Ladies and gentlemen, welcome to the MP Materials Financial Results Conference Call and Webcast. My name is Charlie, and I will be coordinating your call today. I will now hand over to your host, Head of Investor Relations, Martin Sheen, to begin. Martin, please go ahead.
Thank you, operator, and good day, everyone. Welcome to MP Materials' Q1 2021 earnings call. With me today are James Lutinski, Chairman and Chief Executive Officer of MP Materials Michael Rosenthal, Chief Operating Officer and Ryan Corbett, Chief Financial Officer. To follow along with our discussion today, we encourage you to download our slides from our investor website. Before we get to James and Ryan's opening remarks, I'd like to remind you that during today's call, we will make certain forward looking statements that do not constitute historical facts Under the Safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995.
Forward looking statements are predictions, projections and other statements about future events that are based on current expectations and assumptions and as a result are subject to risks and uncertainties. Many factors could cause actual future events to differ materially from the forward looking statements in this communication. For more information about factors that may cause actual results to materially differ from forward looking statements, please refer to the cautionary language in the earnings release and in our filings with the SEC, including the Risk Factors section in our recent SEC filings. During the call, management will also discuss certain non GAAP financial measures, which we believe to be useful in evaluating MP Materials' operating performance. These measures should not be considered in isolation or as a substitute from MP Materials' financial results prepared in accordance with GAAP.
A reconciliation of these measures 2 of the most directly comparable GAAP measures is available in our current report on Form 8 ks filed today and can be found on our website, investors. Mpmaterials.com. And please check our investor website regularly and follow us on Twitter, Instagram and LinkedIn, where we often provide news and information on the company. With that, I'll turn the call over to Jim. Jim?
Thanks, Martin, and thank you to everyone joining us on the call this afternoon. I'm going to cover a few things today. First, I will recap the highlights of our outstanding Q1 results. 2nd, I will provide a quick update on our Stage 2 optimization plan at Mountain Pass. Then I will turn it over to Ryan for some more color on our performance.
And finally, I will make some closing comments before opening it up for Q and A. Let's start with the Q1 highlights on Slide 4. We achieved record 1st quarter production and sales volumes. These numbers show the significant operating leverage we can achieve when higher NDPR prices meet best in class production costs. Our revenue nearly tripled year over year.
Adjusted EBITDA was up more than 6 fold and our adjusted EBITDA margin more than doubled year over year to over 57%. I will talk more about our record sales and production volumes in a minute. The other big highlight in the quarter was our green convertible bond offering. I would like to spend a moment on the Green Conver. I know the initial market reaction to the transaction was not as we had hoped, But I would like to take you all through our logic so you can better understand why we did it and what this means for long term value creation.
First, as we talked about last quarter, we are seeing activity accelerating the electrification and decarbonization supply chain, Particularly related to EVs, the scale of the global acceleration in capital investment is mind boggling. A recent IEA report stated that While it took 10 years to reach 10,000,000 EVs on the road in 2020, they expected that over the next 10 years, By 2,030, this number would climb to $145,000,000 This may seem like staggering growth, but that would only be about 7% of global fleet. And this excludes 2 3 wheelers where there is also huge potential for electrification. By the way, the IEA report followed up their EV study right away with a look at critical materials. So MP is not capital markets reliant, but we are opportunistic.
We now have the firepower to make what we believe are extremely attractive, highly accretive investments towards our mission regardless of market conditions. And if attractive opportunities do not present themselves, We can always return the capital to shareholders, the largest of whom is me. We believe this option value in our very conservative capital structure is valuable to us all. 2nd,
some of you
have heard me talk about the importance of the green bond market. I have been a vocal proponent of this mechanism for the electrification and decarbonization revolution. Better pricing the externalities across global industry will instill further capital markets constraints on the bad actors and benefits on the good actors. I strongly believe that this bifurcation is just getting started. It is a moral and financial imperative that we position MP to be one of the good actors for this decade plus theme to come.
It will likely shape conversations with industrial and government in the years to come. We see it already. So we look forward to the challenge of our shareholders and the market holding us to these higher standards and believe this is a source of competitive differentiation in our industry, particularly when you look at our competition in rare earths. So in the end, I think the green bond created very attractive low cost optionality for us. I believe it enhanced our value creation as various stakeholders gained further confidence that MP is a reliable thought leader.
We believe we have the proper platform for the future, And we will continue to build upon our reputation for execution, both operationally and financially. In conclusion on the quarter, Stage 2 is on track and Stage 3 is accelerating. I will discuss these, but let's move on to Slide 5 first to cover more detail on our strong execution in the quarter. Starting on the top left, you can see that our sales volume was up 18% versus last year. Q1 is usually seasonally weak due to Chinese New Year, but with the impact of a COVID year over year comparison, coupled with even greater demand from increased we did not see much usual seasonal impact.
By the way, logistics have been a real challenge throughout the world lately. So our operations team deserves A lot of credit for navigating such difficult conditions to a great result for us all. And on the top right, You can see the strong pricing we achieved for concentrate as the market appetite for NDPR continues to power higher. Pricing for NDPR increased throughout Q1 and remain very strong through April. Pricing for concentrate followed a similar pattern in Q1 and remained strong.
