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spk08: Ladies and gentlemen, thank you for standing by and welcome to today's MP Materials third quarter 2020 financial results call and webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star and the number one on your telephone keypad. If you require any further assistance at all, please press star zero. I would now like to turn the call over to Mr. Jeff Matejka, Investor Relations. Please go ahead.
spk04: Thank you, Michelle, and good day, everyone. Welcome to MP Materials' third quarter 2020 earnings call. With me today are James Latinsky, Chairman and Chief Executive Officer of MP Materials, Michael Rosenthal, Chief Operating Officer, and Ryan Corbett, Chief Financial Officer. During today's call, we will make certain forward-looking statements that do not constitute historical fact 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 risks, uncertainties, and other factors discussed in our SEC silence. 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 for MP Materials financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measures is available in our current report on Form 8-K, filed today with the SEC, actually filed yesterday evening with the SEC, and our earnings presentation available on our website at MPMaterials.com slash investors. With that, I will now open the call up to James Latinsky for opening remarks. Jim?
spk02: Thank you, Jeff, and welcome everyone to MP Materials' first earnings call as a public company. We're all very excited to be here, and I want to express a bit of gratitude to everybody who helped us through the business combination and listing process. We're grateful for all the efforts. It was a lot of blood, sweat, and tears, and we appreciate it, and we're excited for all our new partners on the phone today who will join us on our mission to restore the full rare supply chain to the United States of America. Since today's our first earnings call, I'm just going to begin with a refresher on the business and the MP story, and then I'll turn it over to Ryan to walk through our financials and metrics in more detail. He'll update you a bit on our Stage 2 optimization, and then we will open it up to questions. So, let's start at the top, and for those of you, there is a slide presentation on the IR section of our website. I'm beginning on Slide 5. So, So for those who don't know us, we own and operate Mountain Pass. It's the iconic American industrial asset with a unique and storied history. More important than that history, however, is that today Mountain Pass is the only scaled source of valuable rare earths operating in the Western Hemisphere. It's a world-class facility with unmatched sustainability profile. When we acquired Mountain Pass in 2017, We saw a powerful opportunity to fill a critical gap in U.S. economic and national security by creating a domestically sourced supply chain of rare earth materials as we enter this new age of electrification. When we acquired it, Mountain Pass was in cold idle status with a skeleton crew of eight people on site. And in just about three years' time, we have taken the site to being fully operational, and we deliver 15% of the global rare earth content in the world today from Mountain Pass with nearly 300 employees. So that accomplishment, and we should say, obviously, that the, you know, for those of you who knew, the key use case is NDPR, and we'll get into that later in the conversation. So, what we've done to date, that represents our first stage of our operating plan for Mountain Pass and for MP Materials. The next stage will be refining, which is optimizing the existing facility that will enable us to produce separated rare earth oxides, and we will be able to move downstream and capture greater margin. Looking further out, our ultimate goal is to move further downstream into magnet production to complete our mission where we'll be, you know, doing the full supply chain for magnetics. So this opportunity is what spurred our business combination with Fortress. Again, we raised $545 million in equity for our long-term plan, and we are already cash flow positive, and we expect to continue. Moving on, the next slide. So Mountain Pass is truly unique. I think a great way to describe it is what Saudi Arabia is to oil, we believe Mountain Pass can represent that to rare earths. It has a 70-year history. For those of you who don't know, it was the global leader in rare earth production for decades. And more recently, about $1.7 billion was invested by prior ownership to modernize the facility with a best-in-class sustainability profile, meeting stringent California environmental mandates. Critical to the Mount Pass story is our unique combination of a world-class resource and this state-of-the-art facility. We believe we're the only co-located facility like this anywhere globally. And the advantage of co-location is that it's vital to consider that advantage when you think about a market that is now dominated in China. We were able to you know, regain 15% global market share, really based on two things, the tremendous need for rare earths globally and, you know, now the opportunity to become a key supply alternative for those in the rest of the world. You know, these are, you know, the sort of great opportunities for us to have this co-located facility, which, again, is really unprecedented elsewhere in the world. Today, we're producing approximately 38,000 metric tons of rare earth in concentrated form. And as we execute on stage two, we expect to produce approximately 20,000 metric tons of refined rare earth oxides and are targeting