjusted EBITDA in the quarter. Turning to our magnetics division, we continue to make steady progress commissioning our commercial production equipment. Magnetic performance is meeting customer specifications, and we remain focused on ramping the core processes with precision.
Building on that foundation, we are advancing through customer validation ahead of full production. In parallel, we recently broke ground on 10X, and we are advancing every aspect of the project with urgency. Drawing on the hard-earned lessons from constructing, commissioning, and production at Independence, we are confident that we can move faster and execute better as we scale this platform.
With proven partners and full Department of War support, we expect construction activities to accelerate throughout the year and will provide updates as we progress. On the financial side, as we noted last quarter, we received a $32 million Apple prepayment in February, bringing total Apple prepayments to $72 million. Alongside that, magnetic precursor production at Independence drove $21.1 million of magnetic segment revenue and $9.6 million of segment adjusted EBITDA in the quarter.
Overall, we are off to a strong start in what we expect to be a consequential year. With policy tailwinds and continued urgency around onshoring and supply chain security, we are advancing our platform with momentum, executing with discipline, and delivering durable financial performance. With that, I'll turn it over to Ryan to provide a brief overview of the quarter's financial and operating metrics. Ryan?
Thanks, Jim. At the consolidated level, the company generated $132.9 million of revenue and PPA income, representing a 28% sequential increase from the fourth quarter, along with $36.6 million of adjusted EBITDA. These results were driven by the record NdPr oxide sales volumes, higher market prices, and PPA income.
These factors also drove adjusted diluted EPS to $0.03 per share, compared to a loss of $0.12 per share in the 1st quarter of last year. On a sequential basis, adjusted EBITDA declined modestly, primarily reflecting the composition of PPA income in the prior quarter. As of March 31st, we had approximately 815 tons of NdPr oxide and metal on hand, in transit, at toll processors, or waiting for shipment.
Regarding pricing, most contracts continue to price on approximately a one-quarter lag to prevailing NdPr market prices, with shipment timing driving some puts and takes. Based on our current view of sales mix and timing, we expect second quarter realized pricing to be in the low to mid 90s per kilogram, with the PPA agreement mostly offsetting any difference between our realized price and the $110 per kilogram floor.
As concentrate production available for stockpiling continues to decline with the ongoing ramp-up of our midstream operations and with NdPr market prices remaining close to or above the $110 per kilogram floor, we do not expect to generate a material amount of PPA income from stockpiled concentrate in the coming quarters. Turning to magnetics, as Jim noted, the segment delivered another solid quarter of revenue and EBITDA performance.
This leaves approximately $62 million of prepaid revenue to be earned for magnetic precursor products over the next 4 quarters on a modestly declining basis quarter to quarter. Once this prepayment is fully recognized, we would no longer expect to produce such products for external sale and instead will dedicate metal production capacity towards our needs for the manufacture and delivery of finished magnets. We continue to expect initial magnet revenue in the second half of 2026, beginning with modest deliveries as capacity ramps over the following several quarters.
While financials quarter to quarter will be impacted by the eventual roll-off of precursor product deliveries, the early scaling of magnet production, timing of certain product testing milestones at our customer, as well as investments in our team and product development capabilities in the short term, we are setting the stage for scaled manufacturing for and strong financial performance from our marquee contracts with GM, Apple, and the Department of War.
We remain very pleased with the progress from the team and the significant strategic and financial opportunity in magnetics, where our scaled vertical platform meaningfully sets us apart. Regarding cash flow, CapEx in the quarter was $77.4 million, with about 60% attributable to the magnetic segment. Second quarter CapEx will step up meaningfully as we acquire the 10X site, broke ground, and are accelerating construction.
We continue to expect full-year CapEx of $500 million-$600 million. Lastly, we ended the quarter with $1.7 billion of cash and short-term investments on the balance sheet. Together with strong operating cash flow, this fully funds our long-term capital plan and preserves our fortress balance sheet. With that, let me turn the call over to Michael. Michael?
Thanks, Ryan. As discussed, we delivered a solid quarter of production at Mountain Pass, with concentrate recovery and grade performing particularly well. That performance stands out even as we continued to experiment with new processes and across different components of our ore body. These efforts are yielding valuable insights that are informing operational optimizations. We are encouraged by the potential to translate those learnings into sustained performance gains.
In our midstream operation, prior process enhancements contributed to strong NdPr production during the quarter. Importantly, we see meaningful opportunity for improvement across roasting and leaching and product finishing circuits. Over time, we expect these initiatives to increase production volumes and reduce costs. As planned, we successfully concluded our semi-annual maintenance outage in April, which included installation and commissioning periods associated with several projects.
