MP Materials Corp.

Ladies and gentlemen, welcome to the MP Materials Financial Results conference call and webcast. My name is Charlie and I will be coordinating your call today. If you would like to ask a question during the presentation, you may register to do so by pressing star followed by one on your telephone keypad. I will now hand over to your host, Head of Investor Relations, Martin Sheen, to begin. Martin, please go ahead.

Thank you, Operator, and good day, everyone. Welcome to MP Materials' first quarter 2021 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. To follow along with our discussion today, we encourage you to download our slides from our investor website. Before we get to James and Ryan's opening remarks, I'd like to remind you that during today's call, we will make certain forward-looking statements that do not constitute historical facts under the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements are predictions, projections, and other statements about future events that are based on current expectations and assumptions, and as a result, are subject to risks and uncertainties. Many factors could cause actual future events to differ materially from the forward-looking statements in this communication. For more information about factors that may cause actual results to materially differ from forward-looking statements, please refer to the cautionary language in the earnings release and in our filings with the SEC, including the risk factors section in our recent SEC filings. During the call, management will also discuss certain non-GAAP financial measures, which we believe to be useful in evaluating MP materials operating performance. These measures should not be considered in isolation or as a substitute 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 and can be found on our website, investors.mpmaterials.com. And please check our investor website regularly and follow us on Twitter, Instagram, and LinkedIn, where we often provide news and information on the company. With that, I'll turn the call over to Jim. Jim? Thanks, Martin, and thank you to everyone joining us on the call this afternoon. I'm going to cover a few things today. First, I will recap the highlights of our outstanding first quarter results. Second, I will provide a quick update on our stage two optimization plan and mountain pass. Then I will turn it over to Ryan for some more color on our performance. And finally, I will make some closing comments before opening it up for Q&A. Let's start with the first quarter highlights on slide four. we achieved record first quarter production and sales volumes these numbers show the significant operating leverage we can achieve when higher ndpr prices meet best-in-class production costs our revenue nearly tripled year-over-year adjusted EBITDA was up more than six-fold and our adjusted EBITDA margin more than doubled year-over-year to over 57 percent i will talk more about our record sales and production volumes in a minute The other big highlight in the quarter was our green convertible bond offering. I would like to spend a moment on the green convert. I know the initial market reaction to the transaction was not as we had hoped, but I would like to take you all through our logic so you can better understand why we did it and what this means for long-term value creation. First, as we talked about last quarter, we are seeing activity accelerate in the electrification and decarbonization supply chain. particularly related to EVs, the scale of the global acceleration in capital investment is mind-boggling. A recent IEA report stated that while it took 10 years to reach 10 million EVs on the road in 2020, they expected that over the next 10 years, by 2030, this number would climb to 145 million. This may seem like staggering growth, but that would only be about 7% of the global fleet. And this excludes two and three wheelers, where there is also huge potential for electrification. By the way, the IEA report followed up their EV study right away with a look at critical materials. So MP is not capital markets reliant, but we are opportunistic. We now have the firepower to make what we believe are extremely attractive, highly accretive investments towards our mission, regardless of market conditions. And if attractive opportunities do not present themselves, we can always return the capital to shareholders, the largest of whom is me. We believe this option value in our very conservative capital structure is valuable to us all. Second, some of you have heard me talk about the importance of the green bond market. I have been a vocal proponent of this mechanism for the electrification and decarbonization revolution. Better pricing the externalities across global industry will instill further capital markets constraints on the bad actors and benefits on the good actors. I strongly believe that this bifurcation is just getting started. It is a moral and financial imperative that we position MP to be one of the good actors for this decade plus theme to come. it will likely shape conversations with industrial and government participants in the years to come. We see it already. So we look forward to the challenge of our shareholders and the market holding us to these higher standards and believe this is a source of competitive differentiation in our