Also, Do not forget that our concentrate sales represent commensurate separated and EPR in the market. Stage to production means we will enjoy that massive uplift of refined product revenue without creating incremental global supply of separated NDPR. Our revenue in a given quarter is obviously a function of sales volumes and pricing. There can be modest timing differences between production volumes and sales volumes over time, particularly due to shipping. Yet long term financial results are ultimately driven by our ability to produce as much as we can as efficiently as we can.
Internally, We closely watch our throughput or feed rate, the recovery or what percentage of the REO fed into the mill results in salable strong in the quarter with 9,849 metric tons produced. Over the last 12 months, we have produced nearly 39,000 metric tons of rare earth oxides in concentrate. You can also see here that production costs remain very low at $14.75 a metric ton. Costs were up a bit versus last year in large part due to timing of plant turnarounds and the reagent trial we talked about last quarter, which was completed towards the end of January. We also increased hiring in anticipation of future growth.
We now have over 320 dedicated employees doing incredible work towards our These are challenging jobs with high expectations, and the MP team knows we have some naysayers. The idea that an American company can compete globally in rare earths while preserving stringent environmental standards does not serve the preferred narratives of certain opportunists, but here we are. Most importantly, I would like to tell you very humbly that we recently hit a milestone of going 365 consecutive days and over 400,000 work hours without an injury causing someone to miss work. Fantastic results like we reported today only mean something when they occur behind a first priority cultural focus on safety. Let's move on to Slide 6 for a quick update on Stage 2.
As many of you know, Stage 2 is our plan to move from today's profitable concentrate production to separating rare earth SaaS means we will have restored the downstream production of these critical elements to the United States of America. Stage 2 is also expected to provide significant upside to our financial profile, which Ryan will talk about in a bit more detail. Last quarter, We covered some details of our optimization plan, including CapEx, and how we believe we significantly derisked H2 relative to last year. We made a lot of continued progress during the quarter. We completed the pre civil site work, the foundation work for critical new equipment is in progress, The fabrication of the roaster is nearly complete with delivery expected very soon.
Some ancillary components of the roaster and material handling equipment actually already arrived on-site. The fabrication of the Sol crystallizer is nearly complete and we actually have key portions of it delivered and on-site as well. See the cool photo on the left side of the page there. So net net, we're making a lot of progress executing Stage 2, and I look forward to keeping you posted. Now with that, I will turn it over to Ryan.
Ryan?
Thanks, Jim, and hello, everyone. Jim already covered a few of the financial highlights, but let me give you some additional thoughts on the quarter, and I'll begin on Slide 8. As Jim pointed out, our year over year revenue nearly tripled, but we also saw over 40% growth compared to Q4. This was driven by 46% growth in realized pricing to nearly $6,000 per metric ton of REO. Meanwhile, our adjusted EBITDA increased over 80% from Q4.
Jim also mentioned the leverage of our model from NDPR pricing. Our REO product margin increased from just over $1200 per metric ton a year ago and $2,500 in Q4 to over $4,400 in Q1, driven almost entirely by the price of NDPR and its impact on the price of our concentrate. The result of which is that sequentially, our revenues increased $18,000,000 whereas our EBITDA increased $15,000,000 So as we've discussed, the vast majority of incremental revenues flow through to the bottom line, causing our sequential EBITDA margin to improve almost 15 percentage points. Compared to the Q1 of 2020, the 70% flow through of revenue to EBITDA is less stark, although still excellent, primarily driven by the growth in headcount as we prepare for Stage 2 and the build out of our public company infrastructure. However, our sequential performance is more indicative of what we expect in the future.
And finally, regarding the impact of SAGE 200 financials, Assuming current NDPR pricing and our expected costs of operating stage 2 we gave back in July, on an apples to apples basis, Our Q1 product margin of $4,400 per metric ton of Oreo produced through the mill would roughly double at full run rate production through Stage 2. Now, we have a way to go to get Stage 2 up and running and to run rate production levels in 2023, and anything can happen to the pricing of NDPR in the meantime. But we did want to give you a feel for the improved profitability Stage 2 brings to the table. Lastly, I would add that our Q2 is shaping up to be strong, driven by NDPR and concentrate pricing. Of course, the West Coast ports are still experiencing delays.
And so as with this past quarter, the timing of shipments is the primary unknown. However, for the full year, we continue to expect full year production to increase slightly versus 2020, resulting in very strong full year 2021 results given what we're seeing in the market. Moving on to the next slide. Last quarter, we looked at our full year cash flow of Stage 1 operations. Here we've updated it for the Q1.
And similar to last quarter as well, in the appendix, you'll see a detailed walk of how we get from our adjusted EBITDA to our reported operating cash flow and then our reported free cash flow. But looking specifically at Slide 9, on the left of the chart, you can see our free cash flow for the quarter was a use of $10,000,000 But adjusted for our offtake pay down of $11,000,000 The CapEx spent on our Stage 2 optimization, plant recommissioning activities and related projects in the quarter as well as one time deal expenses, Our Stage 1 process generated over $21,000,000 of normalized free cash flow in the Q1. That's over $80,000,000 on an annualized basis compared to $34,000,000 in fiscal year 2020. That's also a very strong 35% free cash flow margin, up from 25% for the full year 2020. Keep in mind that the offtake balance is essentially debt, but per U.