production of north of 6,000 metric tons of separated NDPR. Based on our S4 pricing assumptions, that will support a target adjusted EBITDA of approximately 250 million in 2023. I want to emphasize that executing on our Stage 2 and hitting these targets is our near-term focus. Stage 3 is not possible without Stage 2, so we will be maniacally execution-focused. But I would say that behind the scenes, we continue to plan. We are working in parallel. to make sure that we ultimately achieve our mission over time of transforming this company, the cash flow stream, to transform our business, reduce our volatility, and grow our profits over time, which we believe will create a lot of enterprise value. Moving to the next slide, I'm on slide seven now. So why are we focused on NDPR? When we bought Mountain Pass, our thesis was simple. Electrification is one of the biggest, if not the biggest, investable themes in the coming decade. Rare earths are the foundation of that opportunity. Simply put, NDPR magnets are proven to be the most efficient electric motor technology. Many of you may follow the battery market, where everyone, including Tesla, is searching for the best long-term chemistry. But when it comes to the motors, it's the magnet. I think that's a really key distinction that I think people often get confused Our materials do not end up in the battery. They end up in the motor. And so, you know, it's really agnostic to the strategies that you see out there, whether if it's lithium ion or hydrogen or solid state, whatever these technologies ultimately are, you know, the rare earth or permanent magnet motor is likely to, you know, really be the dominant technology for decades to come. And as the largest producer of NDPR in the West, we are effectively a picks and shovels play on the EV revolution and broader electrification theme across all sectors. Moving on to the next slide, and this is, I think, you know, one of the things that is so compelling about the opportunity. When you think about you know, electric vehicles and wind turbines, drones, robots, but just focus on electric vehicles for a moment. And we have roughly 2 to 3 percent penetration globally. And, you know, look around to various estimates of penetration. If you think we're going from 2% or 3% to maybe 30% or plus over the coming decade, that's going to create a 15-bagger in the market for magnets for electric vehicles. And you can do the ultimate math of, if penetration goes to 90-plus percent from this approximate 2% or 700 million-plus today, we're talking about an electric motor magnet market that is in the tens of billions of dollars. And, again, we are the only source of supply of scale in the Western Hemisphere. So, moving on, you know, this chart, I think, really, really shows that, to date, this demand is served by China, as well as one facility in Malaysia that is, of course, in the Chinese sphere of influence. The Chinese have really thoughtfully, methodically, and strategically taken control of the rare earth market. You know, especially in today's geopolitical environment, this creates a lot of economic and security risk in the U.S., obviously for Japan and many other nations as well. It's clear to us and from our industry conversations that the world needs and will support a diversifying supply chain participant, and MP is the only scaled operation today that can meet that demand. And it's important to add that, you know, the demand environment, as you saw in the prior chart, really will necessitate a need for significantly more supply. But that supply isn't easy to build. Remember my earlier comments about, you know, ore body, you know, us being the, Mount Pass being the, you know, Saudi Arabia for the analogy purposes. You know, it really is a barrier to entry. This is a capital-intensive business. The mining aspect is a small piece. It's typically about 10% of the cost structure. It takes years and billions to find, vet, build, mine, and ultimately separate rare earths at scale. And so when NDPR really becomes, you know, even, you know, so critical in the commonplace, I think people will be, you know, excited to recognize, you know, how much of a significant competitive advantage we have today at Mountain Pass in the Western world. Moving on to the next slide. You know, we want to restore this supply chain. And I just want to talk through our strategy a bit before I hand it off to Ryan. You know, our stage one is complete. We're delivering our concentrate. It's approximately 15 percent of the world NDPR supply. And we're doing so profitably and with a strong and consistent growth profile. And I would remind you that as we think about moving forward to stage two, you know, on the next slide, that our supply will, this will not be additive to the market. Our supply is currently being sold into China, and those refiners separate that into NDPR. When we move downstream and finish our stage two over the coming year and change, we'll be able to capture those refining margins, you know, for ourselves and expand our customer base and geographic reach. Moving on, you know, for stage three, we will then be in a position to, you know, to fulfill our mission moving downstream. And, you know, we're doing all this in the continental United States, which of course means the onshoring of jobs and enhancing our national defense and economic security. And it will be an important contribution to a sustainable future for all of us. I'm just gonna touch on a couple key things on these slides on the stage one. If you look here, and I think this is just a really important point to make that might be, although