industry, particularly when you look at our competition in rare earths. So in the end, I think the green bond created very attractive, low-cost optionality for us. I believe it enhanced our value creation prospects as various stakeholders gained further confidence that MP is a reliable thought leader. We believe we have the proper platform for the future, and we will continue to build upon our reputation for execution, both operationally and financially. In conclusion on the quarter, stage two is on track and stage three is accelerating. I will discuss these, but let's move on to slide five first to cover more detail on our strong execution in the quarter. Starting on the top left, you can see that our sales volume was up 18% versus last year. Q1 is usually seasonally weak due to Chinese New Year, but with the impact of a COVID year-over-year comparison, coupled with even greater demand from increased electrification, we did not see much usual seasonal impact. By the way, logistics have been a real challenge throughout the world lately, so our operations team deserves a lot of credit for navigating such difficult conditions to a great result for us all. And on the top right, you can see the strong pricing we achieved for Concentrate as the market appetite for NDPR continues to power higher. Pricing for NDPR increased throughout Q1 and remained very strong through April. Pricing for Concentrate followed a similar pattern in Q1 and remained strong. Do not forget that our concentrate sales represent commensurate separated NDPR in the market. Stage two production means we will enjoy that massive uplift of refined product revenue without creating incremental global supply of separated NDPR. Our revenue in a given quarter is obviously a function of sales volumes and pricing. There can be modest timing differences between production volumes and sales volumes over time, particularly due to shipping. Yet long-term financial results are ultimately driven by our ability to produce as much as we can as efficiently as we can. Internally, we closely watch our throughput or feed rate, the recovery or what percentage of the REO fed into the mill results in saleable product on an REO basis, and plant uptime as the main drivers of our business. production volumes remain strong in the quarter, with 9,849 metric tons produced. Over the last 12 months, we've produced nearly 39,000 metric tons of rare earth oxides in concentrate. You can also see here that production costs remain very low at $14.75 a metric ton. Costs were up a bit versus last year, in large part due to timing of plant turnarounds and the reagent trial we talked about last quarter, which was completed towards the end of January. We also increased hiring in anticipation of future growth. We now have over 320 dedicated employees doing incredible work towards our mission. These are challenging jobs with high expectations, and the MP team knows we have some naysayers. The idea that an American company can compete globally in rare earths while preserving stringent environmental standards does not serve the preferred narratives of certain opportunists. But here we are. Most importantly, I would like to tell you very humbly that we recently hit a milestone of going 365 consecutive days and over 400,000 work hours without an injury causing someone to miss work. Fantastic results like we reported today only mean something when they occur behind a first priority cultural focus on safety. Let's move on to slide six for a quick update on stage two. As many of you know, stage two is our plan to move from today's profitable concentrate production to separating rare earth oxides. Success means we will have restored the downstream production of these critical elements to the United States of America. Stage two is also expected to provide significant upside to our financial profile, which Ryan will talk about in a bit more detail. Last quarter, we covered some details of our optimization plan, including CapEx, and how we believe we significantly de-risked Stage 2 relative to last year. We made a lot of continued progress during the quarter. We completed the pre-civil site work. The foundation work for critical new equipment is in progress. The fabrication of the roaster is nearly complete, with delivery expected very soon. Some ancillary components of the roaster and material handling equipment have actually already arrived on site. The fabrication of the Sol Crystallizer is nearly complete, and we actually have key portions of it delivered and on-site as well. See the cool photo on the left side of the page there. So, net-net, we're making a lot of progress executing Stage 2, and I look forward to keeping you posted. Now, with that, I will turn it over to Ryan. Ryan? Thanks, Jim, and hello, everyone. Jim already covered a few of the financial highlights, but let me give you some additional thoughts on the quarter, and I'll begin on slide eight. As Jim pointed out, our year-over-year revenue nearly tripled, but we also saw over 40% growth compared to Q4. This was driven by 46% growth in realized pricing to nearly $6,000 per metric ton of REO. Meanwhile, our adjusted EBITDA increased over 80% from Q4. Jim also mentioned the leverage of our model from NDPR pricing. Our REO product margin increased from just over $1,200 per metric ton a year ago and $2,500 in Q4 