S. GAAP, the impact of the pay down of that agreement Because our offtake partner retains a portion of the cash from sales of products to pay down the obligation, the impact runs through operating cash flow instead of financing in the cash flow statement as might be expected, which is why we believe it's relevant to add it back to our free cash flow for a comparable metric. Moving to Slide 10, I'll give a quick update on our balance sheet. As discussed earlier, the green bond resulted in net proceeds of over $672,000,000 and combined with our performance in the quarter results in a cash balance of nearly $1,200,000,000 at the end of Q1. In addition, the balance of our offtake agreement was reduced to $60,000,000 in the quarter.
As many of you are aware, the SEC recently issuing guidance regarding the accounting treatment of warrants typically associated with SPACs and de SPAC issuers. Each company's situation is unique, and we have closely evaluated our specific facts and circumstances considering this new guidance. In consultation with our outside legal counsel and external auditors, we believe that our outstanding public warrants continue to meet the requirements for equity classification and that no change in accounting treatment or restatement is necessary. Additionally, regarding the public warrants, We announced on Tuesday our intention to redeem these warrants and require a cashless exercise during the reduction period. Given our position, this allows us to reduce dilution to our shareholders by foregoing the cash underlying the warrants strike price.
With the strong confidence we have in the cash flow profile of our current and go forward plan, this was the value maximizing path for shareholders. With the conversion ratio discussed in our redemption notice and excluding the impact of the convertible note as it is out of the money, our current share count is approximately 178,300,000 shares. Now I'll turn it back to Jim to wrap up.
Thanks, Ryan. Before Q and A, I would like to take a moment to summarize Why we believe MP is so well positioned to become a Western champion of the electrification and sustainability revolution. 1st, We have a co located set of unique world class assets. These are our ore body and our nearly $2,000,000,000 State of the art processing and separation facility. Let me start with our ore body.
We have a bath in a site ore body, which contains north of a 7% mix of rare earths, one of the highest anywhere in the world. Most mines are in the 1% to 2% range and some speculative mines are well under 1%. That means our competition must mine 3 to 7 times more total rock to get the same OREO output out of the ground. And that in turn means more reagents, more processing and more time. That all means much higher operating costs.
Additionally, a bassinacite ore body allows for roasting without the use of additional chemicals at lower temperatures and with fewer potential emissions. We also do not have the radioactivity issues you may have read about These factors compound our early advantage from both a cost and environmental impact standpoint. And then we have a $2,000,000,000 state of the art co located facility in California. There are few such facilities of this scale and none in the world that are co located with the mine like we have at Mountain Pass. This further reduces Transportation, shipping and environmental costs.
We believe the quality of our ore body plus this state of the art facility positions us to become the world's lowest cost producer of separated NDPR, assuming we execute. 2nd, we have structural and financial advantages. Those advantages are scale, time to market and scarcity value, all are aligned with a compelling long term demand outlook for our primary product. Remember that just building a plant of enough scale to compete will take years and bear significant costs, especially with escalating materials prices like we talked about on our last call. Hopefully, we gave some of you an early hint at this emerging industrial trend that was Subsequently confirmed by many companies this earnings season, including Berkshire Hathaway this past weekend, materials and labor inflation is happening across the economy, which means the replacement cost of many things is headed much higher.
We believe this trend is a powerful tailwind for MP's structural advantage beyond simply a reasonable expectation that the price of NDPR should move up with inflation and then some due to demand. Other than a competitor potentially building a refining plant in Texas, which is still not financed or permitted, let alone Broken Ground and Construction, we do not see any material Western supply coming online anytime soon. There has not even been any significant fundraising for such projects despite NDPR pricing climbing north of $85 a kilo. The often told joke is that rare earths are not rare. That's true, but it misses the bigger point.
What is extremely rare is a scaled, economically viable deposit, and the time, cost and expertise to bring any such deposit online only compounds that scarcity. 3rd, our stage 1 process is profitable and cash generative. We did go public via a SPAC And our business is leveraged to electrification. 1 could simplistically bucket MP with the hyper speculative electrification group, many of which we believe will not generate cash flow for years and some others which also may have very aspirational projection targets. Yet our existing operations are not speculative, and we have materially outperformed the original Stage 1 projections we laid out at the time of our go public announcement in July of last year.
In addition, our Stage 2 is fully funded and expected to come online sometime next year. Obviously, our expectation is that this will accelerate our financial performance. 4th, we have an owner operator culture with a sustainability focus. From my earlier discussion on the Green Bond, you know that we believe our platform gives us a competitive advantage. Every qualifying employee was shares when we went public and I remain the largest shareholder of the company.
