Good morning, it's Laurence Alexander with the Jefferies Chemicals team. It's my pleasure to introduce Ryan Corbett with MP Materials. We're going to do a fairly loose and goosey fireside chat. If anybody has any questions, please feel free to chime in. For those who are less familiar with MP, if you wouldn't mind, just starting off with a very quick overview.
Sure, absolutely. Thanks for having us again. Appreciate it. For those of you that are less familiar, MP Materials is the Western world's largest producer of rare earth materials. We're the only scaled producer of NdPr oxide in the Western hemisphere, and are the only scaled business with a fully vertically integrated platform with demonstrated capabilities from mining through to magnet manufacturing. We have been on a journey of building the business in stages. We're at the point where we are nearly complete on the optimization and growth of production of NdPr oxide at our Mountain Pass asset, which is that Mountain Pass is really the cornerstone of the rare earth industry. It's where much of it was born, and it is such a tremendous asset for us to build this platform on top of.
We've taken our successes in the upstream and midstream side of the business and have integrated downstream into rare earth permanent magnets, which, if I was at this conference three years ago, I might start explaining to everybody what magnets are. I think today now most people know what they are and know how incredibly important they are, which is a major sea change, I think, for the industry, just the broad recognition of how critical they are. But we've built out a very interesting business worth permanent magnets, starting with the automotive sector, with our first foundational customer being General Motors. We've expanded that business to incorporate Apple as our next foundational customer, speaking to sort of the vertical integration, not just for magnets at our Independence facility, but as our sort of keystone foundational customer for our scaled recycling business.
I think the thing that is so critical to appreciate about this business is the vertical integration really allows for efficiencies across the value chain. That was a very exciting announcement we had last year. The other very exciting announcement, and really, I think, a sea change for both domestic critical minerals policy and industrial policy as well as a major accelerant for our business, was the announcement of a public-private partnership with the Department of Defense in July of last year. That deal came with a variety of attributes to it, namely, a price floor on our critical NdPr commodity, as well as accelerating our investment into expanding the downstream side of our business, where we've now undertaken what we're calling 10X to build our next magnetics facility. We've broken ground and are making really amazing progress in getting that facility stood up.
We are partners with the Department of Defense in that facility, where they are a 100% off-taker and have a guaranteed minimum earnings level at that facility with the ultimate goal of commercially syndicating that out to commercial customers and defense industrial-based customers. So that on top of a lot of excitement on the materials side of the business, where we've continued to find opportunities for very high return incremental tack-on projects like our chlor-alkali facility, our heavy rare earth separation capacity, and things of that nature , we've definitely all kept us quite busy at MP.
Your two foundational customers are both fairly large companies. Can you talk about how much engagement you have with other OEMs and how that level of interest has changed given China's frequent use of export curbs as a policy tool?
Sure. I think maybe I'll tackle it both on the material side first and then magnetics. I think from a materials perspective the export restrictions that China has brought to bear, I think, across both segments, both products really, I think, have illustrated the single point of failure that has been evident, that we've been talking about for a very long time, but that I don't think the supply chain managers of every large OEM fully took seriously until they were forced to. We get a lot of questions also about the upcoming Trump-Xi summit and what we think may come out of that. But the fascinating thing to think about is from an industrial capacity perspective, so many of the things that ultimately are built in the U.S. ultimately touch other parts of the world, Japan, namely.
What we've seen is clearly there are difficult relations between the U.S. and China, even more difficult relations between China and Japan, and that is really starting to impact the industrial supply chain. I think that there was a major panic with magnets at the beginning because no one really knew what the pathway was to be able to get export licenses and things like that. Those have flowed some, but not very much. I think that everyone on the magnetic side that we talk to, I think, would characterize it as the genie is out of the bottle or Humpty Dumpty's not getting put back together.
Like it kind of doesn't matter what happens in the sense that you can never allow your business to be that reliant on the whim of an export official at the port coming out of China to decide if your automotive plant is going to stay open or not. Across the board for some of the materials that we produce on the refined side as well as in the magnetic segment, the level of engagement is huge. The beauty of the structure that we've put together is independence with General Motors, and with Apple, the vast majority of that volume is spoken for. Then with 10X, with the investment and offtake agreement with the Department of Defense, we are allowed to be very methodical in approaching contracting that facility.
We think about it as every day the strategic value of that asset grows as more businesses really come to understand how difficult this is going to be in the Western world. I think start to fully appreciate the value of our vertically integrated supply chain. We've talked a lot about where we think the bottlenecks are going to be, and we are one of the very few companies that I think can actually address the problem.