it was in our findings, might be some new information for you all. Molycorp, in their best annualized period, the predecessor entity, was only able to produce approximately 12,000 tons of REO. We are now producing approximately 38,000. So our production is north of 3.2 times the predecessor entity. So we've really solved the challenges that they had. And I'd remind you that, you know, at some point in this life cycle, you know, as I like to say, death taxes and cycles, You know, at some point in the prior boom, Molycorp had a $6 billion enterprise value, and we're now producing north of three times of what their best period was ever. You know, on stage two, if we can move to slide 12, I'll just point out, you know, when you think about it, when we were kind of thinking about our predecessor entity and you look at that target, That would have implied that they were able to produce approximately 675 tons of NDPR hours. Because our optimization project is going to add roasting back into the refining process, which was something that they skipped, You know, we should actually be able to inherit the benefits of our ore body that will significantly lower our costs and improve our reliability, as well as reduce our environmental footprint. And so that should lead to an even higher recovery of NDPR. So we'll be able to really maximize the economic power of Mountain Pass, focusing on the much higher value NDPR at a lower cost. So that's our, you know, that's our near-term focus, stage two. But moving on, and I'm on slide 13 now, you know, we believe that there's a more compelling long-term opportunity, particularly when you think about the numbers I showed you earlier of taking advantage of this unique asset and advantage that we have and building a fully integrated supply chain in the West. And, you know, we really have a tremendous head start to do so. And so we're in the early stages of this process. As I said, we are running this in parallel. We are focused on the execution of our Stage 2. And we're very open that this is a long-term, multi-year plan. We need to be execution-focused. We will buy, build, and or JV. But the key thing to remember here, as you think about our company today, and I know many people, investors, often focus on the coming quarter or two, economically, This opportunity is truly transformational for our company. It really will allow us to reduce the volatility of our cash flow, significantly grow our cash flow, and that should transform our company into a true industrial asset that we think is second to none in the world. With that, I'm going to hand it off to Ryan, who's going to walk through our financial results, and then we'll take Q&A. Ryan, over to you.
spk06: Thanks, Jim. And thanks, everyone, for joining today. I'm going to start on slide 15. We've delivered very strong results year-to-date. The nine-month period is covered in more detail in our 8K that we filed last night. So I'll focus the comments on the Q3 results. Revenue of $41 million was up 52% year-over-year, which was supported by healthy sold volumes of our concentrate product and a strengthening price environment. We also in the quarter recognized $8.9 million of revenue from recognition of a tariff credit we received in the quarter relating to previously sold concentrate. I note, since we are currently selling a concentrate product, our realized pricing does not perfectly track NDPR pricing that's more observable in the market, but it is directionally correct. And in fact, this quarter, we saw a stronger price increase versus the implied basket of the REOs in our concentrate. With respect to the removal of import duties, the discontinuation of the ongoing import duties in China does allow us to realize higher effective prices, but I'd note that that $8.9 million one-time credit that I discussed previously is removed from our calculation of realized price, and you can see a reconciliation of that in the appendix of the slide deck. We've also excluded that $8.9 million figure from our adjusted EBITDA and margin calculations to give all of you a truer sense of our strong operating performance absent this one-time benefit. And so moving to the next slide, looking at our key operating metrics, we continue to see a lot of strength in the business. And for perspective, you know while jim mentioned we've been um rescaling mountain pass over the last three years our redesign of the stage one processes started really yielding sustained world-class performance in q3 of 2019 so a year ago so the results we're discussing today are you know fundamentally really the first time we can provide a true stabilized year-over-year comparison um and that comparison is very favorable we um We achieved sold volumes of approximately 9,400 metric tons of rareth oxide contained in concentrate. That was at a realized price of approximately $3,400 per metric ton. The recent strong pricing here, we believe, illustrates strengthening end product demand as we've seen governments globally really seek to stimulate EV adoption. And I think we're seeing the early results of that our sold volume figure in the quarter and going forward is generally a bit lumpy quarter to quarter, depending on the timing of shipments. And so I'd point you to what is likely a better indicator of our production efficiency, which is our produced volumes, which grew to approximately 10,200 metric tons, which was up year over year and sequentially. Because we sell all of the volume that we produce, produced volumes in our view are a more relevant indicator given the timing of shipments can impact quarterly sold volumes. The increase in