We are committed to our vision and our incentives are aligned with you. And lastly, we are at the ground floor of what we believe will be a decade plus transformational growth opportunity. Some of you may have seen a cover story in The Wall Street Journal on Tuesday about the evolution of the auto supply chain for the age of electrification. We also treated it the other day in case you missed it. The auto industry faces existential risk from the past practice of just in time manufacturing.
This new era is one where the ability to vertically integrate the supply chain is a source of strategic advantage. Companies are now competing for the kinds of scarce resources that are exactly what we have at MP. This is why you have seen companies like Tesla and others talking about mining in recent months. The semiconductor mess makes this an even hotter topic and we see it now in conversations. Our Stage 3 efforts continue at a furious pace.
I know many of you want lots of details, but we will share with you what we can when we think appropriate. I would point out though that regardless of the path we take, Our mission is to restore the full domestic supply chain. And remember, this is not just about the auto supply chain. Rare Earth permanent magnets are also important to so many growth industries of tomorrow, like wind turbines and drones, and then maybe some currently unexpected ones like air taxis. Who knows exactly what will come next, but the opportunity is ours.
With that, let's go to Q and A. Operator?
Our first question comes from David Deckelbaum of Cowen. Your line is open. Please go ahead.
Good morning, Jim and Ryan, Michael. Thanks for taking the questions.
Sure. How's it going?
Sorry about the connection. I just wanted to discuss just so I'm clear on Sure. It's actually through the year. In the Q1, it looks like there was some delayed sales to the shipments. You talked about the ports just still having some issues, but was this a global issue?
Did the canal at all have any impacts on slowed shipments in 1Q? And should we naturally see a catch up in the second quarter?
Hey, Ryan, why don't you take that? Yes, sure. Yes. Hey, David. I'd say our original expectation that we flagged on the last Paul, was that just given the congestion we had seen in the LA ports given we ship out of Long Beach and LA port, That shipments frankly are lumpy.
We're only able to get product to the port within a certain period of time of that product planning to leave the port. And so when there is congestion, that limits our ability to ship out product. What we did see is a pretty heroic effort from our operations and logistics teams to get out, from what you saw, A very significant portion of our production did sell in the quarter and that's why production volume and sales volume matched pretty closely this quarter and in even better shape than what we even see typically seasonally in Q1, given we tend to see A seasonal Q1 slowdown on the shipping side from Chinese New Year on the import side. I'd say The ports have become a bit less congested, but it is still something that we watch very closely. And so what I would say is that It's something that we have on our radar that we continue to watch.
We think it should improve over the course of the year. And certainly, we think on a medium long term basis, it's our full year sales and production should match very, very closely. We just want to be clear that in any given quarter, shipping can impact revenue recognized just given that lumpiness.
Thanks, Ryan. I'll try to
just stick to 2 questions here,
so it can be kind to others. But Jim, you talked about Sort of progressing on Stage 3. And I guess I just wanted to square your comments with, you talked about the about that as being sort of held for investment in Stage 3 or do you look at those converts as being flexible beyond what you've already outlined between Stage 2 and Stage 3, perhaps for other potentially accretive opportunities that we're not thinking about?
Well, so you know that obviously if you look at the business, we have a cash flow positive business today in our core. Stage 2 is limited amount of capital relative to our cash balance. I think the way to think about it is we have A fortress balance sheet and a platform that is increasingly becoming the thought leader in this Western supply chain in our space. And so what I would say is that convert really created a lot of optionality in our capital structure to take advantage of what we see out there. And if we don't find a very attractive way to utilize that capital, we can return it to shareholders.
And again, we are we've come at this from an investment perspective. We're fully aware of returns on capital and making sure that things make sense. We're going to say on mission. I mean, we're not if the question is, is the capital going to be utilized to kind of go in some other direction or something like that, We are plenty busy with our near term plans of executing Stage 2. And then as I've said, 20.
We have a pretty great stage 3 team that I work closely with of sort of materials Scientists and technologists and business development folks. And so we are looking very closely at a number of buy build and or JV opportunities, As I've said, you can imagine that the chatter up and down the supply chain has just It dramatically accelerated. I mean, it was already very loud back last year. I think that that Just again, look at the Wall Street Journal a couple of days ago and think about what's happening in the supply chain with semiconductors. And so I think the fact that we now have positioned ourselves as not only a credible counterparty, not that we weren't, but I think that this just sort of adds to the momentum with respect to that, but also shows that we are Holding ourselves to account in the capital markets with the kind of standards that both consumers and our industrial potential partners would want to hold us to just creates a lot of value sort of writ large.
And so that's sort of the logic behind it. But Again, I would remind you that we're all we are the large shareholders here. So we're not looking to go on sort of fantasy directions and other ways, we're really looking to complete our mission, do so in a proper way and make a lot of money for shareholders.
Thanks for the responses, guys.
Sure.
Our next question comes from Timna Tanners of Bank of America. Your line is open. Please go ahead. Hey, good afternoon, guys.
Hi, Tanook. Nice taking action.
Thank you. Yes, definitely. So wanted to circle back on the long standing guidance you've had in the past of $250,000,000 EBITDA by the time that Stage 2 is fully ramped up, assumedly full year 2023. And I might have heard this wrong, so I just wanted to clarify, I thought others might appreciate it. There was a comment saying that when Stage 2 is fully up and running, EBITDA could be double at current prices, what it was in the Q1?
