MP Materials Corp. (NYSE:MP) Q3 2023 Earnings Call Transcript

MP Materials Corp. (NYSE:MP) Q3 2023 Earnings Call Transcript November 2, 2023

Operator: Good afternoon and thank you for attending the MP Materials Third Quarter 2023 Earnings Call and Webcast. [Operator Instructions] I would now like to pass the conference over to your host, Head of Investor Relations, Martin Sheehan. Please go ahead.

Martin Sheehan: Thank you, operator and good afternoon everyone. Welcome to the MP Materials’ third quarter 2023 earnings conference call. With me today from MP Materials are Jim Litinsky, Founder, Chairman and Chief Executive Officer; Michael Rosenthal, Founder and Chief Operating Officer; and Ryan Corbett, Chief Financial Officer. As a reminder, today’s discussion will contain forward-looking statements relating to future events and expectations that are subject to various assumptions and caveats. Factors that may cause the company’s actual results to differ materially from these statements are included in today’s presentation, earnings release and in our SEC filings. In addition, we have included some non-GAAP financial measures in this presentation.

Reconciliations to the most directly comparable GAAP financial measures can be found in today’s earnings release and the appendix to today’s slide presentation. Any reference in our discussion today to EBITDA means adjusted EBITDA. Finally, the earnings release and slide presentation are available on our website. With that, I will turn the call over to Jim. Jim?

Jim Litinsky: Thanks, Martin and thank you all for joining us today. Let me give you a brief overview of today’s call. To begin, I will discuss the third quarter and recent highlights. Ryan will then run through the financials and KPIs, followed by Michael, who will review operational progress. I will then provide some closing commentary before Q&A. So, let’s begin on Slide 4. I am going to start in the middle of the slide with our midstream business. We produced 50 metric tons of on-spec end-to-end commenced shipments. Producing at scale is a massive achievement. Let’s put that amount of production in context for a moment. 50 metric tons of NdPr as feedstock can make approximately 100 metric tons of neo magnets, which would power over 100,000 or so EV traction motors.

In the U.S. sales of EVs are averaging a little over 100,000 units per month. So being in just the early innings of our production ramp, we are clearly already doing amounts that are significant from an economic security perspective but also with a very long runway for domestic and global growth. We expect to produce multiples of our Q3 output of NdPr in the fourth quarter and expect further step change improvements in 2024. Michael and the team are maniacally focused on improving reliability, increasing throughput and maintaining our low-cost position. They are making great strides. Michael will expand on this later in the call. MP’s NdPr will be delivered to customers in the first quarter as either NdPr oxide from Mountain Pass or NdPr metal from Southeast Asia.

So our transition from an upstream to midstream or a refined products producer is officially underway. It’s an exciting time for us and our customers. As a reminder, and as we have consistently stated, commissioning processing facilities and ramping production is an extremely challenging process with nonlinear results. I have tremendous confidence in our team, though. Now let me shift back to the left side of the slide in our upstream operations. This was our tenth consecutive quarter with over 10,000 metric tons of REO production in concentrate. Stage 1 continues to hum along. We must remember that achieving great results in the upstream stage of the business is critical as that is a key driver for the cost structure of the operation. I wanted to note that we did not sell all the concentrate we produced this quarter as significant amounts were sent along into our Stage 2 midstream circuits for refining.

We have now completed the line fill of concentrate needed to charge all our downstream production circuits. The takeaway here is that we are now at the stage where feeding product into the front end of Stage 2 means that the finished product is going out the back end. Ryan will go into more detail on this later. More importantly, I have some exciting news to share. Many of you have heard me say that the nearest-term highest return on capital and lowest risk source of incremental American rare earth supply would be brownfield improvement and capacity increases in past. Well, our Stage 1 maximization and expansion efforts are yielding fruit. Today, we are announcing Upstream 60k, which is our strategy to drive towards the goal of a 50% increase in REO produced within 4 years with modest incremental capital investment.