production that you did see in this figure also demonstrates that we are continuing to progress on constant optimization efforts to drive throughput, which in turn drives improved production cost leverage, which you can see manifested in the production cost per metric ton on the lower right-hand side of the slide. And so effectively what this is telling you is we're getting better at producing more product without significant incremental cost. And as we work through stage two and build towards that over the next year and change, we'll also be focused on generating continued incremental gains in cost leverage, which we think will enhance our ability to accelerate our profitability as we begin to separate the rare earth oxides we produce today. Moving on to the next slide. focusing a bit on capital structure and balance sheet. Obviously, the business combination with Fortress Value Acquisition Corp was completed last week and delivered $545 million in proceeds, which will fully fund our business plan, as Jim discussed earlier. If you look at it pro forma 930, we paid down almost all of our outstanding financial debt, which would leave our net cash balance at $507 million as we head into stage two. Also, certain recognized sales in the quarter enabled us to reduce the balance of our offtake agreement with Shanghai Resources to $78 million or a $15 million quarter-over-quarter reduction, which represents about $6 million in paydowns via offtake sales and about $9 million related to the previously mentioned tariff refunds. I also just want to spend a quick moment to walk through our share count calculations, you know, recognizing that SPAC transactions can be confusing from a dilution standpoint, and we'd like to be fully transparent. You know, as many of you know, we uniquely structured our agreement with Fortress so that any sponsor-promote shares needed to be earned, which would ensure alignment across all equity investors. And assuming our current share prices continue, the 8.625 million promote shares owned by Fortress would be expected to vest. On top of that, obviously, our warrants are well in the money. Putting those two together, that would yield a fully diluted share count of approximately 159.5 million shares. The other thing we want to flag is that there are another 12.86 million shares that are subject to an earn-out mechanism and equal tranches at $18 and $20 per share that are held by the pre-business combination ownership group. Moving to the next slide, I'll give a quick update on stage two. Our front end engineering design is complete and the team is making great progress towards completing long lead procurement. This will position us to begin mobilizing in the next few weeks right after the holidays and engage fully beginning in January. We expect to be able to provide more color around the Stage 2 roadmap and specific milestones in the coming months so that you all can track our progress to this. One other item of importance is that last week we announced that we had won a $9.6 million technology investment agreement with the Department of Defense. That will support our capabilities around stage two. As you can expect, we're not in a position to provide significantly more details than what's in the press release that we announced last week. But suffice to say, from our perspective, we see this as a big win and another strong endorsement of our mission and a validation of the fundamental importance of restoring the rarest supply chain to the United States. And so moving on to slide 19 and wrapping up here, this is a really exciting and important moment for our company. And we're delighted to be engaging with our new public shareholders here as we embark on this journey to bring the rare supply chain back home. All of the pieces are now in place to make that happen. And we have what we believe is the world's preeminent rare earth ore body and production facility. We have a fully funded balance sheet to execute our mission. Our leadership team and our board are aligned with our public shareholders, and we are taking an owner-operator approach to building this business for the long term. And finally, we have a strong and growing team on the ground that is executing and that knows this asset inside and out and has delivered the results so far to prove it. So that will conclude our prepared remarks for today. Thank you, everyone, for listening and for your support. And Jim, Michael, and I are now happy to take questions.
spk08: Okay. So at this time, if anybody would like to ask a question, please press star 1 on your telephone keypad. Again, that is star 1 on your telephone keypad. Your first question comes from Steve Arthur from RBC Capital Markets. Your line is open.
spk05: Yes, great. Thank you, and good morning. Just a couple of questions. First, on the quarter in your Stage 1 operations, looking at Q3 production, about 10,200 tons, do you consider that to be full capacity at this stage? Or if not, where do you think you can get that to over the next couple of years?
spk02: Ryan, why don't you go ahead and take that?
spk06: Sure. You know, what we've said is that we do not view our current production necessarily as full capacity. You know, we do intend to grow REO production coming out of the mill as we move into Stage 2 production. And so I think in the coming quarters, as we execute on that, you'll be able to see that. You know, I think we'll be able to achieve... higher run rate production, both via a combination of improved mill recoveries and an increased feed rate. And so you can expect that you'll be able to see that over the next couple of quarters.