And first off, I guess, I just want to clarify if that's true. And if that were true, then the run rate would be about, I I want to say $264,000,000 So can you just let us know if that was indeed the right way to think about those comments?
Yes. So the number Brian, you want to well, let me just add the number that you're referencing refers to the number that was in the go public transaction from July of last year. And that represented a number based on a midpoint of potential NDPR prices With specifically $70 NDPR. We obviously are sort of in the mid-80s today. You can Due to the math, we also said on last call that we believed that we were able to make some improvements On our potential operating costs, from what we see with respect to a normalized 2023 on an apples to apples basis versus last year.
We haven't updated guidance for new prices, but I think with those moving parts, you can probably put together numbers and think through the significant operating leverage that we have. Ryan, I don't know if you want to add on to that.
Yes, Timna, I think there's some confusion on just talking about product margin versus total EBITDA. So I think that's the disconnect. We were talking about product margin looking at our current production in Stage 1. If we were separating it, that product margin would double. But to Jim's point, no change in our guidance whatsoever in terms of what we think the cost structure looks like pro form a for Stage 2.
So as Jim mentioned, That midpoint of $70 of NDPR, we had guided to approximately $250,000,000 of EBITDA. If you look at the slides and information that we put out that time, we did sort of a low and high end EPR case as well just to sensitize for you what that
Okay. That's super helpful. Thank you for that. And then if I could, a second question is just, I recognize that you talk about stage 3, but aren't prepared to Elaborate on what that might look like. I appreciate that.
But just wondering if you can comment on any thoughts about heavy rare earths and separation or production there? And when we might get any update on timing for Stage 3, please?
Sure. So, on the heavy side, the only thing that we have put out publicly was We have a project with VOD and that release sort of was late last year and that speaks for itself. We haven't and otherwise said anything with respect to heavies. So I'll just let that speak for itself. And then as far as Stage 3 updates, Obviously, as you can imagine, we understand the investors want to know as much as they possibly can, and we'd love to Be as transparent as we possibly can, but we have to just kind of keep moving forward and do what we think is right.
We want to make sure that whatever it is that we sort of tell you or share Is heavily vetted real or whatever? We're not looking to kind of Put out a bunch of stuff until it's appropriate. And so that's really all I had to say on that Obviously, we'll make stage 3 announcements as soon as we possibly can when appropriate.
Understood. Thanks, guys.
Yes, of course.
Our next question comes from Satish Tandon of Deutsche Bank. Your line is open. Please go ahead.
Yes. Hi. Thanks for taking my questions. So my first is on stage the commercial side of stage 2. Makers or any potential off agreements for your Stage 2 products?
So it cut out there, but I think you asked do we have any offtake contracts for Stage 2?
Yes, yes. Have you already had any discussion on that?
Well, you can imagine that I From quite a while ago, but you can imagine that conversations are particularly hot these days given everything that's happened in the supply And specifically semiconductors and frankly the importance of our space, I referenced in IEA report That just recently came out. We actually also tweeted that. And then there was a follow-up around Critical Materials. We really do see what we have as being extremely strategic to the downstream OEMs and frankly other industrial As the world electrifies. I've taken the view and frankly, I think it's fair to say we got a little bit of Maybe criticism isn't the right word, but questioning last year about why we wouldn't sign off take contracts.
And what I've Sort of consistently said is that I believe that we are headed into a game changer regime here. We have a very strategic asset and the world wants what we've got. And so we want to make sure that whenever we do contract that we are doing so in a way that we think maximizes value for all of us. And so, To the extent that we wanted to go out and sign a contract, I'm highly confident we could do so. But we have not done anything At this time, and obviously never say never, we could change our minds tomorrow and you could see something, but we have not to date done anything.
And then, Brian, go ahead.
And just real quick, I think I'd flag also, obviously, the thing that think people lose sight of is this is not new supply, right? This supply is being consumed in the market today. And so we have All the confidence that this can be consumed on the spot market. And I think to Jim's point, the reason we're not trying to lock in prices here is because we're incredibly bullish, The future pricing of the materials, obviously, never say never, as Jim said. I think the other thing to keep in mind is we do have What we view as a very strategic asset in our current offtake arrangement and marketing ability into The Asian market.
And so I think we can continue to leverage that as we would like to with Stage 2 product, it's not limited to Stage 1 product.
Okay. Thank you. My second question is on the market. So one of your peers talked about Chinese players looking to Expand capacity over the next 3 years, do you have any insights on whether these are crossing capacities or just on the mining side Or what it means to the overall market?
Yes. I'm glad you asked that. I found that some of that commentary out there, Whether it's companies or analysts or media, I find a little perplexing. I have a totally different view of it. So for Let me first say, nobody knows what's going to happen in the next month or couple of months on pricing.
