MP Materials Corp.

Ladies and gentlemen, hello and welcome to the MP Materials third quarter 2022 earnings call. My name is Maxine and I'll be coordinating the call today. If you would like to ask a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. I will now hand you over to Martin Sheehan, the head of investor relations to begin. Martin, please go ahead when you're ready.

Thank you, operator, and good day, everyone. Welcome to the MP Materials third quarter 2022 earnings call. With me today from MP Materials are Jim Lotinski, Founder, Chairman, and Chief Executive Officer, Michael Rosenthal, Founder and Chief Operating Officer, and Ryan Corbett, Chief Financial Officer. Before we get to our 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 today. Let me start with the plan for today's call. First, I will open up with highlights of the quarter. Ryan will then review our financials and KPIs. Michael will then provide an update on our stage two optimization at Mountain Pass. I'll then return and close with a brief update on our stage three magnetics business before opening things up for Q&A. So let's get started on slide four. I'm going to change the usual order of my highlights commentary and start with some exciting news. In September, we reached a major milestone. We began commissioning Stage 2 at Mountain Pass. We are starting test operations in several circuits, beginning with concentrate drying and roasting. As you may recall, reintroducing roasting is one of the key strategic decisions we made for our Stage 2 optimization. Roasting of bassinicide concentrate was pioneered at Mountain Pass in the 1960s and was critical to the site's success over many decades. Roasting leverages the natural advantages of bassinicide ore, ensuring high NDPR recovery while significantly reducing the reagent and energy intensity, and hence the cost of the refining process. Roasting is a proven and well-accepted industry process for refining bassinicide ore. In combination with other Stage 2 enhancements, the reintroduction of the roaster positions us to return Mountain Pass as a global low-cost producer of NDPR oxide, thereby continuing what we have already done in rare earth concentrate. I want to stress that these are very early days in the transition to Stage 2. We have a lot of painstaking work ahead that will unfold over the next year. Commissioning will certainly not be a linear process. There will be ups and downs and starts and stops, so be prepared for some lumpiness in our results during this transition. But that said, I am proud of how relentlessly the EMP team has been executing so far. When we consider what has happened this year in geopolitics, the challenges across a weakening global economy, and the continued disruptions across supply chains, today's milestone is amazing. This is probably the most challenging real operating economic environment most people working today have faced in their careers. We are therefore moving forward with commissioning with humility, but we are confident in our ability to execute over time. We have an outstanding team with unwavering determination. Turning to stage three, in September, our magnetics team also reached a major milestone. We topped off the structure of our magnetics factory in Fort Worth, completing the building shell in just seven months and began the build out of internal utilities and infrastructure. As we advance construction, we are simultaneously adding significant depth and breadth to our team and rapidly growing the organization's engineering and manufacturing capabilities. The Magnetics team is focused on advancing the state of the art with respect to manufacturing technology and innovation and rapidly designing and sourcing the long lead equipment we need to begin production. As with stage two, the stage three team has many challenges ahead, but we are off to a solid start. We are making substantial progress. Moving to our third quarter results. Despite the significant stage two related work going on in Mountain Pass, the stage one operation continues to deliver strong production levels while keeping costs under control. we produced our second highest quarterly volume of nearly 10,900 metric tons of rare earth oxides contained in concentrate and sold nearly 10,700 metric tons. And with regards to our financials, if you heard us speak during the third quarter conference season, you would have heard our commentary on the decline in NDPR prices quarter on quarter. We believe the decline was mainly due to global economic conditions and the widespread lockdowns in China. Despite that decline, and a stronger dollar. Average prices were up materially from a year ago, highlighting the continued strong demand for NDPR and, by extension, our concentrate. Ryan will discuss more on pricing and financials in a moment, but in summary, our year-over-year financial performance was very strong. Revenue was up 25% to over $124 million. Adjusted EBITDA was up 34% to over $91 million. our adjusted EBITDA margin expanded five points to 73% and we earned 36 cents per share in adjusted diluted EPS, an increase of 38%. This brought our year to date normalized stage one free cashflow to approximately $321 million. That's an impressive 74% free cashflow margin on stage one for the first nine months of the year. With that overview, Let me turn the call over to Ryan for some additional details on our KPIs and financials. Ryan?