spk05: Okay. I guess related to that, a production cost, is it reasonable to assume that it stays pretty constant over the next couple of years, or with these efficiencies, can that inch lower as well?
spk06: I'd say looking into the next quarter and the next year, while we are in stage one, I think it's a fair assumption that the production cost per metric ton will be relatively stable. We do think that we will start to see some incremental production cost leverage as we do increase volumes. But at the same time, we're obviously investing significantly into infrastructure and related costs related to Stage 2. And so I think a fair assumption would be, you know, relatively flat production costs per metric ton going forward through Stage 1. Okay.
spk05: And bigger picture, and probably more importantly, just on Stage 2, you know, I understood your comments earlier. We'll watch for some, you know, more detailed plans and milestones there. But I guess just on the sales approach for stage two, presumably you'll need to build direct channels to sell into these magnet makers and so on. How will you approach that, or what's the timing for putting some of those distribution pieces in place?
spk02: Are you referring to stage two or stage three? Stage two sales, you said?
spk05: Stage two, yes.
spk02: Well, I think the important thing to remember is that when it comes to stage two, there really are only a handful of customers across sort of the magnetics and OEM landscape. So you can imagine that we have a pretty good feel for those parties and may have had conversations with a number of those parties over the years. So we do not expect that to be a significant challenge as far as identifying who, where those channels are. So we do not expect to have a very large sales force, but we'll obviously keep you updated as we unfold that effort in the coming year and change.
spk05: And just final one, just on some of your pricing outlook and assumptions in your planning now. Have the pricing assumptions really changed from the levels you talked about in the materials over the last few months or anything in the marketplace you're seeing that makes you want to look higher or lower?
spk02: Well, with respect to pricing, you know, obviously it's a commodity market, and nobody knows where prices are going to go. We have prices, as you know, that were part of our process and in our S4. I'm sure you've noticed that the NDPR market has tightened very recently, and so prices very recently have moved quite a bit higher to, you know, NDPR. If you look at the index on Bloomberg, it's now just shy of $60. So, You know, but as far, you know, as far as from there, we don't, you know, we can really only control what we can control. So we want to manage our costs and make sure that we're focused on the execution of our stage two. And then the pricing will do what it does. I'd remind everybody that, you know, the One of the great powers of having a capital structure appropriate for the business that we have is that we don't have to lock into contracts that we believe are not going to give us the upside to what we believe is substantial demand to come, and we do believe that. Our long-term view certainly can't predict the next month or two, but our long-term view is prices are going to head materially higher just given the fact that we are in a boom that is really just getting started. If you think about the 2% to 3% penetration of just the electric vehicle alone, not to mention all the other use cases. And so we've positioned the company for shareholders to benefit from that upside. When and how that happens is anybody's guess. So why don't we, Steve, if you don't mind, we'll move on to the next one. Michelle? Next question. Thanks.
spk08: Yes, your next question comes from Lee Cooperman from Omega Family Office. Your line is open.
spk00: Thank you, and congratulations to all of you on a very successful transaction. I just want to make sure I understand some of the numbers. At the very beginning of the call, you talked about, I don't know if it was aspirational or whatever, a $250 million EBITDA number in 2023. Was that for the whole company that you're referring to? That's the number one question.
spk02: Yeah, sure. So, Lee, that references the, if you, you know, if you go back to the deck that we had in the deal process that, you know, was on the, that is on the website, that references our stage two production. And that, you know, that's no different. We have not changed that. That's no different than we've had over the last few months. And that was in our S4.
spk00: Right. But the 250 would be a total company number? I'm going to ask on top of the numbers is, you know, my associate, okay, 182 million fully diluted shares?
spk02: No, actually, if you go to... If you go to slide 17, Lee, on the deck that we just put out this morning, we actually have a diluted share count figure there, along with the only thing missing are the earn-out shares, but there's a reference to that on the slide, so you can do that.
spk00: Right, yeah, but I think the total comes to about, was it 182 or 172?
spk02: Yes, closer to 172.
spk00: Okay, very good. How do you compare your cost of production versus the Chinese market?
spk02: Sure. Ryan, why don't you want to talk through cost of production, and I can finish up. Sure.