to over $4,400 in Q1, driven almost entirely by the price of NDPR and its impact on the price of our concentrates. The result of which is that sequentially our revenues increased $18 million, whereas our EBITDA increased $15 million. So as we've discussed, the vast majority of incremental revenues flow through to the bottom line, causing our sequential EBITDA margin to improve almost 15 percentage points. Compared to the first quarter of 2020, the 70% flow-through of revenue to EBITDA is less stark, although still excellent, primarily driven by the growth in headcount as we prepare for Stage 2 in the build-out of our public company infrastructure. However, our sequential performance is more indicative of what we expect in the future. And finally, regarding the impact of Stage 2 on our financials, assuming current NDPR pricing and our expected cost of operating Stage 2 we gave back in July, on an apples-to-apples basis, our Q1 product margin of $4,400 per metric ton of REO produced through the mill would roughly double at full run rate production through Stage 2. Now, we have a way to go to get Stage 2 up and running and to run great production levels in 2023. And anything can happen to the pricing of NDPR in the meantime. But we did want to give you a feel for the improved profitability Stage 2 brings to the table. Lastly, I would add that our Q2 is shaping up to be strong, driven by NDPR and concentrate pricing. Of course, the West Coast ports are still experiencing delays, and so as with this past quarter, the timing of shipments is the primary unknown. However, for the full year, we continue to expect full-year production to increase slightly versus 2020, resulting in very strong full-year 2021 results, given what we're seeing in the market. Moving on to the next slide, last quarter we looked at our full-year cash flow of Stage 1 operations. Here we've updated it for the first quarter. And similar to last quarter as well, in the appendix, you'll see a detailed walk of how we get from our adjusted EBITDA to our reported operating cash flow and then our reported free cash flow. looking specifically at slide nine on the left side of the chart you can see our free cash flow for the quarter was a use of 10 million dollars but adjusted for our off-take pay down of 11 million dollars the capex spent on our stage two optimization plant recommissioning activities and related projects in the quarter as well as one-time deal expenses our stage one process generated over 21 million dollars of normalized free cash flow in the first quarter That's over $80 million on an annualized basis compared to $34 million in fiscal year 2020. That's also a very strong 35% free cash flow market, up from 25% for the full year 2020. Keep in mind that the offtake balance is essentially debt, but per US GAAP, the impact of the pay down of that agreement, because our offtake partner retains a portion of the cash from sales of products to pay down the obligation, the impact runs through operating cash flow instead of financing in the cash flow statement, as might be expected, which is why we believe it's relevant to add it back to our free cash flow for a comparable metric. Moving to slide 10, I'll give a quick update on our balance sheet. As discussed earlier, the green bond resulted in net proceeds of over $672 million, and combined with our performance in the quarter, results in a cash balance of nearly $1.2 billion at the end of Q1. In addition, the balance of our offtake agreement was reduced to $60 million in the quarter. As many of you are aware, the SEC recently issued guidance regarding the accounting treatment of warrants typically associated with SPACs and de-SPAC issuers. Each company's situation is unique, and we have closely evaluated our specific facts and circumstances considering this new guidance. In consultation with our outside legal counsel and external auditors, we believe that our outstanding public warrants continue to meet the requirements for equity classification and that no change in accounting treatment or restatement is necessary. Additionally, regarding the public warrants, we announced on Tuesday our intention to redeem these warrants and require a cashless exercise during the redemption period. Given our capital position, this allows us to reduce dilution to our shareholders by foregoing the cash underlying the war and strike price. With the strong confidence we have in the cash flow profile of our current and go-forward plan, this was the value-maximizing path for shareholders. With the conversion ratio discussed in our redemption notice and excluding the impact of the convertible note as it is out of the money, our current share count is approximately 178.3 million shares. Now I'll turn it back to Jim to wrap up. Thanks, Ryan. Before Q&A, I would like to take a moment to summarize why we believe MP is so well positioned to become a Western champion of the electrification and sustainability revolution. First, we have a co-located set of unique world-class assets. These are our ore body and our nearly $2 billion state-of-the-art processing and separations facility. Let me start with our ore body. We have a bass in a site ore body, which contains north of a 7% mix of rare earths, one of the highest anywhere in the world. Most mines are in the 1% to 2% range, and some speculative mines