MP Materials Corp.

Hello all and a warm welcome to the MP Materials third quarter 2021 earnings call. My name is Lydia and I'm your operator today. If you'd like to ask a question at the end of the presentation, you may do so by pressing start followed by one on your telephone keypad. It's my pleasure to now hand you over to our host, Martin Sheehan, Head of Investor Relations. Please go ahead when you're ready.

Thank you, Operator, and good day, everyone. Welcome to MP Materials' third quarter 2021 earnings call. With me today are Jim Latinsky, Chairman and Chief Executive Officer of MP Materials, Michael Rosenthal, Chief Operating Officer, and Ryan Corbett, Chief Financial Officer. Before we get to Jim's 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 NP materials operating performance. These measures should not be considered in isolation or as a substitute for NP 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 8K filed today and can be found on our website, investors.npmaterials.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. Let me run down what we will cover on the call today. First, I will recap the highlights of another outstanding quarter. Second, Ryan will provide color on our operational results and financial performance. Third, I will provide an update on our Stage 2 and Stage 3 progress. Finally, I will share my views on recent market trends and some other thoughts. After wrapping up the prepared remarks, we will open it up for Q&A. But let's start with the third quarter highlights on slide four. The MP team continues to perform above and beyond even our own high expectations, again, setting new records for production and sales volumes. Across the board, Every department continues to improve processes and overall execution, which when combined with select equipment upgrades is driving higher utilization of our assets and higher production volumes. These factors have produced a meaningful increase in our total output for the quarter. I would also add that we produced more REO in just this quarter than our predecessor produced in its best year ever. Let me repeat that. MP Materials produced more REO in just this quarter than the predecessor entity did in their best year ever. This stat is just really incredible, and it is also particularly remarkable when we think about all the operational, logistical, and labor challenges going on related to COVID. I am so proud of our team. I would also like to give a special thanks to our logistics team. Despite significant shipping and trucking challenges throughout the economy, we shipped over 12,000 metric tons of REO in the quarter. This represents a 30% increase over Q2. The ingenuity and dedication of the MP team is just awesome. And we've said this before, we are selling everything we can produce. Strong global demand for rare earth materials resulted in a 127% year-over-year increase in realized prices. This is being driven primarily by NDPR as well as other magnetic rare earths contained in our concentrate. The combination of higher volumes and higher pricing led to revenues more than doubling year over year to 99.8 million. The strong pricing combined with continued diligent cost management helped to demonstrate the leverage in our operating model with adjusted EBITDA increasing nearly six times year over year to 68.3 million. And along with this performance, we delivered operational efficiency improvements as our unit production costs declined nearly 6% from the second quarter of 2021. The improved financial performance is also naturally increasing our cash generated from operations. We generate a significant amount of cash from our operations, and we have a fortress balance sheet. This positions MP to continue to invest in our Stage 2 and Stage 3 opportunities while maintaining substantial firepower to pursue high ROIC opportunities within our mission and, over time, reward shareholders. The Stage 2 optimization project continues to progress at a healthy pace. We continue to manage through many of the challenges we face. MP has an execution-focused owner-operator culture, We understand the importance of Stage 2 to our overall mission, and we remain focused. And again, our strong Stage 1 production achievements further support our Stage 2 volume outlook for 2023 of 6,075 metric tons of NDPR production. Lastly, just quickly on Stage 3, we look forward to sharing more on the vision for our first rare earth metal and magnet facility and the progress we are making towards the end of the year. More on stage two and stage three in a bit, but for now, let me turn it over to Ryan for more details on our quarter.