spk06: Yeah, Leah, I think our cost of production today through stage one, obviously the data that comes out of China is somewhat difficult to parse. But we believe, you know, particularly as we've researched as much as we can on the players in China, that we are the second lowest cost producer globally. And so there is just one producer in China that we believe is able to produce a rare earth concentrate at a lower cost than us. I think that moving forward into Stage 2, we will be able to continue to leverage that position on the cost curve, given the fully integrated facility and some of the things that Jim described before. And, you know, importantly, the change in Stage 2 with our optimization plan to be able to reject the cerium and the low-value rare earths up front is critical in understanding why we are so confident in Our production costs remaining world class through stage two. And so, you know, that's sort of where we sit today and why we're confident in the go forward.
spk00: Gotcha. Last question. Given the demand growth that you see, would you anticipate that demand would be keeping pace or outstripping the capacity growth in the industry? Absolutely.
spk02: Well, here's what I would say. Ultimately, supply and demand have to meet and that's either, you know, via prices or, you know, more supply or less demand, right? My guess is that I think that this is, you know, Lee, as you certainly well know, this is what causes cycles, right? It's been a decade since we've had a bull market in materials. I think look to no other than, you know, the Tesla battery day where they talked about going into mining or look around the world. And I think you see that this electrification is really going to create some pretty spectacular demand in certain areas of commodities and you know, many investors often have sort of the prior decade mindset. And so, you know, obviously that's what makes a cycle. And so I think that, you know, we're setting up for a really powerful cycle and maybe this is the the, you know, sort of the new area of bull market to think about sort of materials and industrials, and certainly the capital markets are telling you that if you look across the electrification landscape. It looks like the mid-90s out there, you know, for the Internet. The last thing I would just say is I think what's really powerful about NDPR that maybe people don't fully appreciate is that if you look at us versus even nickel or copper or some of the other focused EV materials, again, mining is only 10% of the cost structure. This really does require a billion-plus of capital to separate rare earths and to do this properly and at a low cost. My guess is that as you look at where the analysts are as far as what price will incentivize new supply, my guess is they're underestimating the scale of capital and time that's required. And so when you think about commodities, obviously, from a pricing standpoint, you want to be most focused on things where the supply coming online is the hardest and the longest. And we think when you kind of look at that, NDPR is pretty far out there. So we're excited about the prospects.
spk00: Good. One last question, if you know, I may. Of course. Would you consider yourself strategically complete now and that given your balance sheet that you could pull off this program without additional equity? Or are there things out there that you would like to be part of MP that might require additional equity?
spk02: Well, we very clearly said that we believe we are not capital markets reliant. We have a fortress balance sheet now. I want to be clear that we are an owner-operator company mentality, and so we're always strategically complete, I would say, is a concept that is sort of never done. We are always... kind of working forward. And so, you know, I would just say that we're open-minded, but from a capital needs standpoint, we do not believe we're capital markets reliant. We believe that we have the capital we need to fulfill our mission. And so, you know, with a lot of comfort on the balance sheet. So that feels good.
spk00: Congratulations. Great transaction and all the best.
spk02: Thank you, Lee. Appreciate it. So, Michelle, next question.
spk08: Your next question comes from Carlos de Alba from Morgan Stanley. Your line is open.
spk01: Yeah, good morning. Congratulations on getting this done, guys. So on stage three, and I realize that this is probably a little bit further ahead, further out, but it seems that there are two, looking at slide 10, there are two stages, the metalmaking alloying and the marketmaking. Do you guys have an idea, a rough idea, of how much capex that would require, either of these two or two combined?
spk02: Sure, Carlos. So the answer is we do. It's nothing that we've disclosed. We have a team of people at the company that are working on our Stage 3, you know, obviously in parallel as we execute our Stage 2. Our primary focus over the next few quarters is obviously making sure that we execute our Stage 2 properly because there is no Stage 3 without Stage 2. But, you know, I think we, and I also want to be clear that we really do view this as a multi-year process. I want people who, you know, we want our investors to make sure that they understand that we will do this methodically, and we want to make sure we get this done right. This will take time. And so I guess that's a long-winded way of saying we're not disclosing any numbers currently around, you know, sort of metalmaking and magnetmaking. But you do raise a good point. I think it's also important for people to recognize, particularly as they look at you know, folks out there that, you know, want to get this done, this is a scaled problem. This is a scaled problem as far as ability to provide a solution. You really do need the size and capital that our company has. And so we really do believe that we're strategically with our asset long ahead and now obviously have the equitized company and Fortress balance sheet to move forward on this. But how we're going to do that, we just want to be totally open that we're going to buy, build and or JV and get this done thoughtfully in a high return on capital, low risk way.