are well under 1%. That means our competition must mine three to seven times more total rock to get the same oreo output out of the ground. And that in turn means more reagents, more processing, and more time. That all means much higher operating costs. Additionally, A bath in a site or body allows for roasting without the use of additional chemicals at lower temperatures and with fewer potential emissions. We also do not have the radioactivity issues you may have read about elsewhere. These factors compound our early advantage from both a cost and environmental impact standpoint. And then we have a $2 billion state-of-the-art co-located facility in California. There are few such facilities of this scale and none in the world that are co-located with the mine like we have at Mountain Pass. This further reduces transportation, shipping, and environmental costs. We believe the quality of our ore body, plus this state-of-the-art facility, positions us to become the world's lowest cost producer of separated NDPR, assuming we execute. Second, we have structural and financial advantages. Those advantages are scale, time to market, and scarcity value. All are aligned with a compelling long-term demand outlook for our primary product. Remember that just building a plant of enough scale to compete will take years and bear significant costs, especially with escalating materials prices like we talked about on our last call. Hopefully, we gave some of you an early hint at this emerging industrial trend that was subsequently confirmed by many companies this earnings season, including Berkshire Hathaway this past weekend. Materials and labor inflation is happening across the economy, which means the replacement cost of many things is headed much higher. We believe this trend is a powerful tailwind for MP's structural advantage beyond simply a reasonable expectation that the price of NDPR should move up with inflation and then some due to demand. Other than a competitor potentially building a refining plant in Texas, which is still not financed or permitted, let alone broken ground in construction, We do not see any material Western supply coming online anytime soon. There has not even been any significant fundraising for such projects, despite NDPR pricing climbing north of $85 a kilo. The often told joke is that rare earths are not rare. That's true, but it misses the bigger point. What is extremely rare is a scaled, economically viable deposit. and the time cost and expertise to bring any such deposit online only compounds that scarcity third our stage one process is profitable and cash generative we did go public via a spac and our business is levered to electrification one could simplistically bucket mp with the hyper speculative electrification group many of which we believe will not generate cash flow for years and some others which also may have very aspirational projection targets Yet our existing operations are not speculative, and we have materially outperformed the original Stage 1 projections we laid out at the time of our GoPublic announcement in July of last year. In addition, our Stage 2 is fully funded and expected to come online sometime next year. Obviously, our expectation is that this will accelerate our financial performance. Fourth, we have an owner-operator culture with a sustainability focus. From my earlier discussion on the green bond, you know that we believe our platform gives us a competitive advantage. Every qualifying employee was granted shares when we went public, and I remain the largest shareholder of the company. We are committed to our vision, and our incentives are aligned with you. And lastly, we are at the ground floor of what we believe will be a decade-plus transformational growth opportunity. Some of you may have seen a cover story in the Wall Street Journal on Tuesday about the evolution of the auto supply chain for the age of electrification. We also tweeted it the other day in case you missed it. The auto industry faces existential risk from the past practice of just-in-time manufacturing. This new era is one where the ability to vertically integrate the supply chain is a source of strategic advantage. Companies are now competing for the kinds of scarce resources that are exactly what we have at MP. This is why you have seen companies like Tesla and others talking about mining in recent months. The semiconductor mess makes this an even hotter topic, and we see it now in conversations. Our Stage 3 efforts continue at a furious pace. I know many of you want lots of details, but we will share with you what we can when we think appropriate. I would point out, though, that regardless of the path we take, our mission is to restore the full domestic supply chain. And remember, this is not just about the auto supply chain. Rare earth permanent magnets are also important to so many growth industries of tomorrow, like wind turbines and drones, and then maybe some currently unexpected ones like air taxis. Who knows exactly what will come next, but the opportunity is ours. With that, let's go to Q&A. Operator?

Ladies and gentlemen, if you would like to ask a question, please press star followed by 1 on your telephone keypad now. If you change your mind, it's star followed by 2. Our first question comes from David Deckelbaum of Cowan. Your line is open. Please go ahead.