These projects caused a slightly slower resumption to normal production. As such, we expect to achieve a single-digit quarter-over-quarter decline in NdPr oxide production in Q2, followed by significant sequential growth in Q3 as the benefits are fully realized over a full three-month period. Following the commissioning of the remaining commercial-scale processes at Independence in Q4, we are now focused on ramping the facility, driving throughput, improving yields, and ultimately stabilizing operations.
This is detailed, painstaking work that takes time to fully optimize. We are making good progress. We have a strong and growing team in place. The core processes are translating effectively from development into production. The magnetic performance of our commercial magnets is meeting customer specifications, confirming that the system is operating as intended at scale. In parallel with the commercial ramp, our product development efforts are advancing.
This includes new magnet grades and specifications with improved underlying chemistry, including materially reduced heavy rare earth content. This work is aligned with customer programs, including Apple and the Department of War.
As our magnet recipe roadmap expands, we are positioning the platform to address a broad portion of the commercial market, including emerging applications such as robotics, drones, and defense, with meaningfully reduced, and in some cases no, heavy rare earth content. Back at Mountain Pass, we expect to begin recommissioning the first phase of our chloralkali capability in short order, representing an important resiliency and efficiency opportunity.
While our primary reagents, hydrochloric acid and sodium hydroxide, are available domestically and are not directly impacted by recent global supply chain disruptions, chloralkali provides a compelling opportunity to further reduce external dependencies, lower our environmental footprint, and reduce costs over time. Our heavy rare earth separation circuit remains on schedule to begin commissioning in Q2 and to produce terbium and dysprosium later this year.
In addition to those products, the circuit will generate 2 intermediate feed streams, mixed samarium, europium, gadolinium, and holmium to lutetium plus yttrium concentrate that we can either store for future separation or sell to third parties, supporting broader supply chain development. Under our agreement with the Department of War, we are committed to producing high purity samarium oxide, and we continue to make steady progress on plans for that product alongside the potential for gadolinium oxide production and other attractive HRE product capabilities.
Separately, our magnet recycling line at Mountain Pass, developed in support of our Apple agreement, has completed conceptual design and is further advancing engineering and procurement. This line represents both an important strategic asset and a compelling business opportunity, closing the loop on our end-to-end capabilities and creating an incremental source of third-party feedstocks containing both light and heavy rare earths.
In addition to breaking ground at 10X, our expansion efforts at Independence towards 3,000 metric tons of annual magnet capacity, also in support of our Apple agreement, continues to advance. Design is nearing completion. All major equipment is now in order, and we remain on track to achieve our targeted start-up production dates. Overall, this was a very solid quarter of execution across the business.
We delivered stable upstream performance, continued to advance our midstream operations, confirmed the viability of our commercial magnet processes, and made steady progress across a broad set of growth initiatives. As we move through the remainder of the year, our focus remains on disciplined execution, applying what we learn, and converting that progress into higher output, lower costs, and an increasingly integrated operation. I'm encouraged by where we are, continuously impressed by the ingenuity and grit of our team, and optimistic about the path forward. With that, I will turn it back to Jim.
Thanks, Michael. As we have discussed today, 2026 is off to a strong start. As we look ahead, the strategy is clear. Scale to capture demand, complete the integration of our platform, and execute with discipline. We are the national champion with a unique platform grounded in real assets, real production, and real customers.
Moreover, as I have consistently said, I continue to believe that access to NdPr oxide will remain the binding constraint for economically viable rare earth magnet production outside of China for at least the next 5 years. During the quarter, we saw the Japanese government and industry secure nearly all of Lynas' NdPr output under long-term arrangements. As a result, there is very limited uncommitted NdPr supply available to support what Adamas Intelligence projects to be more than 60,000 tons of existing and announced Western magnet capacity over the coming years.
A useful rule of thumb in the industry is that every 2 tons of magnet output requires approximately 1 ton of NdPr oxide feedstock. Put differently, bringing online a 10,000 ton magnet facility ultimately requires upstream mining and refining capacity on a scale comparable to Mountain Pass, an industrial capability that would likely require over 5 years and substantial capital to replicate, even assuming such a resource were identified today.
We believe this reality strongly validates our vertically integrated strategy and positions MP exceptionally well as the market continues to evolve. Importantly, we are doing so with substantial contracted visibility across the platform, including our partnerships with GM, Apple, and the Department of War. These agreements provide durable, long-term growth and cash flow with meaningful upside as we continue to scale. We are confident in the path ahead and grateful to our team and partners for their continued support. With that, operator, please open the line for Q&A.
Thank you. We'll take our first question from George Gianarikas with Canaccord Genuity. Please unmute your line and ask a question.
Hi, everyone. Can you hear me?
Yes. Hey, George.