spk01: Thank you. And on stage two, as you get to that stage, How do you envision your selling expenses changing from stage one into stage two?
spk02: So we haven't put anything out on that, but I would just go back to Carlos' great question. And as you know, there are not a ton of customers here. We do not anticipate a very large sales force at all. So, you know, we do not expect those to be, you know, subsidized. Brian, I don't know if you want to add anything on that that you can in light of the fact that we haven't put out too much, but...
spk06: Yeah, no, the one thing I would say is I don't think we believe the scale of the sales expenses to be, you know, meaningfully different stage one versus stage two. I'd say their location on the income statement may be different in the sense that today there is an embedded sales commission in our realized price that is pulled out of revenue and it's recognized on a net basis, you know, when we move to selling outside of the offtake agreement, you know, we will not have that embedded commission and we'll recognize some more expense in the SG&A line. And so I think from a total sort of EBITDA net income perspective, I don't think it'll be hugely meaningful, but, you know, the location may change.
spk02: All right. Thank you very much, guys. Thanks, Carlos. Yep. All right, Michelle, you want to move forward?
spk08: Next question comes from Jeff Gramp from Northland. Your line is open.
spk07: Good morning, guys, and congrats on the first call.
spk05: Thanks.
spk07: I was curious first off, you know, in the context of a world where, you know, all this demand growth kind of comes to you guys and we're maybe in a world that's short NDPR, can you guys talk maybe high level about any work you've done internally regarding the opportunity to expand the resource base and production capability at the Mountain Pass?
spk02: Sure. So great question. I guess the way I would answer that is I would tell you that to the extent that we're right, that demand is going to continue to grow, which seems pretty obvious given what's happening with the literally hundreds of billions of dollars going into electrification. You can imagine, given what I said about the scale of capital and the unique resource base required, that probably the most significant source of supply at a low cost that could come online in the Western world would be a capacity expansion of ours. I guess that's, you can imagine, we haven't put any numbers externally around that, but the question is noted and I would just tell you that the key um pieces of that are just the the ore body you know you have to have a very high concentration of the ore but then you really have to have the capital uh and the time and the expertise and and clearly mp materials um you know really in the in the in the western world is the only company that's got all of those and so we think we're many years and billions ahead of of any potential competition and to the extent that there are other projects out there um you know we we think um the nearest term addition of supply would certainly be most economically ours.
spk07: Great. That's helpful. Can you guys talk just on when I think about Stage 2 progressing here for the next year or so, can you take us through maybe the main milestones or any key risks or hurdles that maybe keep you guys up at night in terms of executing upon that?
spk02: Sure. When it comes to execution, obviously, we are execution-focused, so I guess in some ways everything keeps us up at night and in others nothing keeps us up at night because we have a good handle on the things that need to happen here. I'd remind you, and I assume you know this, but for those listening, We have an existing operating business, right? So we are cash flow positive in our stage one. That continues, and we continue to execute there. And then as we do this, most of the capital assets are already on site. We're adding a couple major items and a handful of other items that we've previously discussed, but we're talking about really returning the roasting process which existed at Mountain Pass for decades. And so you're talking about a roaster. We're adding a crystallizer and a handful of other items. And so we have a very good feel for the things that we need to add, and we'll just focus on getting those done over time, as we've said. But there's no sort of new or special technology or anything like that that we view as a hurdle or a concern or, frankly, anything that would add risk to it other than the very specific blocking, tackling, and execution of the project over the coming year and change, which is not a small feat. We've got to make sure that we execute that properly.
spk07: Understood. That's helpful. I appreciate the time.
spk02: Sure. All right, I guess next question, Michelle?
spk08: Yes, your next question will come from Jay VanSkyver from Edge UIE. Your line is open.
