MP Materials Corp.

Good day and thank you for standing by. Welcome to the MT Materials first quarter 2022 earnings call. 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 the session, you will need to press star 1 on your telephone. And if you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today,

martin sheehan head of investor relations please go ahead thank you operator and good day everyone welcome to mp materials first quarter 2022 earnings call With me today from MP Materials are Jim Latinsky, Chairman and Chief Executive Officer, Michael Rosenthal, Chief Operating Officer, and Ryan Corbett, Chief Financial Officer. Before we get to our opening remarks, as a reminder, today's discussion will contain forward-looking statements relating to future events and expectations that are subject to various assumptions and caveats. Factors that may cause the company's actual results to differ materially from these statements are included in today's presentation, earnings release, and in our SEC filings. In addition, we have included some non-GAAP financial measures in this presentation. Reconciliations to the most directly comparable GAAP financial measures can be found in the appendix to today's presentation and earnings release. Any reference to our discussion today to EBITDA means adjusted EBITDA. Finally, the earnings release and slide presentation are available on our website. With that, I'll turn the call over to Jim. Jim?

Thanks, Martin, and thank you all for joining us this afternoon. We had a great first quarter. I'll get to the highlights in just a moment, followed by Ryan's review of the financial and KPI details. I'll come back to update you all on our progress on stages two and three, and then we'll open it up to Q&A. So let's get started on slide four. In the quarter, we produced more than 10,800 metric tons and sold more than 11,700 metric tons of REOs. That represents year-over-year growth in production and sales volumes of 10% and 20% respectively. Operational execution, cost management, and market pricing are what drive our financial performance. We executed well throughout the quarter, maintained cost discipline, and benefited from higher realized prices. This resulted in record financial performance. Revenue was up 177% year-over-year to $166.3 million. Adjusted EBITDA was up 301% to 132.3 million. Our adjusted EBITDA margin expanded 23 points to 80%. And we earned 50 cents per share in adjusted diluted EPS, an increase of 285%. These are exceptional results, particularly when we consider the global and industry backdrop. We have seen wide reporting this earnings season of companies in our sector having challenges around production and cost. Our team continues to focus on consistency and continuous improvement in our flotation process while keeping uptimes at world-class levels. We do not take logistics for granted. We continue to overcome challenges with suppliers, shipping, and labor. All these efforts, combined with strict cost discipline, means we are positioning MP to improve per ton economics over time. We also certainly benefited from strong market prices for NDPR in the quarter. In February, NDPR exceeded $170 a kilogram. With our rare earth distribution of nearly 16% NDPR, our realized pricing for concentrate is highly correlated to the market price of NDPR oxide, as it is the vast majority of the contained REO value. Putting it all together, we generated significant cash from operations during the quarter Our stage one business generated over $133 million in normalized free cash flow. After completing our offtake agreement and making substantial investments towards our downstream expansion, we still generated $71 million in free cash flow during the quarter. MP is in an attractive economic position. We are generating free cash flow and strengthening our balance sheet while investing in high return on capital growth opportunities that will transform our business. I should note, though, for those not following as closely, recent NDPR pricing has pulled back from the February highs. Recent geopolitical developments are an obvious primary driver of the current macro market concerns, specifically the Russian invasion of Ukraine and COVID lockdowns in China. We do not see much of a direct idiosyncratic connection between the Ukraine situation and the rare earth industry. I can provide some insights into impacts from the COVID lockdowns in China. There are two ways the COVID countermeasures implemented in China could potentially impact our business. The first is potential congestion or bottlenecks in global transportation. While the Shanghai port was recently closed, we generally do not ship significant volumes through Shanghai, as there are no major rare earth refiners in the province. Should other ports become more congested as ships transit through Shanghai or divert from Shanghai to offload or pick up products, it could ultimately cause delays in ports that we do use more regularly. We have not experienced any significant issues on this to date. We will continue to monitor this situation as you would expect. Secondly, as you may have heard, certain major EV manufacturing facilities in China have shut down or significantly slowed production at times. This and other resulting supply chain issues in China are clearly disruptions that might be impacting near-term NDPR pricing. But as this dynamic unfolds, shipping bottlenecks or shutdown issues are ultimately short-term in nature. I would also add that there were some reports a couple months back that the Chinese government was encouraging rationality in the markets. likely trying to address inflationary pressures on downstream businesses, including magnetics companies, component manufacturers, and OEMs. What we have historically seen with this kind of rhetoric is a short-term blip with limited transactions at lower prices, followed by a return to the forces of supply and demand. In fact, according to Morgan Stanley Research, four of the top 10 OEMs in year-to-date market share for global battery electric vehicle sales Chinese OEMs this means that the Chinese industry needs to incentivize a lot more materials production just as Western industry does in the coming years as I've said many times prices will do what they will do in the short term but we are in the early innings of the transition to electrification across the global economy this is very bullish for rare earth demand and MPs prospects even the as real global growth appears to be retreating amidst a very challenging geopolitical and economic landscape. Speaking of transitions, we continue to make parallel progress across stages two and three during the quarter. Stage two construction is ramping and on track, and construction of our initial magnet facility in Texas is also underway. I'm going to cover stages two and three in more detail after Ryan's remarks. So with that, I will turn it over to Ryan to discuss our financials and KPIs in more detail. Ryan.