In the short term, commodities can be obviously extraordinarily Volatile. So with that caveat, I think when it comes to China, you really have to think instead of looking at sort of Western media or sort of Western protagonists, if you will, I think it's best to actually look what they're doing and saying inside China. And in March, the current head of the Ministry of Industry and Information, M IIT, who is also the previous Chairman of Chinalco, one of the large state owned aluminum and rare earth producers. So made some very interesting public statements. And by the way, the MIIT is the primary regulator of the rare earth industry and much of China's overall industrial development.
So this was the head of that. And so according to the reports, He stated that rare earth producers face a number of environmental problems with Excessive mining and refining kind of creating low prices. He actually went on to say that the prices reflect earth, Not that they're rare. And then and I was surprised this didn't get further coverage. He went on to say that over the course of the Chinese dominance, market dominance, Rare earths have been over extracted, resulting in environmental devastation and that prices for these, and this is a direct quote, industrial gold doesn't reflect their full value.
So He and by the way, he obviously these are to refer to it as industrial gold is quite an interesting thing. And for the head of MIIT, an organization that's really focused on economic development, To talk about externalities in such a strong way was fascinating. And so I actually believe and our team believes and again, it's China, this we're just Trying to read tealeaves, that Chinese government policy has shifted from 1 of market dominance at any cost sort of to wanting a more sustainable profitable industry that better reflects the overall costs of the externalities. And if you think about it, this actually fits with common sense. The rare earth industry is call it $4,000,000,000 or $5,000,000,000 globally.
Now I think it's going to grow by many multiples over the coming years. But this is a this feeds into a 1,000,000,000,000 plus opportunity downstream. And look at the New York Stock Exchange, right? There are massive Chinese companies that are now competing globally. And so why would the Chinese government and again, this is just our opinion from what we read, so but why would they subsidize industrial gold to the rest of the world when they're competing against the rest of the world.
And so I think that Because the last cycle was really sort of a quick boom bust around a demand shock and there was obviously the debacle of our predecessor that really had nothing to do with And there's sort of a lot of talk in the media. I think people are missing that the bigger picture thing of what's happening here. And I always like to say that the next decade very rarely looks like the last decade. And so I think people are backward looking at analysts like to just slap a $70 number on NDPR and say, oh, okay, at $70 that's the price of marginal development and then therefore prices go beyond that. And that's just not how things work in the real world.
This is painstaking work. We've been at this for quite some time. These are multibillion dollar facilities. Even if you had unlimited capital and unlimited human capital and you had the ore body And you had the permitting, none of which exists in scale right now in the Western world, this still takes several years. And so China, in our view, has already shifted to a policy of profitability because they're not focused on the last prior decade, they're focused on the forward one.
And I just think people are missing that. Again, it's our opinion. It's what we see. Things could always change. But that's really our perspective on this.
And so I think that we are headed into, again, with the And so, I think that we are headed into again, with the caveat that the short term is always potentially messy, we are headed into A 2.0 cycle. And I do believe, I've said this repeatedly, that prices in the new cycle typically go to the inflation adjusted prior peak and then some, and I believe that. So that's our perspective for what it's
Our next question comes from Ben Kallo of BARD. Your line is open. Please go ahead.
Hey, guys. Hey, Drew. Hey, Ben. How are you doing?
Thanks. Good. So
I'm fired up.
Yes. Hey,
we see that we're
on a mission.
It's good. It's good.
We're ending
our 2 weeks of Heavy earnings and you've been there before. Inflation comes up a bunch and labor and the where you talked about stage 2, stage 3. I guess my question is just about and Mountain Pass where it is, how you how labor is I guess, getting people to work at your company, I guess, is my first question. And then the supply chain, like, through China, you talked about a bit. Is there more on shoring, like a greenfield is better opportunity than to do something else, like To acquire something in China because of worries about trade tensions?
Thanks.
Yes. So on your point on inflation, it's a great question. I believe you're on our last call and I think we Hopefully, you can get credit for giving folks an early kind of view on this before it became commonplace this quarter. We were seeing significant rises In prices across materials, across lots of things. And we worked furiously to get our Stage 2 optimization contracted.
And so I think that that was a great strategic asset that we achieved for our shareholders. I think that and you're seeing this in the capital markets, there's a bit of a regime change where you're seeing the commodities producers really starting and it's not obviously, it's not rare, it's steel, it's copper, where you're seeing some of these things get going and there's I think people aren't realizing this is a new cycle, right? We had a decade long bear market. And in the real world, things are just not as easy to just slap on new supply. It's not all shale.
And so the way to think about it is these kinds of businesses typically actually have the most upside operating leverage to that phenomenon. So to the extent that you believe inflation is here, to the extent that you believe commodities prices are higher, These are the kinds of companies you want to be investing in. And if it's a cycle just getting going, it's just getting going. Again, that's my personal view. As far as our labor, to answer your question, when you look at the math, it's very small relative to the operating leverage that comes from pricing as the sort of the cycle And so we I would say from a talent perspective, Like anyone out there, we're looking we're actually growing quite a bit.
We've sort of stated that. But I think our Going public and frankly, the importance of our mission, both from an environmental and national security standpoint, really sort of Strikes the passion of a lot of people. And so I think that we've seen a lot of really talented people who want to come join us. And then obviously, we've been hiring them. And So our team just continues to grow.