This suggests that we have the potential for enormous enterprise value creation over the next few years. Michael will provide more details. Lastly, on the downstream business, we have officially moved into the office portion of the magnetic factory in Fort Worth. This is remarkable as we only broke ground 18 months ago. Our first major piece of process equipment has been installed in the factory, and we expect a lot more progress in the coming months and throughout 2024. Despite the treacherous macro environment, we believe the commercial landscape provides opportunity to grow our magnetics business. We are making substantial progress towards a high return on capital expansion of this facility, but we expect only to do so if it can be done in a risk-managed way.

We are always thinking like owners, and we’ll update you on that accordingly. With that, let me turn it over to Ryan to run through our KPIs and financials. Ryan?

Ryan Corbett: Thanks, Jim. Let’s start the discussion on Slide 6. This slide has a bit of a new look from prior quarters as we’ve added NdPr production volumes to the far right. As we’ve talked about in the past, our operating metrics will evolve as we shift from concentrate production and sales to NdPr oxide and metal production and sales. So over time, you will see certain upstream-related metrics fall away with updated metrics that represent our transition into separated products. I would also point out that you’ll see slightly different revenue headings in our P&L, which will also likely evolve over the coming quarters. What remains clear is the strong production volumes for Q3 on the far left of the slide at 10,766 metric tons, is very consistent with both Q2 and last year’s Q3 production.

Sales volumes dropped about 1,499 metric tons compared to Q3 2022 and 1,094 metric tons sequentially. These declines were primarily due to the work in process line fills that Jim just mentioned and that we spoke about on prior calls. As a reminder, operating equipment at each Stage 2 process circuit as well as intermediate product storage needed to be filled with upstream product. We have now absorbed all of that concentrate into these circuits and transition to converting some of that upstream volume into separated products with 50 metric tons of NdPr oxide produced in the quarter. As we’ve also previewed, our transition to separated products comes with a change in the duration of our sales cycle with a slightly longer time to revenue for separated products than with our concentrate product.

Early NdPr production is primarily being used to build inventory at our tolling partners to begin production of NdPr metal, which is further extending the time to revenue on the products produced this quarter. So this onetime transition is reducing our upstream sales and earnings without yet seeing the benefit of the midstream revenue and earnings, but we will quickly lap this impact as we move into 2024. On realized pricing highlighted in the middle of the page, you can see what the impact of lower NdPr market pricing had on our realized price of REO in concentrate, down just over 50% year-over-year. Sequentially, pricing declined about 8% to $5,718 per metric ton, a bit better than expectations as pricing stabilized and recovered late in the quarter.

Lastly on this slide, our production cost per metric ton, excluding Stage 2 related costs, was essentially flat sequentially at about $1,600. Including Stage 2 related costs the cost per metric ton was a little over $2,000. As you would expect, we brought on a tremendous amount of incremental maintenance head count that mostly flows through the P&L and makes up a large portion of the $400 per metric ton that is Stage 2 related. With these changes to our operations and with the launch of scale separated product production, we will evolve our reporting of cost metrics going forward. Moving to Slide 7. On the far left, you can see the combined impact on revenues from the lower realized pricing and our lower sales volumes. In this instance, lower sales volumes of concentrate is counterintuitively positive for us as it means more internal consumption for NdPr production and eventually sales.

As you can see, with most of the revenue decline driven by lower pricing, we see this flow through to our EBITDA in the quarter. Despite weak pricing and additional Stage 2 costs without corresponding sales, we reported a still solid EBITDA margin of 30% in the quarter. And moving to the far right, most of the change in adjusted EBITDA flowed through to our adjusted net income and therefore, our adjusted diluted EPS. Positively impacting the comparison was the significant interest income of roughly $14 million we are earning on our large cash balance. I would also point out that despite the challenging pricing environment, as Jim said Stage 1 continues to generate a modest amount of free cash flow as our cash from operations in the quarter was roughly $11 million, which includes significant investments in Stage 2 related costs and working capital, while our non-growth CapEx was only $4 million.