Thanks, Jim. Turning to slide six, I'll provide some extra color on some of our key metrics. Starting with production volumes, which is on the bottom left of the chart, as you mentioned, this was another really strong result for the company. We've seen a general upward trend in the percentage of rare earths we are recovering through technology, reagent testing, and plenty of trial and error. Importantly, we believe that there are additional process improvements and equipment upgrades we can make to continue to drive those recovery percentages higher over the long term. But these improvements are never in a straight line. And as we've discussed previously, the priority remains our preparation for stage two. Moving to shipments, the team did a great job getting some of the inventory from prior quarters to the port in addition to the majority of what we produced in the quarters. driving a roughly 20% increase in both the year-over-year and quarter-over-quarter shipment volumes. With regards to realized pricing on the top right of the chart, Jim covered this well in his opening remarks. I would just point out that our realized pricing is generally closely correlated to the spot price of NDPR per metric ton in RMB adjusted downwards for the 13% Chinese VAT impact. There is also roughly a one-month lag due to the timing of the contracts and actual shipments, but that lag can move around based on both domestic logistics and the situation overseas. As Jim mentioned, NDPR pricing hit a recent high in late February, so we expect to see the impact of lower recent pricing flowing through to our Q2 realized price. And lastly, our production costs remain solid in the quarter. This graph is on the bottom right of the slide. These costs associated with stage one continue to be very consistent in the $1,300 to $1,400 per metric ton range. And we're actually down about 5% versus last year's first quarter and roughly equal sequentially when excluding the investments we are making in future growth that hit our P&L. Given the inflation in the marketplace, we are really pleased with the team's ability to offset higher costs with increased efficiencies. On a reported basis, including the costs associated with advanced hiring and commissioning for Stage 2, reported production costs were up about 8% year-over-year and 5% quarter-over-quarter. These costs associated with Stage 2 totaled about $290 per metric ton in the quarter. This compares to roughly $120 in the prior year period. The $290 per metric ton includes the incremental cost of operating our combined heat and power plant as well as Stage 2 related hiring ahead of commissioning. As we've talked about on prior calls, the combined heat and power plant is critical for Stage 2 because of the significant increase in power needed for processes like roasting, leaching, and separations. Having our own natural gas-fed plant will significantly reduce our per-unit power costs once Stage 2 is operational, as well as ensure a more stable source of power. Bringing the power plant and associated water treatment plant online early were strategically important to ensure we have plenty of time to troubleshoot the equipment, hone our processes, and give our employees invaluable time and experience in operating the plant prior to Stage 2 commissioning. Right now, the CHP plant has to run at certain minimum power output for operational and permit compliance, and as such, is currently generating excess power versus Stage 1 needs. which we are primarily dissipating to our load banks. The excess cost from this temporary inefficiency represents a little less than half of the $290 impact in the quarter, which will, of course, continue for the next few quarters until the Stage 2 separation facilities are commissioned. This type of investment in our processes ahead of Stage 2 commissioning minimizes operational risks and the strong execution of our team in integrating two new, complex operations further highlights our capabilities in recommissioning site infrastructure, which will be essential as we bring Stage 2 online at the end of the year. As I mentioned, the other portion of the $290 per metric ton impact is related to advanced hiring and preparation for Stage 2. I'll turn to slide seven and just focus on two points that we haven't already discussed. First, we achieved 80% adjusted EBITDA margins in the quarter, a truly impressive number thanks to the strong production volumes and cost discipline allowing us to continue to benefit from the leverage in our business model from strong market pricing. The strength of our margins speaks to our enviable position on the cost curve. And second, on the chart on the bottom right, we now show adjusted diluted earnings per share instead of adjusted net income like in prior quarters. We'll show it this way going forward. Either way highlights the same thing, MP's impressive progression and profitability over the past year. As a reminder, we issued a convert in Q1 of 2021. Our average diluted share count therefore includes the impact of the shares underlying these bonds as if converted into common stock. For Q1 of this year, our diluted GAAP share count totaled 193.49 million shares, which includes approximately 15.6 million shares from the assumed conversion of the convert. With this, I will remind analysts and investors making enterprise value calculations utilizing our diluted GAAP share count that they must also remember to reduce our debt by the gross $690 million in convertible notes as those notes are assumed to be fully converted into common shares as we report it under GAAP. Turning to the cash flow discussion on slide eight, you can see that when we adjust for the growth CapEx, as well as make the adjustment for the offtake pay down, we generated roughly $133 million of normalized Stage 1 free cash flow in the quarter. That's an impressive 80% of our revenues. I would point out that our maintenance capital for Stage 1 operations remains very modest. with the preponderance of maintenance costs flowing through our P&L. And regarding the offtake, as of the end of February, we had completed the pay down of the balance under our prior offtake agreement. And as we briefly mentioned on our last call, we did look at several other potential offers, both via direct purchases and via distributors, to most effectively market our significant volume of concentrate. In balancing the significant in-place logistics, and our desire to both maximize realized pricing and minimize operational risk, we decided to enter into a follow-on arrangement with Shanghai to distribute our current products to end customers in China as we simultaneously work to complete stage two. Under this new contract, Shanghai will remain the exclusive reseller of our concentrate in China, although we will maintain our direct relationships with certain third-party customers who we currently sell to directly, including certain Japanese customers who process our material in China. We will continue to foster our direct sales relationships as we prepare for the transition to stage two oxide sales, but maintain the flexibility to distribute separated products via this arrangement should we choose to. And with that, I'll turn it back over to Jim. Jim?