Since you brought it up, I'll just jump straight into the Trump-Xi summit. There's also a November deadline for the rare earth agreements. Where do you see the main pivot points that could come out of this? Or what do you see as the main risks for the industry?
When we think about this, it's almost fascinating to think about the fact that November would represent a year of a pause on certain export restrictions, right? From our perspective, what we are seeing from customers is what pause? It is incredibly difficult. The data's publicly available, the trade data on gadolinium, yttrium, heavy earth-containing magnets like dysprosium and terbium going into Japan. All of those are basically zero. It's pretty darn close to zero coming into the U.S. as well. Again, you think about how our supply chains and the geopolitical rivalry here is developing such that the line between the traditional defense industrial base and the broad economic base is blurring. Is a data center commercial, or is it defense? You'd be surprised that the answer is maybe both.
I think fundamentally the way that the supply chain needs to be approached now is one where we just cannot rely on China no matter what happens at this summit. I probably am not the best prognosticator on exactly what our President and what Xi will say, but I think in a lot of ways the script is already written from the perspective of the supply chain.
Can you tie this into the upcoming election in the U.S. and how you think about where there are areas with clear bipartisan policy support?
Sure.
Perhaps more interesting, where are there areas where there is controversy or instability in the degree of policy support?
Sure. I think fundamentally the great thing about where we sit as a company and where we sit from the perspective of providing a solution to the Western world is incredibly bipartisan. We've engaged with and worked very closely with each successive administration. We've had engagements and awards from the Department of Defense under both Trump 1.0 and under President Biden. I think that the issue of rare earth permanent magnets came to the forefront, of course, after Liberation Day with a full understanding of the scale and nature of the problem, which allowed us to act in concert with this administration to really address the problem. But you take as an example the day our agreement with the Department of Defense was announced, the China Select Committee, which is a bipartisan committee, came out strongly supportive of these efforts.
Since then, I think that there is tremendous bipartisan support for understanding and addressing the vulnerabilities that we have with our clearest geopolitical rival. There will always be disagreements on exactly how to achieve the ends. There is agreement on the ends, maybe not the means always. But I think from our perspective, we have set the business up in a way where this is a strategy that will be able to be executed under whoever is in the White House, whoever is in control of the House and Senate.
Can you give an update on the near-term projects? I am thinking particularly about the NdPr production rates.
Sure.
You indicated they are nearly complete or nearly at target. Also the magnet production for GM.
Sure. Yeah, so certainly we have been at the sort of debottlenecking initiative at Mountain Pass for a long time. We brought the separation capacity online at the very tail end of 2023. I think for context, a factory and facility and refining facility of this scale being able to get it to where we are today at roughly 1,000 tons, a quarter of NdPr production. The only other comp in this space was Lynas when they brought their facility online, probably about 10 years ago. It took them almost seven years to get to full run -rate capacity. We are targeting getting there at the end of this year. I think the amount of progress that the team has been able to make while continuing to invest in the background and the chlor-alkali facility , heavy rare earth separation, and all these other things is pretty extraordinary.
I think fundamentally the great thing about where we sit right now on this debottlenecking initiative is the major items to address at this point are mechanical reliability as we increase throughput and a lot of material movement issues. These are not sort of fundamental chemistry issues. These are very typical blocking and tackling for a facility of this scale. We continue to keep our heads down and execute on that to get us to our targeted throughputs. To your question on GM and our agreement there and the ramp of initial magnet deliveries, our target is to start what we call commercial deliveries at the end of this year. As we've talked about at length, the approval process to get into production, people call it qualification. It's not really qualification. The magnets are qualified. We know we're making on-spec magnets.
We're making very high-quality magnets, and the team down there has done an unbelievable job in execution to get there. What we're really working through at this point is the final stages of what's called PPAP, production part approval process, which is not just can you make the part to our specification? It's exactly how many you're making a day, how are we going to slot that into facility number one with part number one, and what about facility two with part number one, and then part number two at facility one. It's really layering in and integrating into the supply chain for our core customer. Those initiatives are underway. We're making really good progress, and we're super excited about where we are at this point. More to come shortly.
You alluded in your opening remarks to kind of the potential bottlenecks in NdPr. Can you elaborate on that and what that means for the NdPr oxide market, but also what you think about what that means for the magnet market?