I will talk about CapEx shortly, but to finish the thought on our P&L, we did see about $6 million of higher start-up costs compared to last year’s third quarter, understandably driven by the final push of commissioning of Stage 2 ahead of production of separated products within the quarter. Now that the majority of these assets are achieving commercial production, this line item should start to decline beginning in Q4 as it relates to Mountain Pass, but there will still be some costs related to the startup of our Fort Worth facility expected in that line item until commercial production there. In addition, depreciation, depletion and amortization increased to just under $17 million in the quarter, in line with our comments from our last earnings call.

The year-over-year increase of nearly $15 million was driven by over $350 million of assets put into service over the last 12 months, most of which were related to Stage 2 and other investments at Mountain Pass. We do expect this will continue to climb as we put more assets into service in the coming quarters, including portions of the Texas magnetic facility. Lastly, on the P&L relative to last quarter, our full year expected GAAP tax rate is up a couple of percentage points, which you will see reflected as a slight increase in our year-to-date tax rate. This is partially driven by ongoing updates to our calculations of the 45x production tax credit and its impact to 2023 as well as our ongoing prioritization of minimizing cash taxes in the near and medium-term versus optimizing the GAAP rate.

Similar to last quarter, small updates in the full year rate had an outsized impact on the current quarter’s book tax rate given the small pre-tax net loss. Turning to the balance sheet. Our cash balance remains very robust at nearly $1.1 billion of gross cash and just under $400 million on a net basis. Total CapEx in the quarter was about $59 million, while growth CapEx was $55 million. We now expect to spend up to $270 million in total CapEx this year, down from the $300 million we were expecting a quarter ago. Growth capital of approximately $250 million primarily consists of Stage 3, heavy rare earth separation and other investments in Mountain Pass. The reduction in our forecast is primarily due to the timing of payments as well as a strong focus on capital efficiency.

With Stage 2 capital spending behind us, our expectations for the overall budget on our other major projects, heavy separations and Stage 3 remain generally intact with our prior views. An addition to upstream 60k, the Stage 1 expansion goal Jim mentioned, we continue to evaluate other exciting but smaller investment to Mountain Pass and additionally, are evaluating a high return on capital expansion of capacity at our Texas Stage 3 facility. We expect to provide further details on our 2024 capital plans on our Q4 call. But as always, we remain extremely focused on cash-on-cash returns and maintaining our fortress balance sheet. Taking a quick look at Q4 for you. Upstream and midstream production volumes will be affected by our typical 1-week plant turnaround.

We may sound like a broken record when we talk about how this was our most thorough shutdown to date, but this is especially true this time around with the work performed on all of our Stage 1 and Stage 2 circuits and all supporting infrastructure. Note that we expect concentrate sales volumes will decline a fair amount quarter-over-quarter as we ramp our NdPr production and consume a greater portion of upstream production internally. But as we stated last quarter, much of our initial output of NdPr oxide is going to Southeast Asia to build inventory at our Meadow tolling partners. And therefore, we don’t expect material sales volumes from our NdPr production to begin until Q1. Concentrate realized pricing will likely be flat to slightly up sequentially, assuming recent NdPr pricing stability holds in the coming weeks.

Importantly, as I stated in my opening, as we get through this transition period of shifting from concentrate sales to NdPr oxide and metal sales, and with line of sight to hitting our full production targets, we would expect to see results start to improve off of a likely trough from our transition impact in Q4 as we move through 2024. Needless to say, we expect the success of Michael’s team will begin to become more evident in the financials as we enter 2024. With that, I’ll turn it over to Michael to give you a more detailed update on those successes.