Thanks, Jim. As Jim just highlighted, Q3 was another strong quarter, operationally and financially, and we delivered it even as Stage 2 construction activity at Mountain Pass reached its peak. On slide six, and starting with the bottom left graph, as Jim mentioned, production volumes remained very strong at 10,886 metric tons. And although down about 9% from last year's record production, were about in line with Q1's production output as we guided to last quarter. Recall, last year's production results were driven by record mineral recoveries and extremely high uptimes, and we indicated those production levels were not likely to be reached every quarter. So coming within 10% of our all-time record while focusing on critical Stage 2 activities is a testament to our team at Mountain Paths. Moreover, Stage 1 concentrate production levels north of 40,000 metric tons on an annualized basis continue to support our expectations for stage two NDPR production, although we will always aim higher. Sequentially, third quarter production levels were up about 6%, mainly due to the impact of our biannual week-long plant turnaround in the second quarter. I would point out that we just successfully completed our October shutdown, and therefore, you should see Q4 production reduced sequentially and be more comparable to our second quarter output. Moving to the top left chart, sales volumes continue to track production closely with slight variations based on the timing of shipments. Given the nature of our offtake agreement and the demand for our concentrate, we generally see sales volumes closely tracking production. However, in looking forward to the fourth quarter, as we started commissioning of stage two, we are beginning to divert some volumes away from sales and into the charging of our associates. This will somewhat reduce our sold volumes as a proportion of production. Of course, part of this is a temporary working capital item as we charge circuits to eventually begin production of refined products, which Michael will discuss more in a minute. Moving to the top right, as Jim mentioned, pricing remained very strong relative to a year ago, up over 50%, highlighting the overall strong demand for our concentrate. And this includes a modest impact from foreign exchange moving against us versus last year. Sequentially, pricing was down about 16%, as we had highlighted on our last earnings call, driven by the market price of NDPR, as Jim mentioned. Recall that ND and PR comprise around 16% of the rare earths in our ore body, and on a P times Q, or total value basis, make up over 90% of the value of the rare earths in our concentrate. As such, the price of our concentrate is highly correlated to the price of NDPR, and due to the timing of our price negotiations with actual product delivery, there was a roughly one month lag in our reported realized pricing compared to the spot rate of NDPR. NDPR pricing has recently stabilized in the low $90 range, which would suggest more than a 25% decline in sequential realized pricing, assuming that spot rates hold through the rest of the fourth quarter, resulting in realized pricing that would be below Lexter's fourth quarter on a dollars basis. Recall it was about this time last year that pricing for NDPR began to climb rapidly, and FX has obviously moved significantly year over year. Lastly, on the bottom right graph of the slide, core Stage 1 production costs remained very low at about $1,430 per metric ton. This is up slightly from last year due to the scale effect of large production output and sales of a year ago, while sequentially core costs were up slightly due to continued headcount growth. Stage two related production expenses were similarly impacted relative to prior quarters. We will continue to hire as we move through the fourth quarter and into next year. Initially, some of these labor costs will fall under startup costs until the various sections of the plant are fully commissioned and operating at expected rates. I would like to add that understandably, we get the occasional question on the impact that inflation is having on our business. We are not immune to the many cost increases impacting the economy. For example, diesel fuel for a mining fleet, as well as trucking costs to the port, have all been impacted. Generally speaking, our operating efficiency has mostly offset many of these increases. I would also note that we recognize the impact inflation is having on our employees. They are, after all, the lifeblood of this business and have been instrumental in our success to date. To counteract the effects of inflation, starting in mid-July, we began issuing fuel stipends to all of our non-executive employees. In addition, beginning this week, we issued nearly all non-executive employees a healthy early cost of living pay increase. This is separate from our annual merit reviews that take place towards the end of the year. So while we may see modest cost increases come through our P&L from these efforts, we believe supporting our workforce in these challenging times is critical to our business at large. We believe that fostering an owner-operator culture will help keep employee morale high and turnover very low. which is another competitive advantage in the long run. Moving to slide seven, revenue increased 25% year-over-year at strong realized pricing, more than offset compared to last year's record volumes. This flowed through to our adjusted EBITDA, which was up 34%, our margins, which increased five percentage points, and our adjusted diluted EPS, which increased 38%. Conversely, lower sequential realized pricing off of second quarter records resulted in modest declines in our financial metrics quarter over quarter, as you can see on the chart. The strong operational and financial performance resulted in continued strong cash generation out of Stage 1, which is shown on slide 8. Normalized Stage 1 free cash flow was approximately $93 million in the quarter, bringing the year-to-date total to $320.8 billion. And company operating cash flow has funded all of our growth capex so far this year. as we remain positive free cash flow year to date. Total CapEx was about $92 million in the quarter, and as such, we would expect CapEx to further ramp into Q4. Importantly, we remain on track with our projects from a schedule and cost perspective, but the timing of payments has been better than originally modeled. We continue to expect a total CapEx investment of approximately $700 million to complete our four major projects. Stage 2 light rare separations, heavy separations, the construction of our Stage 3 magnetic facility in Texas, and recycling. But given our year-to-date spend and payment