Thank you, Jim, and welcome, everyone. I'll be beginning on slide six and starting in the bottom left-hand corner. As Jim mentioned, production volumes hit record highs in the quarter as we produced just under 12,000 metric tons of contained rare oxides. This was an 18% increase over last year's production and a 16% increase off of Q2's production, a meaningful increase, particularly since you will recall that Q2 was the previous record for the company. As Jim also mentioned, every department is making improvements in their processes and procedures, which are adding up to improved production results. Our mining team is ensuring consistent ore availability and feed grade to the mill while supporting higher feed rates. Our maintenance staff is ensuring record uptimes by staying ahead of wear trends and implementing strategic equipment upgrades. In the face of an extremely challenging supply chain environment, our procurement and logistics teams are ensuring we have the necessary consumables and repair parts in a timely manner, as well as supporting the outbound logistics needs of record production volumes. Our operations and engineering teams continue to improve our processes and their execution, leading to steady and sustainable increases in production. And our safety and training teams are ensuring improved employee safety and environmental compliance and employee productivity, and that lessons are passed from crew to crew and shift to shift. These individual modest improvements are compounding into meaningful results. As we look at the improvements at a more macro level, we believe we are seeing steady and sustainable improvements on our flotation process with modestly improved recoveries as well as higher feed rates. Notably, our uptimes in the quarter were 98%, a new all-time quarterly high for the plant. This resulted in a 6.5% increase in hours of production versus last year and a nearly 8% increase versus the second quarter. I'd note that the compares are partially flattered by our planned semiannual plant turnarounds falling in Q2 and Q4 of this year versus falling in last year's third quarter. However, we were also pleased to have less unplanned downtime versus prior quarters. To control for the comparability between the quarters, we measure our efficiency in terms of rare earth oxide produced per uptime hour. And in the third quarter, we maintained the material improvement achieved last quarter and, in fact, continued to build on it with a nearly 10% year-over-year increase in production per uptime hour. As we look ahead to the fourth quarter, I want to re-flag the timing of the plant turnaround I mentioned earlier, which impacts Q4's available production hours, and in addition, we generally lose a little bit of efficiency in those turnaround quarters. Reflecting on the Q3 performance, I would note that we've always expected to make improvements in our production efficiency, but the team has executed well and ahead of plan. Moving clockwise on the page to our sales volumes, you can see the timing of shipments resulted in us selling through all of our production and then some. This resulted in a 36% increase in metric tons of REO shipped to over 12,800 metric tons, a 30% increase over the second quarter. As you can imagine, given the stress on the logistics supply chain, this was a particularly heroic accomplishment. And as we often point out, shipping volumes and production volumes usually don't line up quarter to quarter, but over time, they even out. This quarter, the team was able to tackle the modest inventory that had built up over the last few quarters, but in the current environment, it's even harder to predict the exact timing of shipments. Moving on, as you can see in the top right, as Jim mentioned, our realized pricing remains very strong and grew 5% sequentially, driven by continued strength and NDPR prices. Finally, the very high uptimes combined with effective cost controls resulted in a 6% decline in our production costs versus the second quarter and a 4% increase year-over-year, which, as a reminder, includes significant incremental costs from hiring ahead of Stage 2 recommissioning, where certain costs cannot be capitalized and are therefore included in our production cost metrics. This impact is highlighted in the yellow bar on the graph to give a more apples to apples comparison, which would have resulted in a decline of about 3% year over year when excluding the approximately $100 per metric ton of REO of pre-commissioning expense. Looking forward to Q4, I would also remind everyone that my comments regarding the turnaround also manifest in unit production costs, given the lower uptime and efficiency, as well as the additional costs associated with the maintenance effort. Let's move to slide seven. I spent a lot of time on that last slide to highlight all the amazing things the team is doing. So I'll cut to the chase here. Revenues of nearly $100 million were up 143% year over year and 36% sequentially driven by the simple P times Q I highlighted on the prior slide. The revenue growth and solid cost containment resulted in EBITDA growing nearly sixfold to 68.3 million, which was 47% higher than the second quarter. Adjusted EBITDA margins improved from 36% last year to 68% in the current quarter and improved over the 64% margin in Q2. You can also see the leverage in our model when you look at the incremental margin between Q2 and Q3. Specifically, adjusted EBITDA increased $21.9 million from 2Q to 3Q, while revenue increased $26.7 million. that's an incremental margin of 82%. An awesome result, given much of the growth was through volume, not price. As we typically see, that EBITDA improvement flowed nicely to the bottom line as our adjusted net income grew over seven times versus last year to $52 million, which was also a 55% improvement over the second quarter. Before I move off of this slide, I want to point out a couple of housekeeping items. You'll notice on our P&L in the press release and in the appendix of this deck that we've added a new operating cost line item, advanced projects development and other. These costs are incurred in connection with certain government contracts, the research and development of new processes, or to significantly enhance our existing processes, as well as costs incurred to support growth and development initiatives. These dollars are relatively small now, but given our accelerating work with regards to metal alloy and magnet manufacturing, we thought it important to start breaking these costs out from GNA. And lastly, also on the P&L, as a reminder from last quarter, our diluted share count includes the full dilution impact of the roughly 15.6 million shares related to our green convertible bond, as if the bond were converted into shares. This results in a GAAP weighted average share count of $193.2 million, which we use to calculate diluted EPS, again, per the recent ASU requiring full if converted treatment for convertible notes, regardless of whether they are in the money. As a reminder, the conversion price for the notes is a little over $44 a share. So excluding this impact, our adjusted fully diluted share count was 178.2 million shares as of September 30th. I'll now move to slide eight. Our normalized Stage 1 free cash flow remains extremely strong, driven by the financial results we just discussed. This chart is on a year-to-date basis, so starting with our reported free cash flow of negative $13.3 million and adjusting for our offtake pay down of $38.9 million, $80 million of growth CapEx, and another $2.3 million of transaction and one-time items. results in a normalized Stage 1 free cash flow of over $107 million, or a 46% margin on year-to-date revenues. Keep in mind, the reason we adjust out our offtake pay down is that the offtake balance is essentially debt, but the impact of the pay down of that agreement runs through our operating cash flow instead of financing, as we've discussed in prior quarters. I would also point out that in the appendix, we have a detailed walk of how we get from our adjusted EBITDA to our reported operating cash flow and then our reported free cash flow. On that slide, you will see some growth in working capital this quarter as a result of the large number of shipments taking place in late September due to the port congestion. We have since received the entirety of the cash from these lumpia receivables, which will show up in our fourth quarter of free cash flow numbers. Lastly, in the quarter, we paid down our offtake agreement with Schengen Resources by an additional $16 million, leaving roughly $33 million remaining. At this pace, which would assume continued strong concentrate pricing, as well as consistent production and shipping of mountain paths, we would expect to pay off the remaining amount in early 2022. As a reminder, we are entitled to pay off the balance in full at any time with cash on hand, particularly as it is nearly a rounding error in the context of our $1.2 billion cash balance. We have not elected to do this as we continue to pay down the balance quite rapidly via the traditional offtake mechanism. And we also believe that maintaining a balance aligns the incentives of our distributor to maximize the company's profitability. I would also remind everyone that we have the flexibility to sell our product where we choose. And as you can imagine, given the rising demand for rare earth materials globally, customers and distributors regularly express interest in the company's current and future production of both concentrated oxides. With that, I'll turn it back to Jim to give you more details on Stage 2 and Stage 3.