Michael Rosenthal: Thanks, Ryan. Turning to Slide 8, you can see some of our October production waiting to be shipped off-site. It was a solid operational quarter for our upstream business. Concentrate production was down just slightly year-over-year, primarily due to higher unplanned downtime, but both periods were generally within normal ranges. In the quarter, we produced concentrate at a record grade, which gave us an opportunity to experiment with operating at a slightly higher end of the grade versus recovery curve. We also advanced 2 exciting flotation circuit upgrade project that we believe will, over time, drive further improvements in concentrate production. First, we started up a long-awaited Frost camera and automated float control system that incorporates both manual parameters and AI to make adjustments to the flotation circuit.

Like an experienced set of human eyes, we now have a camera mounted a top each flotation cell. The cameras are collecting data on flotation speed, bubble size and color and probably other things we haven’t even thought of. As we learn the system learns and our team learns how to learn from it. For now, we are still in trial operations, but we expect this trove of data and computer learning to help gradually improve flotation circuit consistency and performance. Second, we began construction on a significant enhancement to our grinding circuit. We believe this will unburden our current grinding mill while ensuring more ore is ground to the optimal particle size in basalt site liberation. Given the enormous disparity we observe in the mineral recovery of different sized particles, we are optimistic that this will produce a notable recovery uplift after it comes online next year.

The Stage 2 midstream operations continued to grind out progress day-after-day. Operations are by no means as smooth and predictable as we would like. But by now, we have worked through the vast majority of the initial mechanical issues and instrumentation challenges that were most disruptive in previous periods. To be sure, quite a few areas for improvement remain. The performance of our separation circuit has largely exceeded our conservative expectations and should continue to improve as our technical and operational teams gained experience. The addition of redundant QC vessels and isolation capability in our NdPr production circuits as part of the Stage 2 optimization project has increased our resilience to minor process variability and ensured greater first pass on spec capability.

In 3Q, product finishing of NdPr suffered from several premature failures caused by poor construction and workmanship. These held back 3Q production and bottleneck the circuits upstream, including separations. This has been restored in October and we are confident that we are over the hump of most of these types of issues. As we look to 4Q and beyond, we are increasingly confident in our ability to reach our production targets. With enough operational time now under our belt in most plant areas, we are encountering fewer entirely unexpected problems and now spend most of our time addressing our known pain points. In the next few quarters, we will continue to focus first on increasing process stability, next on ensuring longer uninterrupted run times and then on increasing plant throughput rate.

We believe this approach satisfies our business needs and commercial commitments, while we finalize product qualification and testing with our customers and complete the same for tolled metal. I expect several more quarters of hard work and ups and downs before we hit our stride, but we have a more clear line of sight to our production goals and feel optimistic about our progress. Once again, I’d like to thank our teams for their hard work. We completed another quarter without a last time injuries and are working unwaveringly through commissioning. I’m really proud of our team’s achievements and I’m confident that we have the technical and operational talent in place to reach our goal. Before I turn it over, I want to provide a bit more detail on our upstream 60k expansion strategy.

Although we’ve been heavily focused on Stage 2 for the past 3 years, we’ve never lost sight of the high return opportunity in our upstream business. Over the past several call, I have described the strategy of building upon our stable Stage 1 operations by targeting modest growth from operational improvements and certain low-cost projects, while pursuing more step change growth from larger investments. Our efforts towards step change growth have been picking up steam as over the past 6 to 12 months. Over the past year, our growing team of metallurgists and technicians has been working in conjunction with our geologists, plant operators and process engineers to expand our understanding of our ore body and flotation performance. They have engaged in extensive R&D and piloting efforts to develop high return process improvements to our existing concentrator facility, while also evaluating more ambitious growth opportunities.

I highlighted two of these incremental projects earlier, and I believe there are many more behind those. The teams have been working diligently to develop a plan to better utilize the entire Mountain Pass resource. Our site is blessed with a truly world-class ore body. The richness and ease of processing is perhaps second to none. Because of this, the sulfide cream deposit has been somewhat taken for granted over the past 70 years of mining. As an example, we have calculated a 2.5% cutoff grade for our resource, while many development projects with much more complicated mineralogy, flow sheets and geographies published reports with cutoff grades below 1%. In fact, for much of Mountain Pass’ recent history, the cutoff grade was 5%, which gives a sense of what might have been ignored as uneconomic in the past.