Our fundamental view is that we've seen plenty of capacity announcements of potential magnet plants coming to the Western world. If you look at where the NdPr oxide supply picture sits today, there's effectively ex-China from a scaled production capacity perspective, there's MP, and there's Lynas. You look at the current ex-China capacity for magnet manufacturing, and those are relatively balanced. You add in these announced new capacity additions in magnetics, you would basically need to immediately double NdPr production just to meet what's already been announced. Then the projections, pick your analyst; I'm sure you have your own projections as well. The demand growth that we expect to see for magnetics, whether it's robots, data centers, automotive, energy, you name it, consumer electronics, is incredibly significant. The reality is that the ability to add production of NdPr at that pace has never been seen before.
The market structure here is one where it has always sort of been an oligopolistic market. You see where the major pieces of supply come from. It is because those are the very high-quality hard rock mines, primarily, that are supplying NdPr. I do not see another one of those on the horizon that makes a whole lot of sense at today's NdPr prices. One of two things has to be true. Either commodity prices need to massively respond to the supply addition, or we are going to be faced with capacity getting built into the market that does not have supply to fill it. That is why I think our strategy is so critical, as being really the only proven producer of NdPr oxide at scale with a real vertical integration strategy.
When customers come to us, we can take them to Mountain Pass and show them exactly where the critical commodity is going to come from.
Can you also characterize your strategy for heavies? You recently had a gadolinium contract.
Yes.
It seems like that is probably the first of many rather than the one and done. Can you just talk about where you think this is going to take you over, say, five to seven years?
Sure.
What sort of capital investment might you need to build a franchise in that area?
Sure. Yeah, so I think the great thing about our heavy strategy is that we've been on this journey to build out heavy rare earth separation capacity since 2021. We actually initially had an award from the Department of Defense at the time focused on exactly that. We are in the process right now of commissioning the various circuits to do heavy rare earth separation with a target of having dysprosium and terbium production by the end of this year that we will use internally for our magnet business. Coming full circle to the vertical integration strategy and being able to make the critical components of the underlying product, that is primarily where we focused, was ensuring that we have our own supply to grow what is a very exciting downstream magnetics business.
The reality, though, is there are 17 rare earth elements, and I guess there's an argument over whether yttrium counts or not. We say it does. It's not a lanthanide, but clearly, throughout all of these various individual elements, the use cases are pervasive. You think about turbines for power production, turbines for aerospace often have coatings that have yttrium contained or gadolinium contained. Lasers, optics, et cetera, all rely on these products, and we produce them at relatively significant scale at Mountain Pass. When we started NdPr production, the focus obviously was ensuring that we optimized that piece of the business first before we sort of diversified, which created a very significant stockpile of what we call SEG+, samarium, europium, gadolinium, with the remainder heavy rare earth elements. We are using that now to feed our own heavy rare earth separation circuit.
Like I said, first targets were dysprosium and terbium. We had committed in our partnership with the Department of Defense to also produce separated samarium, which is critical for a variety of use cases, particularly in the defense industrial base. To your point, we recently announced a long-term, very significant contract for gadolinium. To your point, it really speaks to the value of this incredible asset that we have in Mountain Pass, where we continue to find opportunities to invest capital at very attractive returns. The way we have always managed the business as a management team is ensuring that there's durability there, right? The world can change tomorrow.
We doubt that it really will from a scarcity perspective of these commodities, but what you are seeing, and to your question on how the supply chain is reacting, is you are seeing users of these products willing to commit over the long term at attractive economics to ensure that we have this capability in the U.S., which is so critical. We continue to look at opportunities to grow that franchise.
The vertical integration to magnets was kind of intuitive. I think we talked about it when we first talked, what was it? Five or six years ago now?
Yep.
As why not?
How about going farther downstream?
Sure.
Are there adjacencies where vertical integration would actually improve your ability to serve customers?
Sure. We think about this all the time. We certainly are a very opportunistic management team. Our CEO is the largest individual shareholder of the business and the founder of the business. Michael, our Chief Operating Officer, is a co-founder of the business. We really approach this from a very long-term perspective. Certainly what we see in the market today is as OEMs have started to really digest what their supply chains look like through the tiers, what we're seeing is a figment of how the market was set up in China, where you could get whatever you wanted for whatever price you wanted at any time. We'll have customers come to us and say, "Here are the performance characteristics that we need of our magnet, and it needs to perform this way at 150°C ." We say, "Okay, well, why 150°C ?