Oh, hey. Thank you for taking my questions. Jim, you just sort of addressed this, and I'm sure you've noticed, but there's now a lot of momentum outside of MP to build a Western magnetic set of champions, and you've been on the journey for some time. As you move towards your 10,000 ton target, how would you characterize the knowledge or operational moat you've built through stages 1 and 3? Specifically, if you're a greenfield competitor today, what are the primary set of barriers to catching up?
Sure. Well, thanks, George. Yeah, I mean, as you said, there's a lot out there. I think capital formation is generally helpful. You know, we wanna see more in this supply chain, so it's good to see a lot of projects out there. Obviously, with respect to heavies, for example, it's great to see capital formation on that because, you know, from a heavy standpoint
We are focused on a pretty diversified feedstock, you know, supply chain. You know, we're not necessarily as interested in upstream project ownership. We wanna see a lot of capital formation out there. We think that having our existing refinery is really a significant advantage, at least for the foreseeable future, you know, 5-plus years.
Any of the projects that we see around the world, you know, ultimately if it's non-Chinese supply chain, it's ultimately gonna come into or very likely come into, you know, our refinery. We don't necessarily need to be involved in those projects to grow our business, but we can certainly benefit from them.
What I would say, I mean, I think what I guess, you know, these projects are really hard having done this for a decade now. I think that there's a tendency out there to look at projects and say, you know, P times Q equals this, that's the cash flow of the project. You know, the reality is that these typically take a long time to bring online. They're very often more expensive than you think. It takes several years to ramp. You know, you don't just build a facility and turn it on.
You know, often when you look at sort of the potential of a deposit versus what the reality is once you get through the processing challenges, even if it's all the way upstream just to get recoveries, you know, what you typically find is sort of what your sort of, theoretical opportunity is not necessarily what the resulting opportunity is. I think that's a long-winded way of saying that, you know, we really, we take a careful view about where we're gonna commit capital.
Because, you know, I joking, you may have heard me say this before, George, but, you know, there's that famous Bezos expression, "Your margin is my opportunity." You know, we view it as I look around and I say, "Your investment is our opportunity," sort of the Litinsky corollary to that statement for MP, which is just, you know, we wanna see a lot out there.
We're a little skeptical that people will be able to bring online, you know, projects as quickly and get pricing that they think and, you know, all of those things that go into when sort of the fantasy story becomes a reality. But we do think that ultimately it is good for the supply chain. It's great to see governments around the world excited.
It's great to see capital formation and, you know, I think ultimately it's gonna be really beneficial to us because we have the great position of, you know, we control our fate here from the standpoint of we continue to execute. Our cash flows are contracted. You know, if you look at GM, Apple, the Department of War, and the growth of our business through 10X, having all that business contracted, knowing that we have from a financial standpoint, we're completely protected.
Then lastly, and, you know, sorry for the long-winded answer, but it's such an excellent question just given everything we see out there. I do wanna reiterate, George, the comments I made on the, you know, in the prepared remarks about NdPr oxide being the binding constraint.
I really would, you know, not to pitch a competitor, but I would recommend people look at the Adamas Intelligence research. If you look at the next, call it 18 months to 2 years, we see, call it, roughly 60,000 tons of magnet capacity in the non-China, you know, sort of the non-China world growing to something like north of 100,000 tons.
If you look at the only real, you know, scaled material out there is MP and Lynas, and Lynas has spoken for with Japan. Obviously, we're gonna be able to feed our magnet facility. You know, I see all of these magnet businesses out there, and I'm just wondering where the feedstock's gonna come from. I, again, I think it positions us really well. You know, I wanna be realistic. I don't wanna discourage a lot of investment around the space. I do think it's gonna set up some amazing opportunities for us.
It's okay to pitch Adamas. They're great. Just 1 quick follow-up. How are you adjusting, if at all, your metallization strategy as you ramp production in magnets? Thank you.
Oh, sure. Well, Michael, do you wanna cover metallization?
Sure. Yeah. Thanks, George. Our view is to have a hybrid approach where we continue to operate and, you know, expand our capability at Independence. We will have capability at 10X. You know, and we're talking to domestic and international partners on further metallization. We currently utilize certain toll processors, and we expect to continue to use that while we look at other, you know, low-cost, low-cost metallization options around the world.
Thanks. Thanks.
Next question. Our next question comes from Brian Lee with Goldman Sachs. Please go ahead and ask your question.
Hey, guys. How's it going? Thanks for taking my questions. I guess first question I had was just around the materials segment, EBITDA margins. They were pretty healthy here, maybe ahead of expectations. One, would you say that's fair? You know, is that related to better price, or are you seeing anything on the cost side as well? Maybe if you can walk us through some of the puts and takes, and then also how to think about, you know, EBITDA margins off these levels going forward as, you know, as volumes ramp.