Thanks, Ryan. Before I start on slide 10, I wanted to point out that we added a section of cool photos towards the back of the deck, which shows some of the ongoing progress at Mountain Pass. So please take some time to have a look. As I mentioned in my opening, Stage 2 and related work continue to make nice progress. Although not specifically related to Stage 2, we had a very successful first firing of both of our combined heat and power or CHP turbines in the quarter and have now begun continuous performance testing. These turbines each generate north of 12 megawatts of power and recommissioning this facility is important for a couple of reasons. Stage two will require significantly more power than stage one. So having a dedicated power source fed by a pipeline lateral should further improve the reliability of our processes. Second, We believe the CHP could cut our energy costs significantly and will provide us excess steam for our processes, which we would otherwise have to consume energy to generate. Importantly, we expect the plant to come online on a full-time basis by early next year. Also in the quarter, we recommissioned our water treatment plant and for the last two months have been producing on-spec reverse osmosis or RO water. This is also critical for stage two. As you can imagine, to attain the purity levels needed to produce on-spec NDPR and other separated rare earths, we need to use highly purified water. So this is another important milestone to achieve ahead of stage two commissioning. We will also use this water in the CHP plant as well as to assist on a limited basis with our stage one processes. Specifically related to stage two, we have finalized most of the remaining process design decisions and have ordered most of the ancillary processing equipment with all deliveries currently expected within our needed timeframes, despite the supply chain challenges. We have now extended construction to eight work sites, including new concentrate drying and calcining circuits, leach circuit optimizations, and NDPR finishing upgrades. Also, we have enhanced our efforts in coordination with the County Permit Authority to accelerate construction permit reviews to help us with schedule. We continue to invest in developing heavy rare earth separation capability, which we believe is an exciting commercial opportunity. This capability is consistent with our mission to restore the full supply chain and move downstream into magnetics. Process development and pilot activities are proceeding and certain early site work is being evaluated. I look forward to providing more detail on our heavy rare separation activity in the near future. Similar to heavy rare separation, We believe magnet recycling will be an on-mission, accretive opportunity for the business. A recycling capability should be a nice complement to the economics of Stage 3 magnet production. To that end, we are dedicating resources to advancing this capability, including ongoing joint development projects with significant industry and governmental entities. We believe MP is naturally positioned to be a global leader in rare earth magnet recycling in time and look forward to providing more detail in the future. Before moving on to our Stage 3 update, I wanted to remind everyone of the discussion we had last quarter. As you know, a day doesn't seem to go by without a news story discussing the various supply chain, labor, logistics, and or materials challenges happening throughout the global economy. Like others, we are managing in real time the cost, schedule, and other inflationary impacts that are out there. We wish we could be precise around known unknowns and unknown unknowns, but that is not possible. What we can tell you, though, is what matters to us all as shareholders, and that is the great news. We believe any incremental costs pale in comparison to the operating cash flow we are generating. And moreover, we continue to see what feels like a dramatic acceleration of the long-term asset value of what we already have in place as well as that of what we are continuing to create at MP. Moving on to stage three, we continue to build out our team, develop our production and market strategy, and engage with a wide array of customers. We remain on track and are incredibly excited to share the vision of our first U.S. metal and magnetic facility towards year end. With that, I'd like to shift gears before Q&A. to share some market updates and other thoughts. So I know I covered the general global impacts around non-transitory supply chain issues already, but it is especially worth highlighting that these concepts of resiliency and reshoring have an added urgency when it comes to electrification. For the month of September, battery EV sales penetration in the U.S. exploded to 5.2% versus 2.5% a year ago. It was 15.1% and 17.4% in Europe and China, respectively, versus 7.4% and 5.3%, respectively, a year ago. Rather than list them, I would just say pick your favorite U.S., European, and or Asian OEM or industrial supplier, and it was likely they were part of some kind of announcement around investment or planning for electrification in recent months. Trillions of GDP are in play just in electrification. The supply chain is existential. As I have said before, the semiconductor issue was the ghost of Christmas future. With respect to the rare earth magnet supply chain specifically, there were also two major developments worth noting. China initiated a process to consolidate their six super major rare earth producers into just two companies. We believe this is very bullish for rare earth prices And of course, highlights the increasing importance of MP's mission. The US Department of Commerce also initiated a Section 232 investigation into the imports of permanent magnets, nearly all of which currently come from China. Lastly, I would like to take a moment to reflect on MP, how we began, what we've been through, and where we believe we are going. I hope it will help you better understand our business, our culture, the risks we have taken on, the opportunity for shareholders, and most importantly, why we must succeed. We founded this company in 2017. At the time, Mountain Pass was sitting in bankruptcy in care maintenance with eight employees. The predecessor failure to achieve operational stability led many to conclude incorrectly that Mountain Pass was a busted site. We, however, had conviction in where Mountain Pass should sit on the cost curve and had to fight for the opportunity to prove it. We contributed capital just to keep the process going before closing on the acquisition as the key bankruptcy parties pushed furiously to push Mountain Pass into reclamation. This means that an invaluable American industrial site would have been destroyed and the permits lost. With limited resources amidst a bankruptcy battle where we were outgunned We went to the United States government and shared our detailed plan to rescue, restore, and ultimately return Mountain Pass to its rightful place of leadership in the global rare earth industry. We believed we could make Mountain Pass the foundation of a true Western champion of the rare earth supply chain. We knew it would be hard, complex, and nuanced, but we believed our success was critical for economic and national security. We could also see the world changing in a way that meant this was an opportunity of enormous long-term scale. The government seemed skeptical at first, but grateful we were willing to try. We did not view ourselves as any kind of heroes. We were just the only ones willing to take a chance. We were the only ones willing to take the great financial and personal risk and to put in the sweat that would be required to see this thing through. And we were the only ones who fundamentally saw what we saw in Mountain Pass, an irreplaceable strategic asset of enormous and growing consequence, not only to America, but to the entire Western Hemisphere. And so there we went. Higher by higher, rock by rock, and most certainly setback by setback, we began a great American comeback story. MP is now 365 and growing, diverse Americans getting the job done. If you annualize today's reported quarter, we're doing north of 270 million per year of run rate adjusted EBITDA. We also have 1.2 billion in cash, and our mission continues. Yet, no matter how big our team gets, fighting long odds against conventional wisdom is our corporate DNA. every step of the way we have had naysayers detractors and worse our critics do have one thing right though what mp is trying to accomplish is complex challenging and painstaking we have been crystal clear since day one that moving a multi-billion dollar supply chain will not happen overnight we must be pragmatic we must be methodical and we must continuously learn from our inevitable mistakes and be relentless. Many of you have heard me say this, but I must say it again. We believe MP's success is critical, and we are proud to represent a symbol of America's renewed, reinvigorated manufacturing spirit as electrification transforms the global economy. We will be unwavering until it is done. With that, let's open it up for questions. Operator?