Thanks, Ryan. Let's turn to slide 10 to discuss our parallel progress on downstream expansion in the quarter. Stage two work has reaccelerated on site. We have substantially completed engineering and procurement for the light rare earth separations portions. Our EPC is entering the peak of construction with a ramp in craft labor on site, including iron workers, pipe fitters, millwrights, and electricians. They've also recently implemented a night shift to further accelerate work. We are also making progress on heavy rare earth separations. These processes will leverage existing facilities and significant shared infrastructure with other parts of our operation. The existing light-heavy separation line will be expanded to include certain individual separations, and the retired cracking building will be used for additional separation and product finishing. We have begun to demo the existing interior equipment, particularly in the legacy leaching and cracking building, in preparation for the installation of new separations and finishing equipment. Moving on to stage three, the picture on the right is a nice overhead of the grounds being prepared to build our initial magnetics facility in Fort Worth. Last month, we held a formal ceremony at the site to celebrate the beginning of construction with more than 100 government and civic leaders. We are grateful for the strong bipartisan showing of support from local, state, and federal officials. General Motors also joined us at the ceremony. so we could share the great news that we had executed our definitive long-term supply agreement, making them our foundational automotive customer. GM also brought a GMC Hummer EV, which looks awesome. We look forward to supplying magnets for it, as well as many other GM models across the Ultium platform. We have commenced procurement for Stage 3 Long Lead equipment and are also accelerating hiring for the facility. We have a number of job openings in Fort Worth currently, most of which are technical opportunities. So if anyone listening is interested or knows of someone who might be interested in helping us bring this supply chain home, please get in touch. As you've heard me say before, talent begets talent. Scale begets scale. We are building an integrated magnetics national champion that should make all Americans proud. So join us. And on that note, I am very proud of the culture we continue to build at MP. Our operational results this quarter in such a challenging landscape are further evidence of our maniacal focus on execution. This past month marked two years without a lost time injury. To celebrate our team for this fantastic and critical milestone, we just issued a special one-time safety appreciation bonus to all non-executive employees at MP. Keeping people safe and building the right culture requires long-term commitment. We've been at this for a while now, and we hope that our passion for our mission is infectious. We believe that the work we are doing is important to all of us, and as we look around the world, we could not feel more conviction. Just like the semiconductor issue before it, the tragedy in Ukraine is another bold reminder of the risks of capturing short-term savings in exchange for enormous sometimes even existential long-term liabilities several countries in Europe are seeing the severe consequences of relying on Russia for so much of their natural gas needs we should all heed these warnings especially as the stakes seem to be rising a single sourced outside region for an entire supply chain is a significant risk the good news is is that the evolution of the electrification economy offers enormous opportunity. The pie is growing across the globe. Even in challenging times, we can build and benefit for years to come. And I am hopeful that this is one of the areas where it does not need to be a zero sum between adversaries. We can succeed while also helping bring about more security and sustainability. With that, operator, Let's open it up for questions. Operator?

Thank you. And as a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Again, to ask a question, please press star 1. And our first question is from Matt Somerville. Please ask your question. Your line is open.

Thanks. Good evening. Maybe a couple on production and production costs. So with production costs, Ryan, how should we be thinking about that $290 a ton number as we're now sitting here in Q2? And then how should we think about how that ramps in Q3 and Q4 if it is indeed going to ramp further from here? And then I have a follow-up.

Hey, Matt. Ryan, go ahead.

Hey, Matt. On the 290, I think that at this point what that represents, as I called out, is some of the incremental costs that we experience for running the combined heat and power plant at its current level, which is in excess of the power requirements for stage one. So certainly I would expect that portion to hang around in a relatively similar fashion throughout the rest of the year. And then as we continue to build the team for stage two ahead of commissioning, I would say that the levels that we're at will probably slightly increase throughout the year. These folks that we're talking about that are embedded in our P&L at this point represent, for example, a much increased maintenance crew and all the things that you would expect us to be bringing on ahead of commissioning of these assets. There are specific... members of the team that we'll be bringing on, for example, operators for certain circuits that won't fall into our COGS measure immediately if they're not actively participating in the shared infrastructure of the site. And so I'd expect you to see an increase in those folks as well as a slight increase

over the period of this year going into you know the start of production at the end of the year and early early next year both in the production number and outside of the production number got it and then is a follow-up i i think ryan in your remarks you were mentioned you had mentioned that you know long-term production out of stage one still has room for upside via upgrades so many investments you could even be making Maybe give a little bit more detail on how we should be thinking about that timing and otherwise, bearing in mind that you're laser-focused on stage two now, and I certainly understand that. And then I'd be curious as to, as we sit here today, where are the biggest stage one bottlenecks that would keep you from really pushing that envelope further? Thank you.

On that one... Yeah, you want to have Michael hit stage one and then you can finish up, right?

Exactly. Yeah. Mike, you're probably best positioned to give some color there.