Does your application ever see 150°C? " Half the time they're like, "Oh, well, no, but that's just how it was done before." There's a tremendous amount of waste within the system that I think has an opportunity to be worked out. That's sort of why we have the view that we have on the heavy side of the business for dysprosium and terbium. You're also seeing a lot of customers that are coming to us in the same way. I mean, frankly, the genesis of really stepping full throttle into the magnet business was our initial conversations with General Motors were on oxide. As we sort of picked apart the industry with them and tried to decide how we could deliver a durable, meaningful solution, magnets made more sense.
It would not be crazy, I don't think, to see us sitting across from now a magnet customer and them saying, "Well, why not the actuator or the motor?" It's something that we think about all the time, and I think, as always, we will be extremely disciplined and thoughtful in anything that we do. You're starting to see a very interesting opportunity set emerge where a lot of the supply chain doesn't exist in the West yet, and someone's going to have to build it.
So a couple of threads there. First, the DoD, sorry, the DoD gives you an unusual degree of insight into your medium-term earnings power.
Sure.
In a rising rate environment where financing for parts of the chain, particularly if they're starting from scratch, may be more erratic,
Sure
what's your level of appetite to borrow against that future earnings power to take advantage of opportunities? Would we think about it in terms of you want a first step to do an experiment, and then you do a larger one once you've established? Or do you think you understand the chain well enough to really just say, "That's the clear winning technology, we should just have that." Because
Sure
when you moved into magnets, you moved very quickly.
Yep. It's a great question. To your point, if we're going to make a move, we make a move, right? I think in general, what we see to your point on various pieces of the supply chain relying on different funding mechanisms, you've seen the vast majority of the capital formation, I think, in this space be primarily debt-funded. A lot of acquisitions in the space at some of them very interesting valuations, I would say. In terms of approaching those sorts of things that are within our current wheelhouse, I like our asset base. I think our asset base is what we need to execute on our strategy. Will we be able to buy something for cents on the dollar eventually if execution falters? It's certainly possible, and we'll always look at that.
In terms of your question on sort of if it was geared towards downstream opportunities, at the end of the day, we are completely opportunistic, and what it always comes down to is risk-adjusted returns on capital, right? If you're going for something greenfield, what you need to understand is what does the contracting structure look like on the other side to be able to really build out a financial case. Anything can look good in a spreadsheet. We have to execute in reality.
If you were to have a commercial or a production stage mine come available with the right customer off takes, is the return hurdle the rival consideration of, say, doubling the size of Mountain Pass? Or is the return hurdle some other set of options? How do you think about what really is the constraint there? Or is it just a flat return hurdle as a standalone consideration?
Yeah, it's a great question. I mean, at the end of the day, there are so many inputs into a decision like that. Just speaking from what we've seen so far, right? In general, when we look particularly at upstream opportunities, we always come back to exactly your point of we'll look at what we've got and look at what the potential returns of further investing in Mountain Pass would be, and those have always really won out the day. It comes back to sort of this concept of scarcity, right? The world is relatively picked over for high-grade, hard rock, rare earth assets. There are not many out there that make sense.
We do expect there to be incremental supply, and we'll play a role in that, being able to take in third-party feedstocks to Mountain Pass and some of our other initiatives, whether it be ionic clays or some of these other sort of smaller scale, more disparate opportunities. But in terms of real significant additions, we just don't see anything out there that really remotely makes sense in the context of our ability to continue investing in Mountain Pass.
Related to that, can you talk about your funding? So kind of your CapEx levels, your overall cash flow prospects. How much cash do you need on the balance sheet to maintain just operations and customer comfort? Then does that lead you to a need to come back to the capital markets to fund all of these projects?
Sure. I think fundamentally, we have an extremely strong balance sheet, and our view is that from the investments that we are making and that we've laid out, we can continue to invest into those off the balance sheet. One of the things that is very clear is you're starting to see the earnings power of the materials segment really start to come into the fold, particularly as we get to our targeted throughput, and that drives our ability to continue pushing costs down and drive earnings out of that business. From the magnetic side of things, as we've been in this period of time before commercial magnet production, as we've been producing precursor products, a lot of that was via prepayment arrangement with GM.
I think one thing that's probably underappreciated about our cash flow trajectory is as we get into commercial magnet deliveries, that segment really starts to generate cash flow. While we're investing further in Independence to expand for Apple, again, we've been very thoughtful about how we've done that, both for the expansion at Independence and at Mountain Pass for recycling, where that is also funded from a prepayment from Apple. That segment or that facility, Independence, really starts to turn to cash generative, whereas over the last several years, it's been a major piece of our investment program. So what that leaves is 10X, and we've obviously made a tremendous amount of progress since we first announced the deal in July of last year.