Thank you. If you'd like to ask a question, please press star followed by 1 on your telephone keypad now. To withdraw your question, please press star followed by 2. And when preparing to ask your question, please ensure your phone is unmuted locally. Our first question today comes from Carlos de Alba of Morgan Stanley. Carlos, your line is open. Please go ahead. Hi, Carlos. Your line is open.

Yeah, sorry. It was on mute. Hello, guys. Good afternoon. Very good quarter. So if I may, first question will be on fourth quarter output. Is there anything that you can comment, given the planned maintenance that you had already, how much of a reduction maybe we should expect in the quarter?

Thanks, Carlos. Hey, Brian, why don't you take that one?

Sure. Happy to. Hey, Carlos. This is Ryan. You know, we tend not to give specific quarterly guidance, but what I would say is Q2 was another quarter with a planned turnaround, and so that's probably closer to what we would be aiming for for Q4.

All right, that makes sense, Ryan. Thanks for that. Then the impact of the Stage 2 hiring ahead on your cost, is this something that should continue to expand as you get ready to launch that project, or do you think it's going to be more stable at current levels?

Yeah, I'm happy to start, and then, Jim, if you have anything to add.

Yeah, go ahead.

What we've seen over the last couple of quarters, and you can see this in the presentation and our materials, is it's been relatively steady, and I would expect that likely to be the case over the next quarter or two. But we've been pretty clear that 2022 is a transition year, and so as we get closer to first oxide, I would expect certainly hiring as well as several other costs to start to pick up ahead of revenue from oxide sales. So that is something to think about as you guys work on your quarterly models for 2022. I don't know, Jim, if you have anything else to add on that.

Yeah. I mean, I would just say, you know, Carlos, you can see you probably understand this. You hopefully you saw the pictures in the back of our deck. We're making some great progress on stage two and and you likely know what these projects are. So but in case for those out there who don't, you can see, you know, we we've come a long way. We still have a bit to go. So, um, you know, we're just gonna stay focused on getting that done. We feel we continue to feel great about 2023 normalized, uh, and and DPR targets. So, um, but if Brian, I don't know if you want to add anything on that from a modeling perspective, but that's pretty much it.

All right. Thank you very much, Jim. And I want to state my last question. At what time, sorry, more or less around when do you expect to be able to give us more precise timing for the call commissioning or hot commissioning of stage two?

Yeah, well, that's what I was getting at. Maybe I'll tee this one up for Ryan. But, you know, I want to just kind of be clear, as we've said probably, I think, every earnings call since we came public that We really expect next year to be a transition year. We're going to have some costs in front of first fire, so to speak, when we commission. So there will be some advanced work, and obviously it takes a little while to get things going. So we feel very good about our normalized 2023, reiterating that. But maybe for modeling purposes, Ryan, if you can try to be – if you want to help a little bit on that front, but we can't really give a specific target on –

Yeah, the reality, Carlos, is I think that, you know, where we are today, I think it's fair to assume that second half is when we would, you know, when we would have first offside. You know, we're not at this point being more specific than that. We will continue to update all of you as we move along with the project. But as Jim said, you know, obviously, hopefully the results this quarter are speak to our ability to continue to improve our Stage 1 processes, which obviously gives us a significant amount of confidence in what we will be able to achieve through Stage 2, given the REO we're producing upstream in Stage 1. But certainly, as we get ready to bring the refining facility back online, over the course of next year, the focus is properly integrating those assets. And so, you know, in any given quarter, if we need to take an extra day of downtime to get, you know, stage two, initial stage two tie-ins done, you know, certainly we're going to make the right long-term decision for the business. But we'll continue to update you guys as we go along. But hopefully that gives you a little bit of incremental color.

Well, thank you very much. And congratulations again, Jim and Ryan. Thank you. Yeah, thanks, Carlos. Next question.

Our next question comes from David Deckelbaum of Cohen. David, your line is open.

Hey, David. Thank you. Thanks, Jim and Ryan. Hey, how are you guys? Good. Appreciate all the color today and a nice job on the quarter. I did want to ask, you know, just maybe getting back a little bit to last quarter, I think you guys had, you know, you've reiterated your view that 2023 you're confident in the NDPR separated run rate. You talked about commissioning in the second half of 22. I think you guys had alluded to some decision-making around either time or cost. You know, what does that reality look like, you know, this quarter, and how are you feeling on sort of the gives and takes there between cost and timing right now?

Sure. So, you know, great question. I think we try to be as specific as we can in the script, which is just – there are, there's, I mean, you see these headlines every day about supply chains and everything. And you can see from the pictures, we've, we're really, we've made a lot of progress, but you just don't know what's around the corner. So we want to just be, you know, thoughtful until the job is done. And so, you know, you see what we see out there. But, you know, as we said earlier, the project is going really well. Certainly there are, lots of inflationary impacts in the economy. We've sort of openly stated that. And so, you know, we're just managing through all of that. Last quarter, we gave the example of, you know, what we were able to do with DOD and DPAS and getting some items that were at risk of kind of, you know, getting the schedule off, kind of getting those in order. And we continue to work through things like that to execute. But I do want to reiterate, I mean, I think And I understand people are particularly sensitive to this given, you know, sort of the predecessor and given challenges of greenfield sites in coming online. I mean, let's not forget that at the end of the day, this is a very cash generative business while we wait. I think it's fair to say after this quarter, we, you know, we're, you know, really executing very well. So we're generating a lot of cash. And as I said earlier, you know, Whatever sort of, you know, when we kind of add it all up in the yen, whatever amounts we're talking about here really pale in comparison to the operating cash flow we already have as a business. And, of course, it's just the in-place asset value that we have. If you were trying to create a site like this from scratch, you know, there's clearly about, you know, $2 billion of invested capital if you look back. in our site and you're talking about five years and multiples of that to do a fresh one. So everything that we're seeing, you know, put multiples on that as far as replacement costs. But hopefully that answers your question. I know I know, you know, you want to model these things, but we feel, you know, we feel really good about how the project is progressing. And we just want to make sure that we, you know, are just very thoughtful about each day until this is done.