Yeah. Hey, Brian. It's Ryan. Thanks for the question. I think as we look at the performance in the material segment, you know, certainly we were pleased with.
Michael and his team's ability to continue to ramp production ahead of expectations there. You know, I think that's great. We also had a very successful sales quarter. As we've talked about in the past, you know, there are always quarterly puts and takes on shipment timing as it relates to, you know, sales recognized ultimately in that 3-month period.
Certainly with the, you know, exciting new partner we announced last quarter, you know, we were able to start deliveries into that contract as well. That drove some incremental strength in sales volumes. You know, I think that we continue to see a clear path to us pulling costs out of that business.
You know, we see no material change to the trajectory that we've laid out as we get ultimately to run rate volumes and stably operating at run rate volumes. You know, we still continue to march towards that. You know, we have work to do there, but I think the path is quite clear. I, I don't expect that there's really anything in this quarter that, you know, caught us materially by surprise. I think we're really just heads down in execution mode, continuing to move towards our ultimate targeted throughput and targeted cost structure.
Okay. Great. Helpful. Appreciate that. Maybe just bigger picture, you know, a lot of good operational milestones here and discussion. On the customer development side, I know, you know, last quarter you had announced a new customer. I know it's not reasonable to assume a new customer every quarter. C an you speak to kind of where the engagement activity levels are and then kind of how you're looking to secure more off takes and maybe what types of customers you're most engaged with here? Thank you.
Sure, Brian. I mean, the engagement is very high and it remains, you know, it has been pretty extraordinary and it remains as such. I think we're having a lot of great conversations. Certainly what we see around the world with the change in warfare, I think there's a particular and increasing recognition that the world has changed.
Then obviously, given all of the excitement that we see in physical AI and what that means, I think already NdPr is a binding constraint, you know, in the magnetics business. I think as we see that growth, I think that, you know, people, particularly in some of these growth verticals, are recognizing that as well. So it positions us really well.
What I would say, and just remind you, I know you've heard me say this, but our business is contracted. You know, we're in a good position with respect to obviously independence is gonna be essentially for GM and Apple. Then when we look at 10X, you know, we will take our time to kind of thoughtfully, you know, thoughtfully sort of build out the customer base of that facility.
It certainly is not for lack of interest or demand. We will approach that methodically and I would say there'll be some customers that are, you know, extraordinarily sensitive where you know, you certainly won't hear a name or an announcement. Then there'll be some that, you know, that want to announce. What I would say is that, you know, that discussion continues. We're gonna, I think it's gonna be really attractive for us and, you know, we'll just keep You know, stay tuned obviously for things we announce in time.
All right. Makes sense. I'll pass it on. Thanks, guys.
Our next question comes from Corinne Blanchard with Deutsche Bank Research. Please go ahead with your question.
Hey, good afternoon, guys. Thank you for taking my question. Can you maybe talk about the cadence of production that you're expecting for the rest of the year? My second question would be maybe like a general view on, you know, the Middle East conflict, any change in customer approach or demand. Thank you.
Michael, why don't you go ahead and take the first part, and then I'll do the second part.
Okay, great. Thanks. As I mentioned in my prepared remarks, we expect production of NdPr in the second quarter to be down slightly quarter-over-quarter. We do expect the third quarter to show a material improvement again. Then I expect continued progress towards reaching our 500 ton per month run rate by the end of this year. No real change to what we previously discussed.
Corinne, on your second part on the Middle East, you know, sort of just expanding on that, touching on it again. You know, it started over the past few years as we saw, what happened in Ukraine and the developments around essentially physical AI, right? The use of drone and robotic warfare.
I would say that the events in the Middle East, have certainly just sort of accelerated and magnified, I guess, pun intended, the perspective around, you know, drones and robotics being, the future of warfare. What I would say is, you know, I think that the importance of this supply chain was sort of already widely known. You know, it's sort of like, is infinity times two still infinity kind of thing.
Like, I don't think we necessarily needed those events to remind people of, you know, the status quo and sort of the rare earth magnetics for, you know, as a national security industry needed to change. There's no question that it is just a further recognition and maybe even pulling that timetable and the scale of that demand forward. I think that it's very likely that, you know, the future of warfare will be around millions if, you know, eventually not billions of robots and drones working in cohesion. You know, obviously, that is, you know, that is just a huge demand accelerant for rare earth magnetics.
Thank you.
As a reminder, if you would like to ask a question, please click on the Raise Hand button, which can be found on the black bar at the bottom of your screen. We'll take our next question from Lawson Winder with Bank of America Securities. Please go ahead with your question.
Okay. Thank you very much, operator. Good evening, gentlemen. Nice quarter. Great update. With Independence, the wrap-up appears to be going extremely well. At this point, I expect you to be somewhat close to knowing a sensible timeline to reaching nameplate capacity of 1,000 tons on the 1st phase. Is that something you could start to guide us to now? I have a follow-up on that one.