Over the past 18 months, we have piloted small and commercial-scale equipment with marginal feedbacks from Mountain Pass and also on slipstreams pulled from our flotation plans. While it is early days, we really like what we see. At this point, we have enough real-world pilot data to take the next steps of project development. Adding it up, we are confident that between reagent optimization, operational improvements, small capital projects in our concentrator and the investment in additional beneficiation capability targeted at underutilized resources, in 4 years, we can increase our overall REO producing concentrate by approximately 50%. With that, I will turn it back to Jim.

Jim Litinsky: Thanks, Michael. Let’s wrap up on Slide 9 with this gorgeous picture at Mountain Pass. Please take a moment to enjoy this pretty view of revenue on a mountain landscape. As we look around the world though, the picture is not so pretty at all. I think it is fair to say that most of us are seeing things we never expected to see. The sad truth is that nothing can be taken for granted at such a perilous time. With major conflicts in Europe and in the Middle East, it is possible that a third theater or regional war erupts or just that things continue to evolve materially from here. We certainly hope it does not. At MP, we believe that despite her faults, America has been the greatest force for good in the history of the world.

We pray that, that continues. In our industry, it has been a very difficult year, and that started before the event of October. There are concerns about the pace of electrification and EV adoption. Interest rates moved higher and Chinese industry and the global industrial economy remained challenged. Specifically, commodities prices and companies levered to the materials for electrification are out of favor right now. But despite near-term turbulence in the market, the long-term secular cycle, we believe, is largely intact and bodes well for the price of our products and the value of our company, which makes our share price at current levels as something we are very surprised to see. And as Michael and I discussed earlier, we’ve been laying the groundwork for further long-term and hunt on capital enterprise value creation at MP.

In essence, it is likely that no rare earth project in the Western world would make sense again if you do not think our sub-assets demonstrate incredible and asymmetric value from here. In the meantime, recent global events remind us that what we have achieved at MP is important for America. We are proud of that. With that, I will open it up for questions. Operator?

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Q&A Session

Operator: [Operator Instructions] The first question is from the line of Matt Summerville with D.A. Davidson. You may proceed.

Matt Summerville: Thanks. First, obviously, I want to talk about the big announcement you’re making regarding Stage 1. And I guess I want to understand, as you look out over the next 4 years, is this a linear ramp from 40,000 tons to 60,000 tons? Do you think about on a commensurate basis – adding more – realizing Stage 2 still ramping, but adding more Stage 2 capability alongside that or maybe that capability is already inherent with the asset base you have on the ground. Maybe if you can just talk through that to start, that would be helpful.

Ryan Corbett: Sure. Hey, Matt, it’s Ryan. I’ll start. And Michael, if there is anything I miss, please jump in. But – as it relates to Upstream 60k, we don’t expect this to be a linear progression to 60,000 tons upstream. We laid out our over 4-year time frame given that we think there will be incremental upgrades to our current production and our current mill and flotation circuit that will come to pass in the much shorter term, but there will also be the opportunity for a step change that will come a little bit later in that period. I think one of the things that’s pretty exciting about this is that some of this step change growth may actually come from let’s call it, alternative sources, if you will, material that we classify right now as waste.

Some are cutoff grade. We actually have had really exciting results from that. Tailings some of these other opportunities where we expect this to be incredibly value accretive not just because we’re growing our upstream production by 50%, but also because of the sources of that REO. So we’re incredibly excited about that. I think in terms of your question on the Stage 2 capacity, what I’d say there is our focus is on delivering the 6,000 tons that we’ve committed to first. And so I don’t want to make any promises to you about exactly how and when this upstream material may get separated. But I think it’s safe to say that as we designed the circuit, the downstream circuits, we did incorporate plenty of engineering factors and things of that sort.

So we will continue to look at that opportunity to add even incremental value above and beyond what we’re talking about with the upstream expansion.