And so I think that our ability to kind of build talent is still there. I think we have the benefit of again being such a unique company, unique set of assets. But I would imagine it is sort of very hard out there in general for what that opinion is worth. And I would also say, I think that again speaks to the strategic advantage we have because whoever is out there trying to raise capital, and again, we have seen no capital formation in the Western world for this stuff. Whatever they thought it cost last week, it's a lot more expensive And it's going to be a lot more expensive next week.
And so that just sort of speaks to the reflexivity of kind of what we're facing today. And so again, yes, labor costs can go up, but I think that we have attracted a lot of talent. I hopefully will continue to attract great talent. If you have Friends that are engineers send us their resumes, we're always looking for great people, but I think that's what we're seeing. Those trends that you're witnessing are a tailwind for us, we believe.
The only thing I'd add on that
That's it, John. Thank you.
Yes, go ahead, Brian. Ryan will
Yes, Ben, I think some context to just on sort of location, I think we obviously Are proud of the fact that we have really what we think is the only co located asset and we're in the Mojave. And so When we say that, people think of us being in the middle of the Mojave, but we're 45 minutes outside of the city of Las Vegas. And so our ability to attract Talent, it has not been an issue at all. We've been able to grow pretty well both on the corporate side and the operations side. And I think you can see in the results, the reason we continue to be able to drive pretty significant efficiencies, growing production despite Many fewer production days this quarter year over year is the fact that we have been adding, for example, probably the best maintenance staff that we've had, plant maintenance ever.
And we expect that to continue. And we're gearing up ahead of stage 2, and we expect to be able to kind of extract efficiencies out of that as well, just given the quality of the folks that we've been able to attract. That has not been an issue. And to Jim's point, importantly, if inflation is here, the leverage for us is just right, where Prices on our product will go up, will have a bigger impact than the impact to our costs from a labor perspective. The one thing I wanted to hit on your second question about Sort of the on shoring and is it better to do something greenfield in the U.
S. Versus having sort of JV or something. We're obviously not going to comment on specifics of Stage 3, but I think your question hits on exactly why We think we have such an incredible competitive advantage, both in our current business and in our potential Stage 3, where we are the only co located asset of scale. And so absolutely, our customers And the end users of these products, the industrial end users are seeing what has happened with the supply chain with semiconductors and having a mine on one continent and a processing facility on another continent and then Another piece of that, on a third, it's just not an acceptable risk for some of these customers. And so I think we're just So Lee
in full
position, given our co location and the scale of our asset. And I think that will sort of that is the competitive advantage when we think about stage 3 and moving into magnetics is access and secure access to raw materials.
Maybe on that front, too, just we had so we had some lithium guys report today. And the question always is like how difficult it is to get lithium. And there's a bunch of I think, Jim, you talked about like the juniors out there trying To make a mine. And so you got liners down there in Australia. And how long does it take to make a mine Like you guys have I mean, if you guys had a guess from your engineers?
Yes. I mean, well, that's and we it's a great question and we try to make that point because there's this is Hard. It takes years. I mean, it's and you need one you need an ore body to start, right? If you don't have an economic ore body.
Sometimes you'll hear from juniors, oh, we have this new technology, right? We have a smarter way to process I'm typically skeptical of those claims. I mean, you might as well I think if someone came out and said, I have a new way to make some guy in his garage said, I have a new way to make a computer chip and I'm going to compete against Intel and build a fab and it's only going to cost me $1,000,000,000 I think People would be a little skeptical. With some of these juniors out there that are making these I think there's a little bit of that. We're just there needs to be a significant capital raise, but really does require this is a chemical plant.
I mean, it's complex and difficult to do. And so, one, you got to start with the ore body. And so if you have a 1% ore body, you just can't be economic, Again, unless you change the laws of chemistry. And then but then from there, you got to get financed, you got to get permitted. And then by the way, you have to go out and hire tons of people who know what they're doing.
And frankly, the only people in the Western world who have any experience doing this is that are at MP Materials. And so We just think that this is really just such a powerful source of strategic advantage for us. We've also said that we believe the Lowest risk, nearest term, highest return on capital source of new supply would be one us getting more efficient at Mountain Pass, that's But it is us doing some kind of expansion at Mountain Pass where we made an investment. Now obviously, I'm not Saying anything today, we would obviously kind of be very specific if we were to make an announcement on that front. But that would be likely the nearest term sort of a source of Western supply, at least as far as we see it today.
And so Again, I just think that this idea that you'll see all sorts of Western supply. I mean, we haven't even yet really seen real capital formation, let alone actual facilities and that will take time. And by the way, even with an experienced operator that In theory, would ship material from the other side of the world to here, you still have to be you have to get the financing in place and you have to get permitted And you got to build it. And so anyway, you get my point. I just think that there's a lot of stuff here.
You basically have people I get this Jim, rare earths aren't rare. Well, yes, that's totally beside the point. What's rare is actually Having an ore body that can be done economically, then having the human capital, the financial capital, The expert and then going out and making it happen over a number of years. And so that's Again, I think people miss that. And so we try to hopefully that's helpful color.