We continue to believe that with the cash flow generation capacity of the business and what we see from a construction perspective, we feel very good about where we sit. We will continue to update you guys as we get further along in construction and ultimately targeting getting into production at 10X at the end of 2028.
Can you also update us on your thinking around the LOI with Saudi Arabia?
Sure.
Maybe if you can explain to people the context of that and, if you can speak to potential size.
Sure. Without getting into a ton of new detail that we haven't yet shared, I think fundamentally, that deal was announced, I think it was November of last year, where MP and the Department of Defense would partner with Ma'aden to bring a rare earth refining facility to Saudi Arabia. Certainly, that area of the world has had its challenges lately. It does not undermine, I think, the sort of the fundamental case here of being able to have a centrally located refinery that can take feedstocks globally. That is set up to take a wide variety of feedstocks and is one that is in a location where access to raw materials, chemicals, power, et cetera, is all easy and relatively low cost. I think that has a tremendous amount of value.
From our perspective, I think the great thing is that the way we will approach this is from a capital light perspective. We're really leaning forward and being able to leverage our intellectual property in the space to be able to drive further value for the supply chain and for the U.S. That I think remains the case. It is sometimes lost on folks when you look at the scale of production of rare earths in China, where the ultimate feedstock actually comes from often. There are feedstocks globally that are feeding into the Chinese refining complex that I think are eager for another outlet. That is something that that strategy would play into.
When you've talked to OEMs, I mean, it's interesting that we've been in this, as you say, roughly a year of relative shortage on critical magnets. But we haven't had that many companies talking about outright outages.
Sure.
Presumably there's a lot of scavenging happening in the background.
Yeah.
But when they talk to you about what they want the industry structure to be-
Let's say world stabilizes, do they want 20%, 30%, 50% of supply outside China? What's enough to make them feel there's a cushion?
Right.
Can you tie that back to your comment about the NdPr bottleneck?
Sure.
How large does the NdPr market have to get to
Right
create that new equilibrium?
Sure. I think the answer completely depends on the end use case. I think fundamentally, we have seen for certain use cases, a hard bifurcation, whether everyone has fully realized it or not. A perfect example being for any magnets that find their way into the robotics supply chain, namely humanoid robotics. That is a dual use product. You can fully imagine the future of warfare being centered around that. There really is no way for those Western customers to get any percentage of their magnet needs out of China, because they won't be able to. Automotive, maybe it's a little bit of a different equation where, obviously GM has made the decision that for domestic manufacturing of vehicles, they want a domestic supply source. I think a lot of companies will make that similar choice.
A lot of them also have large businesses in China, and I'm sure they'll do domestic for domestic in China as well. So, globally, it will be some percentage. But I think that really as we move into this world of AI and sort of the blurring of the lines that I've mentioned before between what is truly a defense industrial base and what is just critical for economic security, more and more what we see is a realization from customers that they can't rely on China as a supply source.
One of the adages that was pounded into my head when I was a junior analyst was that when you have an emerging space, the first contracts are usually the worst contracts.
Right.
But in your case, you had GM and Apple both pre-pay you to build your facilities.
Sure.
Now, the drone and robot scenarios
or those players are coming late.
Sure.
Some of them have deep pockets.
Sure.
What would you need to see from them
to not get a similar prepayment on a facility? In other words, if you announce an ambiguous contract but there's no prepayment, what should we assume you're
Right
getting in exchange?
It's a good question. Look, I think the way we approach our commercial agreements is it's all a package, right? I wouldn't say that presence or lack thereof of a prepayment is indicative of anything other than that is a way at the end of the day, as I mentioned earlier, it all comes down to risk-adjusted return on capital. A way to pull that forward is having cash in the door sooner.
Certainly. From our perspective, I think what we see and as we see the market today, the strategic value of the capacity that we're building at 10X, as I mentioned, I think is compounding by the day. What we want to be able to do is be thoughtful stewards of shareholder capital to be able to garner the return that is relevant to such a strategic capacity. That is what we think about every day. The great thing about how this has been structured is coming out of the announcement of the Department of Defense agreement, having the certainty of the offtake and the minimum guaranteed EBITDA of that facility allowed us to go really quickly. It does not represent necessarily where we think the ultimate economics of that plant will be.
Okay. I think we're out of time, so thank you very much.
Thanks very much. Appreciate it.