I can appreciate that, and I know that it's probably difficult to provide a resolute answer to either time or cost right now.

And the presentation will help. Oh, thanks. Sure. And, David, I think we've been resolute that we feel – and we sort of said this from the get-go, right, that 2023 normalized, that whenever you're ramping up for a commissioning and then commissioning that there's – sometimes there's challenges you don't you didn't expect i'm not saying we're seeing anything like that but you know we we want to make sure that we're very clear that we view next year to be a transition year so um hopefully everyone is is kind of long prepared for that we're openly telegraphing that and you know judge us on our ability to deliver 2023 but by the way in the meantime you know we we continue to generate a lot of free cash flow um while we wait so um i think it's sort of a a unique positive in that in that sense

Absolutely. Perhaps for my follow-up, you know, I'm intrigued by the commentary around recycling because I think that this, you know, sort of underscores all of the sort of accretive opportunities that are out there as sort of a rare earth hub in the United States. You know, when you think about undertaking these, I know with stage three, the downstream magnet production, you know, this is going to be perhaps a small step, you know, not necessarily a pilot, but it would be, you know, consuming the minority of your NDPR. As you think about some of these other opportunities, you know, do you foresee sort of taking on a large splash a la like a stage two sort of project within the next, you know, three to five years? Or do you think that this is going to be more of a testing the waters, setting up pilots, you know, small iterative process?

So great question. Thanks for asking, David. I think that's something that I'm not sure people fully appreciate yet about our capability on the recycling front from the standpoint of when you think about recycling a rare earth magnet, it really is. solvent extraction, right? It's what we do at Mountain Pass, or obviously what we're gearing up to do. It's what our in-place facilities have. And so we expect to be the global leader in rare earth magnet recycling. It's not a big business today, but I think if we look out a decade from now, it could be a huge business. And essentially to lead in that business, it's almost a certainty that you need to have strong solvent extraction capability. And so it's really part of our core competency. I think it's totally possible that you'll see a large project to the extent that it would make economic sense where we felt like we had a very high amount of product to flow in where it would be attractive economically. What I would tell you when it comes to recycling, if you think about it, we're still just at the precipice of figuring out and when i say we i mean society writ large figuring out recycling of battery materials and all these other things that as the ev supply chain builds up and the practical reality is although you know sales are just starting to kind of take off and go asymptotic if you think about a life cycle of an EV, let's say 10 years, some will be five, some will be 15, whatever the number is, we are many years away from having the high volumes where it really makes a lot of sense to be truly economic. And so I think that there's a lot of excitement around it. We see that, we feel that. And by the way, I would tell you, we are doing projects with leading industry parties, government entities. We're exploring various things. We're always having conversations, as you can imagine. And we expect to be a big player in that business. But the practical reality is it's not ripe yet. The one other thing I would just say, but by the way, we'll be there when it is, and I think it's going to be a huge opportunity for MP as a further transformation of our business. But what I would also say is just one thought on that is when you think about magnetics, there is some – when we think about rare earth recycling today, you may hear of some, for example, in China – that is magnetic swerve kind of falling off the manufacturing line, and then that's kind of taken and put back through the process. We will certainly want to be positioned to do that well because that's obviously what we consider to be manufacturing efficiency, where we're making sure we're not wasting materials in our magnetics process. And so that is something I think in the very near term as we kind of think about rolling out, and, you know, stay tuned through the year end, right, as we think about – you know, we're going to want to make sure that we have that capability to be really efficient, economic, competitive to the competitors out there. But then I think beyond that, over time, the larger opportunity will be there will be, you know, spent rare earth magnets from EVs, wind turbines, all of this stuff, and the natural potential party to recycle those, even if there are major recyclers of other stuff like lithium and whatnot, the natural party hopefully will be us leading some of that effort. So we're focused on it.

Sounds great, Jim. Certainly not a desert of opportunity out there. Good luck to you guys. No. Yeah. Thank you. Thank you.

Our next question comes from Satish Kassanathan of Deutsche Bank. Your line is open.

Yeah, hi, good evening. Thanks for taking my questions. My first question is on the Stage 2. Last quarter, you highlighted the potential to improve the scope of the project to include heavy railroad separation. Any update you could provide on that front, including any details on incremental capex required?

Yeah. So, hey, Satish, thanks for the question. So, you know, we said that. We said also, but I think I can kind of expand on that, and then maybe Michael can, too. uh so we we continue to do a lot of work on heavies how we can do it economically what um you know what it would look like for us to do it at mountain pass we believe that it will be a commercially viable attractive business um obviously we have no announcement for you on that today. But certainly it's on mission to make sure that we can do that. So you can expect that it's top of mind again. And so it's another quarter of progress. I don't have anything specific I can give you. But maybe, Mike, if you want to give a little bit more background on some of the thought process behind heavies. Go ahead.

Sure. Thanks, Jim. Yes. Obviously, many magnets, including higher performance magnets, have some percentage of dysprosium and terbium. And therefore, to support our own magnetic capability, we would like to be able to have that ability. Our process development team continues to pilot work and optimization work to improve upon what we've done so far in heavier separation, including look at alternative separation techniques and extractants. And we continue to move along in terms of pre-construction site work and other evaluations of site infrastructure. So continue to move along and evaluate the opportunities.

Okay, I appreciate the color. So, my next question is on the production volumes. So, you indicated some downtime, some low production volumes for fourth quarter, but given the operational improvements you have seen in the past quarters in terms of higher feed rates, higher recoveries, how should we think about the sustainable run rate on an annualized basis? Sure.