Hey, Lawson. You know, I'd say we're obviously incredibly pleased with the performance of the team there. You know, there is plenty ahead of us though. You know, we are now at the point where all of the commercial equipment is commissioned, and we're in the stage right now where we're in the product qualification process with our foundational customer, with GM. As we've probably talked about before, that is a fairly rigorous and demanding process that's not really just about, you know, can you make the part? It's about defining a very detailed quality management plan, you know, testing run at rate scenarios.
Frankly, a lot of this has to do as well with taking validation parts that have to be made on the commercial equipment, not the NPI equipment, putting those parts into motors, doing regulatory testing, things of that scale. There are a lot of puts and takes as to how that will look over the next 2 quarters. You know, we're pleased with where the team is, but certainly, you know, we expect that to take a bit of time and then, you know, deliveries will be modest and then grow over time.
You know, we've guided to the fact that we expect to be in production for, you know, our second marquee customer there towards the middle of next year for Apple. When you start to layer those volumes on, you know, certainly, the momentum starts to build. You know, from that perspective, I think, you know, we're pleased with our progress.
You know, a follow-up on that would just be thinking about 10X and really the second part of Independence with Apple. I mean, how would you frame the timing of the next phase and then 10X, given the first of kind learnings that you've already had at Independence?
Look, I think certainly, we have learned a lot of lessons, you know, from building this business from scratch, right? I mean, our first Magnetics employee was in 2021. It's pretty amazing to see the progress that we've made, but there are a tremendous set of learnings, you know, including right now as we move through the process.
I think Michael explained it well in his prepared remarks that will give us, circling back to George Gianarikas's question, you know, the moat that we've built from this operational know-how in building this business out, is tremendously valuable. You know, each incremental customer hopefully is probably easier than the 1 before it. You know, we've given rough guidance on where we think 10X will be from a timeline perspective.
We are moving with extreme urgency to bring that facility online, you know, in line with our partners of the Department of War. You know, it's really just all hands on deck from an execution perspective, getting those ramped up as quickly as we can.
Thank you very much.
Our next question comes from Bill Peterson with JPMorgan. Please unmute your line and ask your question.
Yeah. Hi, good afternoon. Thanks for taking the question, and nice job on the quarterly execution. Wanna ask a few questions as sort of follow-ups, but maybe with some more precision on some previously asked questions.
Taking the cost side, a year ago you had a cost bridge outlining a target to drive costs from over $60 per kilogram down to $40 on higher utilization, fixed cost absorption, as well as benefits from the chloralkali. You discussed the chloralkali earlier, as a snapshot, I wanted to check on where you are on that journey, notwithstanding the second quarter impact from downtime as well as your path to get to that prior target.
Yeah, sure, Bill. It's Ryan. Thanks for the question. You know, I think as I laid out before, you know, with all of the inputs we sort of put into that guidance, we don't see any meaningful deviation from our ultimate plan. I think if you think about, you know, taking a snapshot in time in any given quarter, making, let's call it roughly 1,000 tons last quarter, there are a lot of different ways to make 1,000 tons. Some are lower cost, some are higher cost, and I think certainly as we move towards stably producing at our run rate target, that is going to unlock that operating leverage that we've talked about.
You know, within any single quarter, there's, you know, there are a lot of moving pieces on, you know, investing in this debottlenecking as we speak. Certainly, I think one of the impacts that you're seeing right now where you don't have perfect visibility into the standalone NdPr operation is the fact that we're investing quite heavily, you know, that shows up in the P&L in ramping staffing for the Heavy Rare Separation Facility, as well as getting ahead of ramping for, you know, team and tools for that Chloralkali Plant ahead of it being online.
When you fast-forward over the next several quarters, you combine getting to our targeted throughput, and you bring these operations online, is when you'll really start to see the leverage flow through.
Yeah, yeah. Thanks for that context. Maybe following up on Lawson's question. Like to clarify the magnet revenue trajectory for the balance of the year and into next year, taking into consideration the declining precursor sales ahead of the finished magnet ramp for your customer. I guess in essence, should we assume overall revenues in the magnet segment, you know, would decline at some point in the back half of the year or early next year before ramping as the finished magnets ramp? Just trying to get a sense for how we should model that business from the revenue side.
I think what we see right now is obviously getting through the PPAP process is going to unlock moving into revenue on the magnet side. You know, it's the reality is we are producing behind the scenes, but we need to get into a saleable PPAP status to start recognizing revenue there.
Certainly, you know, I think we gave you the moving pieces of the remaining deferred revenue that will roll off and sorta start to start to decline sequentially. Then, you know, we are working as quickly as we can to pick up, you know, the delta there on the magnet side. We'll keep you updated as we, you know, get through these next couple of quarters.