Sure. Yeah. Thanks for the question. The law of diminishing marginal returns certainly applies to our concentrate operation, you know, as with anything else. But I think as we've said in the past, or I've said maybe, I'm increasingly optimistic about the opportunity to apply the known technologies and additional automation to improve our recovery, our grade, and our throughput potential. Some of these more game-changer opportunities are not likely to be implemented this year. This year will be more focused on incremental improvement. In terms of where the bottlenecks are, mining is certainly not a bottleneck. So, it is in the processing operations. We continue to increase the throughput slightly. In order to see if we can identify where those is, I would say right now more in the grinding circuit is where we anticipate initial bottlenecks, although we haven't reached there yet. But we see opportunities to do things that will open that up. So long term, I see a pretty tremendous opportunity to improve the quality and quantity of our concentrate production.

And then I would just add, Matt, you kind of said this in your question, but as you can imagine, as we gear up in preparation for the rest of the year for getting stage two online, obviously that's our primary focus. And there'll be a lot of activity on the site for that. And, of course, getting that done properly and safely is our primary focus as the year unfolds.

Got it. And then I'm just going to sneak one more in real quick. Any change in timing for this year's stage one maintenance outages, you know, normal scheduled maintenance? Are we still looking at Q2 and Q4 or is that changed at all?

No change, but Ryan, if you want to cover anything on that from an operating standpoint or financial standpoint, but no change.

Yeah, that's right, and we actually just completed a very successful turnaround here last week, and no change to the schedule versus last year. So the year-over-year compares will be lined up as opposed to how they looked in 2021. Great.

Understood. Thank you, guys.

Thank you. And our next question is from Carlos de Alba. Your line is open.

Good morning. Good afternoon. How are you? Good afternoon. All good. Thank you very much. It's a good quarter. I just have a question or several questions, but the first one maybe is related to the inventory situation that you currently have. You shipped a little bit more than you produced. you're going to have the maintenance average already in the second quarter. What should we look for in terms of production? Maybe what color you can give us production and shipments for the fourth quarter given those two situations. And then coming back to your comments about the potential disruption on port and logistics that is happening in China, what are the ports or the key ports that to where you shipped your material. If you can share that, that would be awesome.

Yeah, sure. Ryan, why don't you take the first part, and then, Michael, you take the second part about the ports, and then I'll come back at the end.

Sure. Hey, Carlos. Good to hear from you. On thinking about production, obviously, we don't give specific production guidance. I think what Matt just asked applies here in terms of the timing of the maintenance outages and then comparing year over year, Q2 last year had a similar maintenance outage. And so I would look to sort of the cadence of production from last year as indicative in terms of the impact from a maintenance turnaround. And then from an inventory perspective, obviously we were able to get some of the slight inventory that had built up in transit to the port over the course of the quarter in addition to the preponderance of our production. You know, the shipping situation, as you can imagine, continues to evolve. I think we were pleased with our ability to get material to port this quarter, but it is always in fits and starts. And so I don't think there's anything really specific at this point that I would call out, you know, just sort of the typical trends that we've seen You know, so nothing really there to call out in particular. Mike, you want to take the rest of it?

Sure, yeah. In terms of ports that we ship to, the primary ones are in Tianjin, Qingdao, Lianyuangang, occasionally Luzhou. Those are the biggest ones.

Thank you. Thank you, guys. And maybe, Michael, since... Since we have you there, more or less roughly, could you comment as to when do you expect to start trials in the concentrate of the trial and the consignor of stage two? And can you give us a rough idea of the physical progression of completion of the stage two project?

I'll defer to Ryan or Jim on dates. I can touch on the physical progress, though, in generalities. The progress is moving along nicely. As Jim said, the number of craft on site has increased, and we're starting to add a night shift to the schedule. A lot of the civil work is complete, and steel erection, structural steel is wrapping up. in the next couple of months, we hope. That leaves piping and electrical, which are always sort of at the latter end of the project, along with the ancillary equipment. A lot of the primary equipment is installed already. And then in broad strokes, we do hope that the calciner and dryer will begin trial operations ahead of the conditioning of the rest of the facility. It's also, sequentially, in the process, it comes first. We're hoping to have that prior to commissioning the rest of the circuit, but that doesn't necessarily mean we'll run it continuously at that point.

Hey, Carlos, Jim. I believe we said on the last call that we expect to be mechanically complete by year end and hit run rate normalized production sometime in 2023, and that remains on track. So we've made a lot of progress in the quarter.

Sounds great. And maybe one last for Ryan. Now that you have paid down the prepayment with Schengen that you have with Schengen, the off-take agreement that you had with Schengen, but you renew the agreement, is there anything – how do you – cash flow pressures in particular is going to change now that you paid down the off-take?

Sure. Yeah, that's one of the key benefits of transitioning into this new agreement is, you know, we do not have that balance that would result in sort of the non-cash revenue portion that you had seen, sort of the roughly 15 cents of every dollar that was a, you know, effectively a debt pay down, but from our gap treatment came through operating cash flow as an offtake pay down. So that portion will go away. The broad economics of the agreement are not dissimilar and sort of, you know, whatever commission fees that are built into it are shown primarily on a net basis. And so, you know, that's already accounted for in our realized price. And so from that perspective, the entirety of that portion of the cash flow that we had that negative impact from will go away. So all else equal, a real benefit to operating cash flow.

Sounds good. Excellent. Thank you very much, guys. Thanks, Carlos. Next question.

Thank you, yes. Our next question is from David DeCabal. Your line is open. Hey, David.