I don't know if Ryan or Michael, do you want anything on that? No, that's good. Yes. That's good.
Yes. I mean, the only thing I'd say is to your point on lithium, I think that's why we're so incredibly bullish about our particular piece of sort of this electrification materials is the supply demand function in rare earths, It is just much more difficult to add supply than many of the other materials. I think we're all incredibly bullish, all of these materials, given demand that we see. But I think the critical differentiator, all of us likely will see this demand boom, but the supply And how difficult it is to add supply is what's very unique and, pun intended, rare in our space.
Yes. And just and for I'm glad Ryan addressed the lithium point. I guess I forgot to do that. Lithium, just as an example, There are you have a lot of production in South America, then you have sort of the North Carolina area and Nevada. There are lots of areas where to extent the investment is made, with time, you can get product online.
And again, as Ryan said, we're bullish on all of this stuff. I think just the game changer that's happening in the commodity space with respect to electrification is pretty amazing. But this is very different than lithium for the exact reason that you have to find an ore body that can be economic just to get in the game. And we don't know of one that in the Western world today.
Thank you. That's helpful.
Our next question comes from Serena Rocha of Morgan Stanley.
An advance if this was already asked, I got disconnected for a minute from the call. But I'm wondering if you could give us some additional Caller, in terms of the pace of CapEx, either as we think about the rest of this year or thinking Stage 2 Overall, how do we do we assume just a steady pace Within that budget and the timeline minus what was spent this quarter? Or could it be more weighted towards The back end of the project or lumpy throughout, what's the best?
Yes. So we have not Yes, we have not given any guidance around sort of specific timing on stage 2 CapEx. But maybe, Ryan, you can sort of not answer the question in a more
Yes. No, there is Certainly, the chance for it to be lumpy. I think we did sort of discuss at a very high level, as with any of these projects, it's a little bit lighter in the Beginning and it gets a little bit heavier towards the end as parts of the project complete. I certainly wouldn't draw a straight line. There will be lumpiness just based on certain milestones that are achieved.
But certainly, I'd say, you saw our spend this quarter. Next quarter will be lighter than I'd say the following few quarters.
We have time to take one more question. So Subhash Chandra from Northland, your line is open. Please go ahead.
Thank you. Thanks for fitting me in.
Yes, of course.
How are you? Good. Thank you. You might have briefly referred to it and I hopped on the call late, so you might have explicitly referred to it. But that IA report, it 2 things, reduced supply through control of illegal mining in China and then also perhaps tightened processing because of this revised Waste Solution Act, Solid Waste Solution Act, which Seems like it's about 6 months old.
Can you elaborate on that? And sort of do you have an opinion If those are meaningful events to kind of I'll respond to that scenario that China will just flood the globe with supplies.
Yes. And so, I covered this, but I just I will I think it's a great question because it's really critical to understand. I think that there's That idea of flooding, in our opinion, from what we read there, obviously anything can change. But that idea of flooding is really a backward looking thing without recognition of sort of Chinese strategic imperatives and pronouncements. The most senior Chinese rare earth official, the head of the IIT refers to Rares as industrial gold and wants the prices to reflect the environmental externalities.
And so And if you just think about it logically, I don't see how China would benefit from Subsidizing an industry so that the Western world can now compete better with their dominant downstream companies, which is where The jobs in dollars and yuan are at stake, right? So I just think that the world has evolved enough where the access to resources are really of such strategic value and that they want to compete downstream. And so they don't want to destroy their environment to help Western competitors. Again, Opinion, this is just based on kind of what we read in here. And so I think that I take that at face value the extent that the headwearth regulator is saying that prices need to reflect the idea that they're rare, not that they're earth, and calls on industrial gold.
I think that it's fair to think that bear earth prices, particularly relative to where they are today and frankly on a dollars basis are probably headed higher. But that's our perspective on it.
And Subash, on your question on illegal mining and the reduction there, I think One important nuance that some don't appreciate also is when you've seen announcements about increased Quotas, which I think people like to focus on those headlines, in our opinion, a significant amount of that is bringing illegal mining Into the regulated fold because of exactly what Jim just laid out, China trying to clean up the environmental impact, which their country and their citizens are demanding. And so when people look at supply models and Take the increased quotas and just add that and don't make the right Adjustments to illegal mining, which admittedly is hard. So by its nature, it's hard to measure. But that is with what we've seen in the industry there, that is a lot of what's going on. And so I think that that is a pretty important factor in driving the supply balance in China.
Okay. No, that's very helpful. So we might be double counting if we don't include the illegal mines when it comes
to Exactly. And When it comes to yes, when you're adding to supply from increased quotas, I think the thought would be look very closely at how much of that is already contained in the market, but is illegal mining. In the market, but is illegal mining.
There are no further questions. So I will now hand the call back over to James
Okay, sure. Thank you. Well, thank you everyone for listening today. We are sort of very Proud of our execution here. I think the team did a really great job.
With you and have a great night.
Ladies and gentlemen, this concludes today's call.