I think the reality for us is, you know, zooming out for a second, certainly, you know, heads down executing, there's gonna be lumpiness in the next several quarters. If you look at sort of how Jim explained where we are in this business, you know, the operation that we see right now, you know, magnetic characteristics of our parts are performing extremely well.
You know, we've proven out at this point that we can take what we've done, you know, on smaller scale and scale it up. It's just a matter of time. You know, we're looking forward obviously to layering in increasing volumes once we're through the PPAP process, bringing in our next set of customers. You know, over the next several quarters, that financial model will certainly start to play out.
Yeah. Thanks, Ryan, and thanks to the team for all the insights.
Our next question comes from Davis Sunderland with Baird. Please go ahead with your question.
Hey, good evening, guys. Thank you for the time. I appreciate you taking my questions. I actually wanted to start by going back to one of the parts of Lawson's question as well, just on 10X. Ryan, appreciate you talking a bit about the learnings and wondering if you guys could just expand maybe on how the learnings from Independence might make 10X more efficient on a $ per capacity basis or timeline or any other metrics on how version 2.0 might be better than the first, if you will.
Sure. Michael, why don't you go ahead and take that one?
Sure. Well, certainly we've learned a huge amount over the last couple of years in designing, building, and then ramping new facilities. There's a lot of engineering that can be, to some extent, copy and paste. We don't need to reestablish certain vendor relationships. We've leveraged the existing knowledge. The design process will be a lot faster, and less prone to mistake, change order, rework, et cetera.
We're, you know, certainly the pace of engineering design construction will be a lot faster than expected. We also think the ramp of Independence over, you know, starting last year and through, you know, this year and beyond will give us tremendous insight into, you know, a process of producing great magnets, driving costs down.
That will be applied from day one into the operation of 10X. The fact that our teams will be able to travel between the two different sites will enable us to leverage that knowledge without having to rebuild it all. We certainly expect 10X to be significantly smoother in terms of startup than we will look back on for Independence. Of course, the scale that we're doing, you know, additional products complexity, there'll be no doubt its share of challenges as well.
Hey, Davis, this is Jim. Just adding on to what Michael said. There's one point he hit that I think is really important when he mentioned about equipment vendors and how we think about our magnet business. If you go back to when we went public, you know, about 5 years ago, and we started the magnet business from scratch, you know, there were really a handful of things that I was focused on, you know, in building that business.
Obviously, number 1 is hire a great team, right? We hired a great leader, and then we started building out a great team there. Number 2 on that list was developing a non-China equipment sourcing strategy. You know, at the time, even though the world was in a very different state, we know, we thought it would be sort of very odd and hard to argue that it made sense for non-China supply chain for rare earth magnetics, but then be wholly reliant on Chinese equipment, right?
We started, and this probably was, you know, certainly expensive and painful to us, you know, over the years. We really built that facility from day one with the thought in mind that we needed to truly restore this supply chain all the way through the equipment.
You know, the last thing, that I think we're compounding on is that the last piece of that, you know, sort of great team, adding to that team equipment, but is sort of mapping and understanding the IP landscape, and specifically within their grain boundary diffusion strategy. You know, certainly the Chinese magnetics makers are outstanding at pushing the boundary, I guess, again, another pun intended.
You know, sort of Chinese and Japanese industry are very effective about, you know, advancing the IP and making the best magnets for the buck, so to speak. We were very focused on that from the beginning, and I think we've now taken the MP team to the cutting edge.
You know, as you may have heard me say, I believe over the next few years, we will ultimately leap ahead from an IP standpoint. One of the goals that I've set for the team with 10X is that I believe that by, you know, when that facility comes online, MP will be from an IP standpoint, we will leap ahead and be the best magnet maker in the world.
Obviously, we're gonna learn a lot of painful lessons as we ramp that facility and as we grow our business. We're already, you know, we're already thinking about all of those things to make sure that we're leaping ahead technologically. It's not just about sort of building a giant box and putting equipment in it.
Super helpful. Thank you both. Maybe just one more, maybe a boring housekeeping question, but probably for you, Ryan. I just wonder if you could talk at all about contract adjusters or any other inflation protection mechanisms you guys might have to, I guess mitigate the impact of increased shipping and logistics cost, or maybe this will manifest in a longer than typical sales lag, or any other considerations there. Thank you guys very much.
Sure. Yeah, as it relates to the material segment at least, you know, the shipping and logistics component, at least from sort of a, you know, a cost of fulfillment perspective is extremely minimal relative to the cost of the product. You know, even with sort of inflation out there, you know, in logistics costs, I don't expect that to be a material driver of the business.