Good evening, everyone. Thanks. Hey, how are you guys? Thanks for taking my questions. Good. I just wanted to confirm, Jim and Ryan, with the addition of the night shift and the construction crew, I guess, was this part of the original plan? Does this result in any incremental cost, or is this one part of the steel structural installations, or is there an assumption that you'd be having two crews running through the remainder of the year?

Well, I'll chime in with some thoughts, and then, Ryan, feel free to finish. As you can imagine, this is a huge project. And if we kind of think back over the last few quarters, as we sort of said, we've been handling all sorts of issues in the supply chain in the world as pretty much everyone has. And so we've been kind of managing day to day. And certainly, as you can imagine, with so many moving parts with construction schedules, if one thing gets out of whack, you can have that can have repercussions on the rest of the job. And, you know, we sort of made clear that we're going to manage this in real time and make sure that we get this job done, you know, effectively on time and economically. And, and so we've been doing that. So it's, it's hard to say how much of a night shift was in their original plan because it's sort of like all battle plans, you know, good until the first shots fired. I would say that the, The original plan, it moves over time, but obviously the lion's share of what you're doing is the same. We've been working out that. I couldn't tell you exactly if we think back how much of a night shift we might have anticipated, but certainly the night shift is helpful. We're trying to get this work done as quickly as possible. I think we also mentioned on You know, prior calls we've utilized DPAS because we're a DPAS rated project. And so we're trying to utilize all the levers. And then as far as budget, you know, we remain on track with, you know, in the last call we kind of gave an outline of what our expectations were. You can kind of see our CapEx in the quarter. And so, you know, we feel good about where we are, you know, with respect to the project financially. Okay.

Appreciate that, Jim. Yeah. Maybe just the renewed agreement with Shanghai for concentrate sales. I guess, does it cover just concentrate sales going forward, or would you be using Shanghai for any residual lanthanum sales? Certainly, I understand you're going to be stockpiling the heavies once the NDPR separation circuit's up and running. But for, I guess, the remaining lights, would those be marketed by Shanghai?

Yeah, so you're right on the heavies. Ryan, why don't you address the agreement, and then I'll finish.

Sure. So the agreement is time-based, so it's an initial term with a renewal option at the company's option. And with that, the focus, obviously, primarily, and the take-or-pay obligation on the part of Shanghai is for the concentrate sales. As I mentioned in my remarks earlier, We continue to distribute directly to certain customers of ours, and we'll continue to focus on building up our direct sales relationships, particularly in Japan and Southeast Asian markets, as well as, of course, in the U.S., and obviously continue to focus on ultimate sell-through via our downstream strategy. This particular agreement does give us the flexibility, again, at our option level, of distributing separated products through Shanghai into the Chinese market, should we so desire.

Appreciate that. Maybe if I could lob in another one, also around just contracts, but this time with GM around magnetics products and magnetic flake and stage three. Is there a, there is a timing target around first production or first sales there, but Is there a timing element to your contractual relationship with GM as an anchor customer?

Great question, David. I can't get into the specifics of the contract relative to what we've disclosed, but I'll rehash that and maybe give you some expanded color and go from there. We've stated that there's sort of two main product components. We expect late 23 to be selling alloy to GM, and so that will come online late next year. And then 2025 is when we'll start delivering magnets to them. You can imagine that as we... I'll sort of step back in general terms, so I don't get very specific on single customer details, if you will. But we made very clear that we viewed the stages two and three businesses as separate businesses. We would not rob Peter to pay to Paul, so to speak, and that we need to make the downstream investments. We need to have a setup that is an attractive return on capital for what we're undertaking and the strategic nature of our supply. So you can imagine that any agreement that uh, we would do, um, with, you know, that fits what I've sort of very clearly stated we would do, uh, would be long-term in nature. Um, and, um, and so, you know, I'll, I'll sort of leave you with that. Um, but we haven't disclosed sort of specific timelines, but of course, uh, as, as GM has publicly stated and it's said in the press release, you know, this is covering, um, across the LTM platform. And so the, you can look at all the cool models that they have, um, uh, coming out and the scale of what's to come. And so there's, you know, quite a bit of demand to come as they grow their business. So I don't know, Ryan, you want to add anything on that?

Yeah, I completely agree with with all your comments, Jim, I think you hit it. You know, certainly, we continue to see a lot of strong demand, you know, across the board, from a variety of industries. And so I think that to Jim's point of, you know, having the separate businesses and being sure that we are setting up contracts that, you know, certainly are meeting our customers' needs but protecting us given the significant capital that we're putting into the ground, that's obviously something that we focus very closely on balancing.

Thanks, Jim and Ryan, for the time. I'll likely keep it again. And thanks for the entertaining whole music as always. Take care.

No problem.

Glad you enjoyed that. Yeah. Thanks.

Thank you. And our next question is from . Your line is open.

Thanks for taking my questions. My first question is actually on Stage 3 again. So clearly Stage 3 has significant expansion potential up to ten times the current plan. So I was wondering if you could provide more color on your growth strategy. Is the priority here to first commission the Texas plant with 1,000 tons capacity, meaning any growth is more 2026 and beyond story, or would you simultaneously consider expanding and the capacity is more of a moving target?