Well, Satish, I'm going to use this as an opportunity to once again reiterate, because I just think it's a really powerful thing, and I think that the entire team at MP should just be very proud. When we think about this quarter, the fact that we produced more REO this quarter than the predecessor did in their best year ever, you know, ever is just, it's an extraordinary achievement and it shows, it goes to just sort of the culture of execution that we have here. And so I'm just, I'm really proud of the entire team on that front. So I just think it's worth reiterating that that is just a remarkable stat. With that, I think, You know, Ryan touched on some of the stuff for next quarter, but I think you're talking about sort of more longer-term improvements. Yeah. Yeah, so maybe Michael or Ryan, if you guys want to chime in on this, go ahead.

Yeah, I can start, and Mike, please feel free to fill in, but I think, Satish, we feel very good about the sustainability of the improvements, and the reason we talk about REO per uptime hour is because that, you know, that's the critical factor here, our ability to have driven both increased feed rates while maintaining and improving mineral recovery, I think has been an incredible feat by Michael and his team. You know, the reason, you know, we obviously are not giving specific guidance. I think you can kind of see what the bounds of our potential outcomes can be given, you know, the results that we've put up over the last several quarters. And, you know, we talk about because I think the only reason we would have a different result, I think, than this quarter is when we take downtime, you know, both for plant turnarounds and for other reasons. I spoke a little bit about in response to, I think it was Carlos's question, just the focus for 2022 is, is doing the right thing long-term for the business in properly tying in stage two assets, you know, over the course of the year, sort of regardless of when you think first oxide is coming. And so, you know, we don't want to be overly prescriptive on any specific volumes, but I think that... you know it it's safe to say that um you know we feel very good about the sustainability of the improvements that we've made um we're just going to be focused on executing for the long term and being sure we're doing the right thing for the business and and bringing on state to assets thoughtfully over 2022. okay uh thank you and uh congrats on a great set of numbers thank you thank you appreciate it next question

The next question comes from Tyler Langton of J.P. Morgan. Tyler, your line is open.

Good evening. Thanks for taking my questions. Could you just provide a little bit of color on sort of how much CapEx is left for Stage 2 and then sort of how much is kind of fixed and how much could be sort of exposed to cost inflation? Sure.

So, great question. A good way of asking it in a more detailed way. We haven't given those numbers out. So, obviously, if we were to do that, we would be backing into something specific that we want to make sure that we're not backing into yet. So, you know, I don't know what we can tell you on that front, but maybe, Ryan, if you want to take a crack at it as well on sort of what kind of Cat back, answer his question.

Go ahead. Yeah, sure. So, Matt, you know, we had spoken about the stage two project overall being about a $220 million project. And obviously that's sort of the number from, you know, several quarters ago. We don't provide a specific breakout on CapEx spent to date on what goes where. I would say of the approximately $80 million of growth CapEx that we've spent so far this year, a significant majority of it is stage two related, but there are pretty significant sums of capital in there for the combined heat power plant and water treatment plant recommissioning. So I would not assume that, you know, all of the capital that we've spent this year is stage two related. You know, I think the thing that becomes a bit difficult to triangulate into for everybody, obviously, is, you know, Michael talked about some of the, you know, the pre-construction site investigations and things like that for heavy rare earths. There are a lot of things that sort of tie into the rest of the plant. So putting a pin in it is a bit difficult. I think the reality is we'll continue to update you as we go along. you know, on our progress on the capital spending for stage two. But that's about as far as we've disclosed to date.

Okay, thanks. And then maybe just for stage three, I mean, is that something where you consider taking on a partner or is it something where the more the focus is to sort of build and operate it yourself?

Well, so I won't steal the thunder from our announcement before year end as far as what our first step is going to be. Historically, we said, buy, build, and or JV. And, you know, that remains the case. Obviously, we said on the last call, I think someone asked this, or maybe it was the call, I wasn't track of time here, if it was one before, but the fact that we're, it must have been the last call, the fact that we're announcing before year end means we're building something. And so there's at least that Easter egg, so to speak. But So we are building something. But I would also just step back and say longer term how we view this because I just think it's important to understand it all. We will produce, you know, you have our target NDPR, but we view the magnetics opportunity as something that is actually larger than what our current underlying content production is. If you look at EV penetration, just that alone, not to mention all the other electrification stuff, this is a very large opportunity. And what's fascinating about it is it's something that in the West it's very challenging to do locally. unless you're positioned like us, where you feel like you have some certainty upstream in the supply chain, right? And I think whether it was, just to give an example, because I saw it on CNBC this morning, the CFO of Ford was talking about moving upstream. Every OEM is talking about moving upstream. I think what people are realizing is that if you play out these numbers, right, pick, look at the market cap that is just in EVs, right? So add up Tesla, GM, Ford, Volkswagen, all of them, Lucid, Rivian to be, this trillions of market gap and then take the 2030 street numbers and then cut those in half, if you must. And what you see is the amount of magnetics required, i.e. the amount of rare earths required, that really, it's such an enormous opportunity relative to our business today. I think one other analyst noted, you know, we need three more mountain passes in the West, right? And so all of this needs to get built. And so, you know, We're going to take a first step, but here's the important thing is we're going to take a first step, but we really want to make sure that people understand that our stage three, we don't rob Peter to pay Paul. So our next step is going to have to be thoughtful, very attractive, high return on capital. And so we want to be thoughtful about how we do this initially, but also make sure that we're executing this well, that we're the best at it. so that we can build a great and bigger business. That's obviously the longer-term opportunity. And then lastly, what I would just say is if you think about all the OEMs, I mean, I think, and I said this in the opening, you know, in the remarks, the semiconductor issue really is the ghost of Christmas future. I think that that has not been lost on all the major manufacturers globally. And everybody is starting to think about upstream in the supply chain. And if you are somebody... who is thinking about your magnetic situation, and you want to have a non-Chinese supply chain, we are really your only realistic option. And so, you can imagine that that has occurred to many parties. And so, you can imagine that we would be having conversations with some or all of those parties. And I think, unlike maybe other scenarios, we are not in a rush. um, to, to, you know, just get something done for the sake of it. We believe we have something enormously strategic and valuable. And so we want to make sure we have the right partners, the right deal, the right customers, all of those things so that we can build a much larger, broader business. Um, that's how we're thinking about it. I know that that probably doesn't give you a lot of specifics, but, um, that that's how we're thinking about it. And so longer term, what I would say is again, that the, you know, you should expect that the buy, build, and or JV aspects, all those may be part of an ultimate long-term solution. But hopefully in very near term, you'll get some specifics from us of an initial step.