You know, as it relates to the cost structure and materials, certainly, you know, we've heard other producers, you know, particularly those that are relying on sulfuric for their process, talk about challenges and cost challenges there. I think we're fortunate that, you know, as Michael mentioned, those are not the materials that we use in our process. Of course, we're not immune from sort of general inflation.
You know, gasoline and diesel certainly are used in our mining fleet, but that is a very small proportion of the cost structure. You know, overall there, you know, we feel pretty good. Magnetics is sort of a, you know, a bit of a different beast in terms of the way we've set up the contracting. I would say that without getting into details of individual contracts, we have always been thoughtful about protecting ourselves from raw material price increases wherever they come from, you know, any type of raw materials. You know, we feel quite good about how we've contracted around that.
Our next question comes from Max Yearal with BMO. Please unmute your line and ask your question. We'll take the next question from Sam Brandeis with Wedbush Securities. Please unmute your line and ask your question.
Hi. Can you guys hear me okay?
Yes. Hey, Sam.
Hey. Jim, with your kind of framing as NdPr oxide as the binding constraint for non-China magnet production over the next 5+ years, it's definitely compelling with 6,000 tons announced scaling towards 100,000, plus limited feedstock. With independence essentially spoken for between GM and Apple, as you guys mentioned, and 10X building out, how are you thinking about the right balance between locking in additional long-dated offtake agreements and also preserving optionality to capture pricing and margin as s upply and demand balance?
Yeah. By the way, Sam, it's 60,000 over sort of the next, call it, 18 months, six zero.
Okay
apply approximately 30,000 tons of NdPr demand, which so it's sort of a you know, already it's quite a It's sort of blindingly obvious that NdPr is the binding constraint just over the next year or two. Then, you know, that number 60 is supposed to go to over 100 over the next five years. Obviously, all of those won't get built. I, you know, I do scratch my head. If you are building a magnet business today, without a certain and dedicated feedstock, you know, at scale, and that's demonstrable, I just don't see how you can produce a magnet.
To answer your question, it's an excellent question. I think this actually goes down to the sort of the foundation of the company when we started building this business. You know, we've said this many, many times, which is, you know, we view these businesses as distinct, the midstream and the downstream. Although the strategy to be vertically integrated is critical, we wanna make sure that we maximize returns and that we're thoughtful, i.e., we don't rob Peter to pay Paul.
When we look at our magnetics business, you know, we don't, we don't wanna subsidize by, you know, taking bad pricing, let's say, in the midstream business and think, "Oh, gee, we invested this money in the magnet business, and we, you know, gave some kind of price protection, and we ended up losing money on that investment."
No. It's, you know, for the most part, we wanna make sure that our magnet business is getting material at the equivalent of market. Right. Obviously, there's some puts and takes on contract structure, but for the most part, the magnet business is getting material at market and then is sort of expecting a very attractive return from there. That's a long-winded way of saying that, you know, we will benefit from that exposure.
I actually think there's a compounding effect, which is, yes, the price will go up, in my opinion, for NdPr. I don't think so much so for the heavies. I think actually that if you look, you know, I know that there's some talk out there of sort of heavies, and I think, again, nobody knows with commodities prices.
I think versus market expectation, I wouldn't be surprised to see the heavies prices, you know, specifically the magnetics heavies, DyTb decline. Not the others, just the magnetics ones, DyTb decline quite substantially from here, because they sort of are secondary now to this binding constraint of NdPr. We do expect to benefit from the price of NdPr, as well as then the fact that. We have this business together.
Our customers are gonna wanna come to us. I mean, if you were out there and you wanted to buy a magnet, why would you risk supply chain? You know, even if you're willing to pay more and all of the things to onshore, why would you go out and take an unstable supply chain situation? It's kind of the reason you're there.
I think we can sit in front of customers, and we have. I mean, we're seeing this real time where because we have the feedstock, we're able to, you know, contract long-term attractive business at incremental attractive margins in the magnet business on top of getting the benefit of the price of the commodity.
Great. No, that was very helpful. To kind of follow up, so you have framed the physical AI, drones, robotics, autonomous defense systems as another step-change demand accelerant for the industry and for MP Materials in particular. As you talk to customers across these emerging verticals, how are you sizing incremental NdPr demand pull from physical AI relative to the more established EV and traditional defense channels? How does that reshape how you're thinking about 10X capital allocation and the pace of expansion beyond that?
You know, it's a great question, and actually that ties into the last question which, you know, sort of is another piece of why I feel like, you know, we may really see sort of DyTb prices decline materially, is that as we look at the physical AI market, you know, our expectation is that from a robotics standpoint, and some drones that, likely the vast majority of that are gonna be, you know, heavy free magnets.