Yes. Hey, Satish. So, well, just want to correct one thing, which is I do not believe that just 10 times what we've stated as sort of the initial poor worth facility is the kind of capacity of where we can go. I think it's actually quite a bit larger than that. Certainly our output from mountain paths goes 10 times, but I think that this industry is so dynamic. We are working in parallel. We made clear from the very beginning that we'll buy, build, and or JV to continue to grow this business. And we think we're in such an attractive area. And I would say, I mean, kind of to restate the obvious, but just given what's going on in the world, I think that the importance, the strategic nature of what we're doing is, you know, just continues to strengthen by the day. So you can imagine that we're having lots of conversations. And I think the main thing here is that You know, I want to make sure that we do this in a thoughtful way. We don't want to just sign deals. We want to execute and get this done right for our customers. So I would just say that I believe that the if you look out longer term, that the magnetics business, as we kind of see the scale of the growth opportunity exceeds the sort of the 10x, which would be the next step for our existing business. or body. And so we are years and billions ahead of anybody in the West. And as I said, in the prepared remarks, we believe, you know, if we look around at our team, we believe we are creating a Western national champion, a fully integrated national champion in magnetics. And it's a it's a huge growth opportunity. There's a lot to execute. But, you know, we we are focused on that. So

Yeah, thanks for the color. And actually, it ties down to my next question. So you said that the expansion potential is even more than 10x. So it all depends on probably the third-party feedstock and recycling opportunities. So any color you can provide in terms of what quantify the opportunity from third-party feedstock and recycling, or is it too early?

Well, you're right. And so when we think about the recycling and third-party capability, the whole goal with that, and that's why we have a variety of work that we've taken on in parallel. And the reason is because we believe that that positions us both obviously to internally consume magnetic swarf or waste from the production process, if you will, so that we can kind of have a loop uh, for our pro closed loop for our process, uh, as well as third party feed. And what I would tell you is I think as we look around, um, there's just so much more capital that needs to come into this space. And I think having been at this for a while, um, that, that these, these are hard things to bring online. Um, and I think that there's going to be attractive opportunities for us to, to frankly provide other parties. We want to see the supply chain grow. And so I think that we can provide other parties a solution to sell an intermediate product to us. You know, right now, obviously the only real alternative is, is into China. And so to the extent that people want to build out a Western supply chain, our ability to take third party feed is a source of competitive advantage. And then frankly, to the extent that there are people who, you know, have put together a project and have underestimated the cost and the timing, um, you know, we'll be there to, to lend a helping hand, of course, but, you know, obviously our, our shareholders will, will, uh, you know, demand to benefit as we should. And so we just think it positions us really well. And when I say the opportunity is bigger than 10X, I just mean that, you know, just the magnetics business is growing. Of course, there'll be competition out there. There needs to be a lot more. And, you know, we just think that there's a lot of opportunity. And so I just wouldn't cap the growth at the, you know, what is our existing output today is the concept.

Okay. Thanks for the call, and congrats on a great quarter.

Yeah, thank you.

Thank you. And our next question is from George Genericas. Your line is open.

Hey, good afternoon, guys. Thanks for taking my question. Hey, George. Yeah, of course. Hello. So maybe to start, just when you think about the landscape and you've discussed lots of opportunities that you're working through with various third parties, is it possible for you to have a direct deal giving your stage three ambitions for just NDPR? Is that something you'd sign a deal for or are you more leaning the firm towards becoming a full magnet maker and therefore only looking for deals for the third parties that want to buy your magnets virtually over the long term?

Sure, George. I would say that we're opportunistic. We come at this um, originally as investors. And we think about, um, you know, we think about what is sort of the most thoughtful, um, return. What I would say though, and is that, and, and, uh, you know, kind of just again, rehashing what I said earlier, but as we think about the world today, the strategic nature of what we have, um, you know, is so critical that we, we want to grow our downstream business, right? That's just more total dollars of profit. It transforms the, the business. and so you know over a very long period of time we we want to just maximize um the opportunity set for ourselves um but we we certainly will do ndpr we would do you know we'll we'll do anything that makes sense and and um so you know you you could certainly see something like that from us um and then moving on to the recent comments from the uh ministries in china it's the

fall of the price of NDTR from about $1.70 to, I don't know where to say, $1.30, seemed to have been timed and correlated perfectly with those comments. So I'm curious as to what you think the mechanism was through which that happened. And second, a question we get a lot is about supply, particularly from China that is somewhat opaque in terms of its capacity. How quickly can supply turn on? How quickly can it turn off? I'm just curious as to whether you can share... First, like I said, about the dynamics that led to that price decline. And second, what your assessment is of the landscape in China and how quickly supply can come on the market. Thank you.