spk03: Hi, good morning, and congrats on the years of work getting here, guys. I get that your environmental profile relative to, say, Chinese suppliers is, you know, propelling for EV manufacturers tend to be more eco-conscious customers, but There's also the defense aspect where there's a little less clarity, and I guess there has to be, but not relying on a geopolitical rival for critical input is a pretty important factor here. I think you've disclosed, at least as I understand it, two separate Department of Defense contracts where one is for heavy rare earths, one is for light. Do I have that correct? What does that support generally consist of? to the extent that you can comment on it. And where does that fit into the stages that you guys have as you move along for the next few years?
spk02: Sure, Jay. So that's correct. We've disclosed, what we've publicly disclosed is there are two separate contracts with the Department of Defense. The first one is related to heavy-rare separation. Heavies are sort of not part of the Stage 2 and 3 from the standpoint of, you know, Stage 2 will make a heavy concentrated product, but as far as heavy separations, that would be separate. And, you know, obviously I can't go into the extent of sort of what that project is other than sort of what's been publicly stated, but that would involve, again, heavy separation. And then the other one which we recently announced is the technology investment agreement from the Department of Defense that is a $9.6 million contribution towards, that is specifically towards our Stage 2 optimization effort. And obviously, you know, we're very proud and humbled that, you know, DOD wants to do this with us. You can imagine it's a lot of work and diligence and we recognize the gravity of what a relationship like that means and we're focused on making sure that this all gets done right.
spk03: I think it's amazing. How much volume do you think the U.S. defense industry would take and do you think there's room on sort of our allies taking additional material?
spk02: Well, the thing I would say on the defense side, you know, defense, and obviously there are not amazing numbers on this, but the defense applications are typically low single-digit percentages of global demand. And so they're not going to be a big driver of demand from a global supply and demand standpoint relative to electrification. They are very Higher margin magnet opportunities downstream, of course, but the national security, there's really two aspects of it. There's the national security, the supply aspect, making sure that allied nations have the supply of materials they need to make the things they need. But then the bigger, broader thing is really the concept of commercial national security. We're talking about we're now, you know, we're now in a multi-trillion dollar transformation of the global economy. And if you think about what the Chinese have very thoughtfully done is, you know, 30 years ago without a rare earth industry having transformed that. And look at the capital markets today and all the, you know, very well-performing Chinese electric vehicle manufacturers. They've clearly utilized this industry to go downstream. from rare earths to the magnets, which they now control that industry as well, and, you know, are working on the EVs, and really that's a function of seeking the GDP and the jobs that are related to this. It's very important for competitive reasons that there is a company like MP Materials to make sure that we can provide, you know, major industrial partners the materials they need so that they're not beholden to some kind of strategic disadvantage from, frankly, what will be their competitors over the coming decade or two. And so I think that the, you know, certainly can't speak for them, but I think from a national security standpoint, it's not just that, you know, sort of supply piece. It is the bigger, broader GDP and jobs issue. And certainly I think we're going to see a lot more of that with the incoming administration. And the good news, by the way, for us with the incoming administration that is particularly even more so focused on climate change and really accelerating electrification. The fact that Mountain Pass, you know, the fact that we are not only a reliable scale source of supply in the Western world, but we, you know, our sustainability is creds, so to speak, are second to none, I think is going to be a, you know, a really powerful attribute, you know, for government to want to, you know, support us over time, you know, particularly because we're serving that need in a sustainable way. But again, you know, we need to do that in a low-cost way. We need to be commercial and can't rely on that support.
spk03: Perfect. Congratulations.
spk02: Great. Thanks, Jay.
spk08: This brings us to the conclusion of our Q&A session today. I turn the call back over to James Latinsky, CEO, for closing remarks.
spk02: Sure. Thank you, Michelle, and thank you, everyone, on the call today. This is obviously a really special occasion for us as our first call as a public company. You know, I can't stress enough how excited we are for this journey ahead. We're really delighted to be engaging with you all. And, you know, this is a really important mission that we are on. company and you know our leadership and board are very aligned with you our public shareholders we are taking owner-operator approach to this we will build this business for the long term and you know we have a very strong and growing team on this on the ground focused on execution we know this asset inside and out and and obviously we so far have delivered the results that you would expect and And so I guess with that, I just want to say thank you again, and we look forward to speaking with all of you soon. And thank you again. Have a great day.
spk08: Thank you, everyone. This will conclude today's conference call. You may now disconnect.
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