I mean, we're pushing the boundaries today. Our, you know, our ability to produce magnets at the specs that are needed, you know, with very little or no heavies is just being, you know, the reduction that, advances that we're making are pretty extraordinary. I think that, it's a great question. It's what we think about pretty much every day, in how we're gonna build out 10X, because I do think that the physical AI boom is so critical from both a national security standpoint but also just a economic opportunity. I say this with, you know, a big grain of salt.
I, again, I wanna just kind of say, you know, you look at what's happening in some of the AI supply chain out there where all of a sudden an advance happens and then you see this cascading effect, whether it's memory or CPUs or some of these things where things are going parabolic, because all of a sudden they realize, "Wow, we had this technology breakthrough, we need more of X, we don't have it." It's so critical to downstream, you know, sales and value that the prices go sort of parabolic. I do think, again, I don't know the timing.
I'm not saying it's next week or next month. I do think that at some point as humanoid robotics in particular becomes, you know, a reality if we, if we believe what, you know, sort of the great technologists are saying, rare earth magnetics are the key item, right? Along with obviously chips and the ability to figure out how to make and manufacture the product.
I do think that there'll be sort of that, you know, psychological revisiting of the importance of our product and we really wanna position the business, you know, along with some of the other customer areas. We are very focused on that vertical for when that day comes.
Thank you very much. That was extremely helpful.
Our last question comes from Carlos de Alba with Morgan Stanley. Please go ahead and ask your question.
Yeah. Thank you very much. Can you hear me?
Yes. Hey, Carlos.
Yeah, great. Hey, thank you, Jimmy. Jim, sorry, just one question. On given the discrepancy between supply and demand, you just alluded to a very strong outlook for NdPr. Have you assessed what the incentive price would be for NdPr capacity or supply to possibly respond to the demand that we see ahead of us?
I mean, I, it's a great question. I think about, you know, obviously we think about it. We've talked about it over the years. I think that, you know, as I've said, that having lived this for a decade now, getting these things online is. Once you've identified an ore body, you know, again, and have worked through the challenges of sort of what you can really get out of it, and you've figured out the refining piece and whether you're selling it to a refiner or you're, let's say you're building a mine and refinery. There's a big time component, right? It's not just, you know, building a big refinery takes a lot of capital.
Ramping it, you know, you don't just kind of hit a button and turn it on, right? There's typically, you know, a multi-year period to bring it on. I think, I think that, you know, Lynas took over a decade. We did it much, much faster. Any of these things, you know, they take time. When you actually adjust a model for, you know, not just sort of, we look at our reserve report and then take all these rare earths in there and multiply it by a price and look at that basket, and then we think we can build it for X and so therefore our NAV is Y, right?
Like, that's sort of the history of the industry and what we're seeing it today, right, in, out there. The reality is as well you won't get that full basket. You'll get some recovery of that. It won't be perfect. It'll take you years longer than you think. The cost of capital inevitably does change over time with cycles. What you find is that, you know, these things are just harder to get online and more difficult. Again, I'll say it one more time 'cause I've, you know, I'm just having fun here.
You know, the corollary to the Bezos quote of just, you know, "Your, your investment is our opportunity," the foundation of this company is sort of benefiting from, you know, an enormous amount of investment that we've sort of come in and fixed. I do. We're already seeing some of that out there that I think we'll get opportunity from that. To that I guess to directly answer your question, it's materially higher than, you know, sort of people think when you add in all those things.
It also really depends on the geology, right? I mean, capital's the easy part if you have an attractive project. The real question is what is the geology? How are you gonna mine and refine? Then, you know, how long does it take you to get online? You know, when you add up all of those things, you can come to a number, but it's certainly materially higher than today's prices.
Yeah. That makes sense. It's very clear what you alluded to. Thank you for that. Maybe it was a very solid quarter, right? Maybe the only thing that I would say is cash from operations surprised a little bit to the downside. Maybe we should just be smarter given the pacing which the company is right now. How do you see that in the coming quarters so that we fine-tune our model more closely to reality?
Yeah. Hey, Carlos, it's Ryan. I'd say in general, Q1 tends to be our weakest working capital cash flow quarter. There's a lot of, you know, prepayments for certain things that occur in the first quarter of the year. You know, employee compensation, all of those sorts of things from a working capital perspective end up being a drag in Q1 that's not really repeated throughout the rest of the year.
Other than that, it's really just, you know, puts and takes. Certainly, there are, you know, pieces of the earnings pool at this point, and pretty significant amounts of sales that, you know, we're starting to collect on as we speak. It's really just a timing issue of working capital.
All right, fantastic. Thank you very much, Jim and Ryan. Strong quarter. Congrats.
This concludes the question and answer portion of today's call. I will now hand the call back to management for closing remarks.
Well, thank you, everyone. It was certainly an outstanding quarter of execution. We are gonna get back to work and look forward to seeing you next quarter.