Sure. Great question, George. So what I would say is this, and I touched on the kind of typically what happens, and I think this is probably an imperfect analogy, but I think we saw it about six months earlier in iron ore. there was a lot of speculation and the government talked it down and then you know what happens is obviously in china um when the government says do x uh there's there's a we'll put it this way there's a much higher adoption of x than there might be in the west and um and so you you typically will have a reaction where you know people will want to to show that they're following that policy and so Um, you know, you'll see some transactions happen at lower prices, but they'll typically be small amounts. Um, and, and it'll sort of freeze up the system if you will, a little bit, and then a little time will go by and supply and demand, um, will kind of come back into play. And so, um, because ultimately, you know, that that's what has to happen. Um, and so I think that this is similar, uh, in the sense that, um, you know, prices had moved quite a bit, um, There's concerns over there about inflation as there is here. And so I think that there was an attempt by some people to just demonstrate tighter pricing. What I would say, and again, this is the MP House perspective on this, but I said in the remarks, the four of the top 10 global market share battery electric vehicle producers, OEMs, are Chinese OEMs. And ultimately, the Chinese need to have material and so there needs to be a lot more supply we need a lot more supply right just if you look at the u.s auto market alone for example we need and you know forget wind turbines drones all that stuff forget the rest of the world we need three more mountain passes right so there's just and i i think that that's the bigger long-term trend that i still think and the the world doesn't yet fully appreciate especially as we now kind of head into this period of obviously the global economy is um severely challenged geopolitically given everything that's happening. I don't need to rehash that. But when we look around at these commodities in the electrification supply chain, and again, whether it's copper or aluminum or any of these things, they're just the capital that needs to come in to expand the output and the time that it takes there just isn't enough. And I think you're seeing a lot of that in the rhetoric out of the downstream now, right? You've heard it from some of the major OEMs. And I think in our space, you know, obviously that is the same. And I don't expect – it would seem illogical to me to expect the Chinese government to push to subsidize the OEM competitors of their national champion OEMs. And so if their OEMs need product and the Western world needs product and there isn't going to be enough for everyone, then you'd imagine that it wouldn't make sense to push – the prices of material down to a level where the Chinese economy was essentially subsidizing Western producers. And I think that that is sort of the change, if you will. A lot of people have trouble kind of thinking about the forward decade versus the last decade. And I think that when you think about the forward decade, this new cycle, that is sort of going to be the new dynamic is that the Chinese are not going to destroy their own environment and subsidize their competition. They've moved downstream and they're going to make sure that their OEMs have what they need. And so anyway, I add all that up and my, you know, our belief that, you know, this is, this is a brief pause. Certainly the world is, is backed up if you will, and production shut down. And, but I believe it's a temporary pause. And again, I don't know how long, It is, but I do believe that prices will go materially higher from here still.

One more, if I may, if that's okay?

Of course, yeah.

Just on talent, you said plenty of times that you're trying to build a magnetics chain in the U.S. that hasn't really been done. And so how do you feel about the talent pool? You have a lot of recs. You mentioned that at the end.

of your talk so are there people that you think could fill the role that you need to operate both stages two and particularly stage three yes i mean there's no there's first there's no question that there are you know there's a struggle for talent all over the place right we we're we're seeing that i mean pretty much every company is talking about that um but what i would say is the advantage we have is um our mission really motivates people right and and that is that frankly is a differentiating factor and it's frankly it's non-political right um you know i i was at a thing you may have seen with um where the the president announced our our dod um uh contract for for heavies and you know we said we're gonna hire um a few hundred people we're gonna hire in in both uh at mountain pass and in fort worth and so we've got a lot of hiring to do um but what we see is as as what we're doing gain speed, we have a lot of talent that wants to join us because, again, whether you are on the left side of the political spectrum or the right side of the political spectrum, everybody wants more American jobs. Everybody wants to get some diversity in the supply chain. Everybody is in support of a producer that is doing things sustainably. Clearly, we don't need to rehash all of the environmental attributes of what we're doing. relative to other production. And so we continue to find that there are a lot of people attracted to our mission. And so in that sort of struggle for talent out there, I think it's, you know, a source of advantage. And, you know, we just obviously want to spread the word and get as much talent as we can. But, you know, we think we'll be able to get the people that we need. And we have, you know, incredible people joining us all the time.

Thanks, guys.

Yeah, of course.

Thank you. Our next question is from Subash. Chandra, your line is open.

Thank you. This question might have been asked and it might have been answered. If it wasn't, it went over my head. I'm just curious, is the structure pretty well settled now to get to stage three with the existing GM contract or are you still open for additional joint ventures or partnerships to get to that point?

Well, I'm not sure I, you want to say that one more time?

Yeah, sure. So, um, I think you've talked about, you know, you can build by, uh, and joint venture your way to growth. I was just curious if the GM deal right now, the $700 million stage three, the way you have it structured right now, where you're bringing that, uh, pretty much on a sole basis to first production. if that is settled at this point or are you still open for additional joint ventures? Oh, yeah. So, yeah, sure.

So, well, um, uh, a few things on that. Um, the, they are the foundational automotive customer of the forward facility, but they're not the only customer and it's not an exclusive. And so you should expect us to want to grow. You know, we're, we're here to build a magnetic business. And, um, you know, frankly, For them, for us, they want us to be successful. So we expect to have additional customers in that facility. And then, as you can imagine, we're thinking about, over time, 10X and beyond, right? And so the answer is all of the above. There's nothing exclusive about that. And I think you could see additional customers. You will see additional customers in automotive as well as other verticals. um and in that facility and in you know future facilities so the magnetics business uh will be a 100 organic um business for you uh not interested in joint venturing in the magnetic business well i i well i wouldn't say that i mean i would say that i mean certainly as as it stands today We have an outstanding team. We're growing that team. We're building that facility. As we said on the call, we're already building that facility. But to the extent that there are interesting partnerships and other things, again, as we go back to kind of our original mission, we'll buy, build, and or JV to create value. I mean, ultimately, if we think we can execute well for our customers and create value for shareholders, we'll consider it for sure.

Okay. Got it. And then, uh, just an update. So the, you know, 700 mil, so, you know, talk to quite a bit about inflation and, and it certainly seems like a game of inches every quarter. Um, but, uh, how does the 700 mil, uh, feel right now to you?