Matt Summerville: Got it. And then just to Jim’s last point, with the stock price where it is, realizing you guys want to maintain a very healthy balance sheet, having said that, does that give you – does that change the way you’re thinking about capital deployment? Obviously, plenty of growth projects on the drawing board here. No doubt about it. But do you think about share repurchase differently given market conditions? Thank you.

Jim Litinsky: Sure. Thanks, Matt. And yes, as I said on the remarks, I think we’re very surprised to see the share price where it is. And I think you’ve generally heard my views with respect to capital allocation on prior calls. But of course, I think it’s always worth repeating that we are owner operators. I’m the largest shareholder of the company. You can imagine that we spend every waking moment thinking about allocation of capital and how to create value for all shareholders. What I would say, I think just to sort of put in my kind of terms, what we’ve announced today with Upstream 60k, if you look at our valuation today and of course, commodities businesses are volatile, they are cyclical. And let’s say, hypothetically that you believe this is a cyclical trough valuation and we’re just around $3 billion, okay?

What we basically announced today is that with modest incremental capital, we can expand over the next, call it, 4 years, 50% REO, which in theory, means that assuming we do that right, that is just a 50% increase in enterprise value, right? That should be worth $1.5 billion at trough levels. If you assume a normalized value over the last few years, that’s probably worth double out or more several billion. The point is that when we think about our assets, the return on capital is just enormous if you can invest a modest amount and get many multiples. Those are the kinds of investments that we want to make sure that we have the flexibility to make because particularly given the environment that we’re in, first and foremost, we must have a fortress balance sheet.

That has been sacred to the company from the very beginning, and we’ve been clear about that. But then from there, we want to make sure that we can do all of the sequencing thoughtfully. With that all said, I kind of look at the screen here and scratch my head. And so with that all as a preface, I reserve the right to do anything here. So stay tuned. But again, just what we’ve announced today is what we believe is going to be some enormous value creation for shareholders.

Matt Summerville: Appreciate the color. Thanks, Jim.

Jim Litinsky: Sure.

Operator: Thank you. The next question is from the line of Laurence Alexander with Jefferies. You may proceed.

Laurence Alexander: Good afternoon. Two questions. First, just to follow on that. Can you sort of help narrow down what you mean by incremental or sort of capital required for the expansion either in terms of the capital you expect to spend or including working capital and also – or in terms of like payback at some kind of normalized price? Can you just help people sort of frame that?

Ryan Corbett: Sure. I didn’t get a great line on that. Could you repeat that, Laurence? Sorry.

Laurence Alexander: Sure. how much do you expect to spend for the REO expansion?

Ryan Corbett: At this point, what we expect is sort of order of magnitude about $200 million. And as we laid out this plan occurring over the next 4 years, I don’t expect that spend to be linear either. But I think that probably gives you a sense. We’re talking about a 50% expansion in our upstream production. And obviously, you’ve seen how profitable that business is and can be. And so with that level of spend, I think this sort of speaks to exactly what the point that Jim was trying to make a minute ago. And I think it’s just important for us to highlight the embedded value of our assets here being able to spend that quantum of capital to grow our business at that scale. It’s something we’re very excited about.

Laurence Alexander: And then can you give a little bit of a more granular update for how your thinking has evolved around the cadence or the financial metrics for the magnet business?

Ryan Corbett: Sure. There is really no change in cadence there. The thing that I would highlight is we did mention in our prepared remarks, we’re looking very closely at similar in a lot of ways to what we laid out in the upstream, a very high return on capital, potential expansion of the downstream business given the scale that we’ve gotten by making the initial investment in that facility. We see a lot of interest from customers and a very good opportunity to expand scale there. And so there is really no change in how we think about the go-forward plan or metrics on the Stage 3 business.

Laurence Alexander: And then just lastly, on the regulatory front, can you just give a quick update on what you’re seeing, particularly in the U.S. around sort of any chance of movement on any of the magnet builds?