I appreciate the call. That's helpful. And just, you know, just final question. Are you hearing anything just, you know, in China, we've heard about sort of the impact of sort of power restrictions on lots of different industries. Are you hearing anything about, I guess, you know, restrictions or the power restrictions impacting rare earth production over there?

Well, and so, I mean, not that this has anything to do with it, but you've obviously seen NDPR prices continue to go higher. And I think that's probably driven by just the enormous demand. I mean, I think the – The intensity of the reach-outs that we have received from parties has increased even more so than last quarter. So I think that's a function of the increased realization of potential shortages of material. So that's very attractive. As far as the outages, there's nothing – that I'm particularly aware of. You know, I think what you're asking is sort of similar to what's happening with aluminum, right, where there's shortages and it's driving the price of aluminum here. But I actually do think it's a relevant analogy. So I don't think it's not something that's kind of happened, you know, that we've noticed in the last couple of weeks or anything like that. But it's a really excellent analogy to think about how people in the supply chain are thinking about this issue. And they're thinking about it um across all these things and this is not you know one this is more we'll say more than one party that understand the risk to having the vast majority of raw materials come from one place right and again i i think i mentioned this um in the you know in as a big development during the quarter but i would not underestimate um how important of a evolution it is that china is consolidating its big six into a big two And I think, and I've said this on prior calls, and again, I just think it's a really big point. If you think back a decade or two decades ago, you know, there really wasn't much electrification. I think that the Chinese wanted to take over this industry. But when you think about the world today, you know, look at the public markets, NIO, Chao Peng, BYD, you know, all, Li Auto, there are, these are huge companies manufacturers. And so I think that there's probably an increased realization that where are their own manufacturers going to get enough supply, let alone do we want to subsidize the West, right? It doesn't make sense to destroy our own environment to subsidize. And again, I'm just making up names, Tesla, GM, Volkswagen, whomever to compete against our major OEMs that are now going global. So I think you've actually really seen a sea shift in, in the strategic mindset of, And, again, this is just our reading of the tea leaves, but it's intuitive, right, which is they're now positioning their upstream to feed into their downstream. And so I think that, you know, the Western manufacturers are realizing that we're not going to – China's not going to destroy their environment to subsidize our supply chain anymore. We better go figure out our supply chain. And then, of course, you know, our phone rings, which is nice.

Great. Thanks. That's it for me. Appreciate all the color. Yes.

Our next question comes from Matt Somerville of DA Davidson. Matt, your line is open.

Thanks. So just two quick questions. First, with the production number, I mean, I want to underscore that a little bit as well, being, you know, 20, 25% higher. in this quarter than any other quarter that at least I've looked at going back historically. I mean, that's a huge step function up. Why could we not just apply simple algebra to that and say, okay, if 10 a quarter became 12, then why doesn't, you know, 6,000 plus tons of NDPR, you know, purified NDPR, why is that not 65, 6,600?

Hey, Michael, since you live at Mountain Pass, you want to take that one?

Thank you, man. This one sounds a little bit like last quarter. Yeah, we continue to make improvements in our process, and I'm really proud of our team, and they're working very hard from operations, engineering, maintenance, et cetera, and I do believe we've made sustainable improvements, but with those improvements, we continue to do trials and try to improve that further, and sometimes they work, and sometimes they work less well, and So, you know, sometimes it's two steps forward, one step back, but we're constantly moving forward. And, you know, I think the biggest opportunity for improvement and leverage to the financial model is improvement and recovery, and so we continue to focus on that. But you're correct, if the contained REO goes up in our concentrate, yes, you can do the math and it would result in more NDPR becoming available for separation.

Got it. And then it's pretty easy to pick up a newspaper and see some pretty striking statistics on just how clogged the ports have been for Los Angeles and Long Beach, which I assume, given you're not that far from there, you probably rely on those pretty heavily. So maybe just talk a little bit about how you're managing. I mean, you say it's very clear everyone's managing it well, but how are you managing through that on a daily basis? And was there a discernible hit to your P&L, albeit we may not be able to see it just due to the inherent leverage in the model, but was there a quantifiable hit to the P&L from expedited freight, et cetera, this quarter?

Ryan, go ahead. Hey, it's Ryan. Yeah, I'm happy to take it. It's a great question, and we've said it a couple of times, but I'll say it again. We are tremendously proud of the team and what they were able to accomplish, not only getting out record production, but obviously, as we've talked about at Nauseam, the timing's not always perfect, and so they were able to get out the small amount of inventory that it sort of backed up into the system over the last couple of quarters. The reality of the port is that even with you know, the incremental hours that the longshoremen are now working, the pinch point, as you would expect, as soon as you address one piece, moved somewhere else. So originally, over the course of the entire year, it's been a sprint to get shipping capacity, outbound shipping capacity, we are lucky in that we are an exporter. And so in being an exporter, the sea freight pricing has not remotely had the step function that the sea freight and imports have suffered before. But what's happened is now that we've been able to secure capacity on an outbound basis on sea freight, trucking has become the pinch point. And I'm sure you've heard this in many other conference calls. And so it's sort of a bit of whack-a-mole. As soon as one piece is fixed, another crops up. But I think that we are addressing it the best that we can. You can actually see in our P&L we disclose – in our reconciliation of our production cost KPI exactly what the shipping and freight costs are for the business. And so you'll notice on a per time basis, it has not moved meaningfully And again, that's, I think, from a lot of hard work from the team. But it has seen some inflation, which is not unexpected. But just given the sheer amount of improvements that the rest of the operational folks have been able to achieve, that's a bit drowned out in the overall numbers. But it's something that we'll continue to execute on and hopefully be able to continue to overcome over the next couple of quarters. But everyone can see uh the numbers on the amount of ships out there and it continues to go up so it is uh it's a full-time job for a lot of folks here got it thank you guys sure thank you our final question comes from george gianericus of bed george your line is open hey guys hey george for sneaking me in

I had a quick question on GM in the recent announcement with GE. I mean, it fits into this narrative of the U.S. and Western auto EMs trying to procure materials, but I'm curious if you had any more detailed thoughts on that particular announcement. Thank you.