Yeah. Um, well, what I would say is if you, if you go back, I think I, um, I think I said this sometime last year. I'm forgetting. I believe it was in August, kind of after our Q2 call, but it was sometime about a year ago. You know, our expectation was that the, you know, I used the 1973 oil crisis analogy. And, you know, when you have a supply chain disruption, at the time, you know, people were kind of talking about transitory. And I can tell you that internally at MP, we were very focused, you know, as we've been, about um making sure that we're positioning as best we can for all the disruption because our house view you know my view has been that um that we are in for a number of years of reverberating supply chain shocks and other um and um you know obviously sort of the world continues to play out that way what i would say is we will not be immune to inflation right our our employees um need to have, and I would demand it, you know, we have incredible team, we've tried to build an owner operator culture, I want to make sure that people's real incomes grow, right? Because it doesn't help if your nominal income is growing a little, but you're getting destroyed by inflation. So when people join MP, we want them to grow and do well, all of them, every single employee. And so we won't be immune to inflation. But what I would tell you is that it just actually grows our competitive advantage because our in-place assets, the scale of capital and time, if again, if you even had all the stuff that we had, it just gets that much harder and that much more expensive. So I believe that, that if we continue in this inflationary environment, you know, right now, I think the talk is kind of, is it peak inflation? You know, who knows, but, but I think that misses the bigger question, which is whether 8% was the, I would argue it's probably not peak over the coming years, but even if we stabilize that 5% for a while, that's still a lot more inflation than we've had over the last several years. And so what that means is that the value of the in-place assets that we have will continue to grow, particularly because we sell into the largest growth story for the next decade, which is electrification. Again, if those timelines get thrown off a little bit, it still is a great growth story. So what I would tell you is, we will not be immune um but um we will we will be able to be a beneficiary in an inflationary environment um and oh on the 700 yeah we we feel good about that we've you know we we planned and and um and so you know we we feel uh good about that number as we see it today um and and so it's not like there's anything um you know that we've seen in the last few months that that would change that number i mean we feel really good that um you know, that we'll get that done, you know, at that or within that. But, you know, to the extent that we're growing beyond that and doing other things, of course, you know, if we thought, if six months ago we thought something would cost X, you know, it could cost 2X. But I think the bigger, broader picture is we are in a space, you know, the mining material space, this is a space that in this kind of environment will do well, right? If you're, you know, this is a space that will grow on a real basis in an inflationary disrupted world.

Right. Okay. Got it. Thanks. Good to hear. Sure. Yeah.

Thank you. And our next question is from Matt Somerville. Your line is open.

I just have a really quick follow-up. I know the call is running over a little bit. With respect to Stage 2, at what point do you think you'll start looking at transacting with third parties for your outbound Stage 2 material? Is that something you start to do immediately after startup? Is that something you start to do a year after being up and running? How should we be thinking about the cadence of that cutover to non-Chinese customers is basically what I'm asking, Jim.

Oh, well, yeah, no, sure, Matt. I mean, we've been looking at that since day one. If we go back to 2017 when all of a sudden we had this site and we had eight people and it was a turnaround, we were thinking about You know, we're thinking about one day having a magnetics business, right? So, I mean, we're thinking about stage two sales always. And, you know, so we've been thinking about that for a while. And you can imagine that we've had plenty of inbounds from a variety of parties at various points downstream in the supply chain. And so, you know, frankly, the challenge will just be to, you know, um, the, the kind of the broader downstream benefits of, of that. But, um, I don't know if Ryan or Michael, you want to chime in on this and share a thought, but, um, you know, that, that's something that we're, we, we, we do, we have no shortage of people who would like to get our, our stage two product.

Got it. Understood. Thank you. Okay. Yeah, sure.

And our last question is from Carlos. Yes, last question from Carlos Diaz. Your line is open.

Hey, yeah, this is going to be quite brief. It's just on the effective tax rate went up to around 25% in Q1. I think it's quite large than what we saw in the last few quarters, even greater than what we saw in Q1 last year of 22%. So I wonder if GMG or Ryan can give us a little bit of color going forward.

Yeah, of course. Ryan, why don't you take that?

Sure.

Hey, Carlos. On that, what I would say is obviously as we've discussed our plans from a stage two perspective of completing construction and bringing those assets online this year, that does have an impact on our effective tax rate given the potential bonus depreciation we can take on what is a pretty significant scale of assets. And so we are in the beneficial position from a tax perspective of enjoying a couple of different deductions that end up being net income limited. And so when you bring in a significant amount of bonus depreciation some of those deductions effectively get stopped out when you've got lower net taxable income. And so, you know, we're in the beneficial position of likely being able to have a very attractive cash tax rate this year, but that does actually find its way into the effective tax rate from a gap perspective over the course of the year. So I would say, you know, likely what you see here is around this area is reasonable for the next couple of quarters, and we'll continue to reevaluate that as we get closer to in service of Stage 2.

Great. Thank you very much.

Thank you. Thank you. And there are no further questions at this time. I would like to turn the call over back to Mr. Leszczynski for closing comments.

Sure. Well, I just want to thank everyone. It was a great quarter for us. And so just we'll get back to work now. Everyone stay safe, and we'll talk to you soon. Good night.

And this concludes today's conference call. Thank you for participating. You may now disconnect.