Let me see what I want to say on that. It was obviously a beautiful announcement. And we noticed and we applaud it. And I think that that announcement is indicative of a lot of the conversations that you can imagine are happening writ large. And I think it highlights the importance of exactly what we're doing in our mission. And it was pretty cool.

Well, I guess details will, I guess, follow later on that one. I'd like for you, if you could, expand on your thoughts on the Chinese restructuring and exactly why you think it's as bullish as you think for NDPR. I mean, I think I understand the broad logic, but if you could just share any more details there, I'd appreciate it.

Yeah. I mean, I think that... If you look back, and again, this is just reading the tea leaves, so you always do your own work on this front. But from what we see, if you kind of look at the arc over the last decade or two, right, there were hundreds of players, many illegal ones. There was essentially no regard for the environment, particularly in the south of China with people you know, clays and just toxic water going places, whatever. You can go on YouTube and see stuff in the north and the south, whatever. That was cleaned up over time with a consolidation into the six majors. And even throughout that process, there was a, you know, continued crackdown on some of the the illegal mining um that had occurred and you know some of the when you hear of the quota system that's really about getting the illegal mining into the legal uh you know production uh system um and then what i think you saw here is just a continuation of that theme you know it's a very strategic process um which is i think in the beginning there was sort of a free-for-all of production of materials and magnets to be the low-cost producer, irrespective of profitability and externality impact, right, to take over an industry. But the longer-term objective was likely, I would think, is ultimately about GDP and jobs, right? That is political power in China is driven by GDP and jobs. And so I think that now that there has been downstream movement and look at the major companies that have moved and brought jobs there downstream in this space. Now that that has occurred, Chinese industry has not just accepted that, they've moved downstream themselves and they want to compete. And to their credit, this is a brilliant strategic move to utilize an industry to then move downstream. But it wasn't lost on them that there were some very significant environmental impacts. Um, and that subsidy, which was helpful historically makes little to no sense in a world where they now have their own downstream competitors and those downstream competitors want to get product. And so what I think this is setting up for is those two large entities will be able to satisfy downstream demands of their industrial leaders. And I think that consolidating that into a northern, a southern, for a light and a heavy provides much more centralized control over that upstream to then figure out how and when and where to feed into the downstream. But I think it would be a big stretch to then assume that the whole point of that would be to say, hey, okay, Western OEM, here's some magnets at a below market rate because we just want to keep making magnets, right? That doesn't make any sense. And so I think that is sort of the long historical strategic narrative that we see. And so I think, again, it comes down to, Just think of, for example, semiconductors. I think there were a lot of people who thought, oh, you know, this is a $2 chip. This can be made somewhere else forever. And I think what we're seeing is, uh-oh, if for whatever reason there's an interruption in that, that is then existential. And so maybe there'll be some excess supply. Maybe there won't. But then the question is, if you are a huge company today. And you see there was an article on Bloomberg today about the magnate who runs CATL and their use of going upstream and dominating materials to move downstream in batteries. And what you realize is that if you're a downstream player, I don't think that you're going to want to risk your existence, your business on that supply chain, even if you don't believe it's nefarious, it's just a strategic risk. And by the way, this piece is not just sort of Jim's musings. This is what we're hearing from downstream parties. Now, the challenge, and this is what we like to highlight on our asset value when people, if you're thinking about a million here, a million there, or whatever the number on the small stuff is, when you think about if this huge amount of material and magnetics needs to exist in the West, who's going to build all this stuff when, you know, if there's a very cheap cost of capital downstream, because the market cap of EV makers, for example, is, you know, through the roof, but when you have mining and materials trading, you know, with higher costs of capital, how is all this stuff going to get made, particularly when you think about the fact that this is challenging stuff, it takes years, right? And so I just think this is setting up for people should go out and do this math of look at the 2030 projections. Again, look at the 2030 projections of what all of this market cap is suggesting in global industry for the electrification. And then go check your various commodities. And in particular, I think NDPR, it's very striking. something's got to give, right? And maybe it's something in the middle. And of course, there can always be some substitution in some areas. But of course, if you substitute in some areas, there are trade-offs of other commodities and significant losses of performance with batteries and other commodities and losing out to your competition. And so I believe, and I said this last quarter, that what you're going to see is there are some early OEMs that have figured this out that are already solving this problem. And then the ones that are sort of last to figure this out You know, their businesses may literally fail or they'll need a bailout of some kind. And so that's why I believe that we are uniquely well positioned because, you know, and I mean this with the utmost humility, but I do believe in five or so years they'll need us more than we'll need them. And so we want to balance being, you know, on mission and thoughtful. and making sure that we serve our strategic objective of making sure that we can satisfy a lot of industry participants with obviously doing what's right for shareholders. Thanks.

Sure.

That's the end of the Q&A session. I'll hand the call back to Mr. James Lutensky for closing remarks. Thanks.

Okay, well. Thank you, everyone. I obviously want to say again thanks to the MP team. Really outstanding quarter in execution. And we look forward to talking to you all soon. Have a great day. Night. Bye.

This concludes today's call. Thank you for joining. You may now disconnect your line.