timing factors, such as holdbacks and retentions for the final completion of Stage 2 and down payments for long-lead Stage 3 items, a greater percentage of that cash deployment will spill into 2023 versus 2022 as compared to our original expectation communicated in February. Regarding the balance sheet, as you will recall last quarter, we took advantage of the rise in treasury rates to invest a portion of our cash balance into higher-yielding, short-duration, U.S. government-backed securities. This quarter, we increased that investment, and as of September 30th, we now have approximately $836.3 million of short-term investments in addition to $428 million of cash and cash equivalents for a total balance of $1.26 billion cash equivalent and short-term investments, which is virtually unchanged from the end of the second quarter despite the ramp in capital expenditures. You will also see the impact of this move from cash into short-term investments on the cash flow statement when we file our 10-Q tomorrow. Before moving on, I did want to address a couple of housekeeping items for you. First, regarding adjusted net income and diluted EPS. Historically, we had excluded depletion expense when calculating our adjusted net income, and therefore also our adjusted diluted EPS. This was to aid comparability between our pre- and post-IPO financials. As pre-IPO, we recognized a royalty expense for our mineral asset versus our current treatment of recognizing depletion on the stepped-up book value of our consolidated mineral interest. Going forward, we are no longer excluding the depletion expense from our calculations and have presented prior periods on an apples to apples basis. Second, as we've previously discussed in our filings, we made a request to rezone certain of our properties at the Mountain Pass site. We are pleased to have received final approval from San Bernardino County and the Division of Mine Reclamation on this rezoning and the related changes to our reclamation obligation in September. There will be additional details in our thank you, but in short, this change results in materially lower estimated reclamation costs, reducing our asset retirement obligation, or ARO, liability on our balance sheet by over $13 million. The gap accounting for this change required us to reduce PP&E, i.e., the carrying value of the relevant assets, by $10.4 million, but charge the remaining $2.7 million as a credit to our depletion, depreciation, and amortization expense. So, for this quarter, you will see a discrete credit in DD&A, which should not repeat going forward. Looking forward to next quarter, I've already provided some commentary on pricing and volumes versus this quarter and versus the year-ago period that will provide some quite challenging comparisons. Importantly, The fourth quarter will be the beginning of several transition quarters as we prioritize commissioning of our Stage 2 assets above all else. We expect volumes held back for commissioning and charging of the circuits to ramp through the fourth quarter and continue into next year. But of course, we will continue to work to maximize the earnings power of the Stage 1 business as we get Stage 2 ready and ramped. In closing, I want to reiterate our conviction in our markets and our operating model, with Q3 representing another strong quarter across the board for the company's operations. Production cost control and demand for our product continue to highlight the significant early success of our three-stage strategy, which gives us additional confidence in our ability to execute on stages two and three. With that, I'll turn the call over to Michael to give you some additional details on our stage two progress.

Thanks, Ryan. During the quarter, construction continued and weekly progress was steady. Concrete, steel, and major process equipment installation has largely been completed. Secondary mechanical equipment, piping, electrical, and instrumentation represented the predominant effort in the quarter, as we would expect at this point of the project. Completion of construction is now in sight, and we see no major impediments to completion. other than time and our insistence on quality control. Slowly and soon quickly, we will be pivoting from construction mode to all-out commissioning mode. This starts with pre-commissioning efforts that incorporate the examination of each process boundary to identify punch list construction items, verify as-built to piping and instrumentation diagrams, confirm the safe operability of equipment, complete pressure testing and line flushes. verify all utility services, and perform other pre-startup checks. Next, we will verify electrical terminations, complete instrumentation loop checks, equipment bump tests, and begin enabling the automated operation of all equipment and control systems in coordination with our equipment vendors and commissioning team. Once this is complete, the real fun of commissioning begins, and we will move on to the next circuit or system boundary. In September, we reached an exciting first milestone with the commencement of commissioning activities in the concentrate filtration, drying, and roaster area. Initial fills of the filter feed tank have begun and rare earth concentrate slurry has now been run through the filter press and filter cake has passed through the rotary dryer. We are addressing control systems, bugs, and mechanical equipment issues as they arise. We are planning for initial runs of dried concentrate through the roaster in the coming weeks. At the same time, construction is nearing completion in the salt crystallizer area, and the pre-commissioning steps and loop checks are starting here as well. Over the past several months, many of the legacy circuits have completed their upgrade and recommissioning efforts and are awaiting fresh feed. In this camp includes the impurity removal circuits, the heavy light rare bulk separation process, and the NDPR separation facility. Our waste bind treatment and concentration facilities are now substantially ready for operation as well. with various expansions and enhancements underway. It is an exciting time at Mountain Pass. We are growing our teams in preparation for operating and maintaining the Stage 2 assets, completing standard operating procedure development, expanding training, and getting into the slog of commissioning. As mentioned, we have started to feed a limited amount of rare earth concentrate into the new circuits to feed them. We will then begin commissioning and conducting performance testing, largely in process sequence, to confirm the ability to meet design flow rates. To the extent necessary or required, we will test out of process order, such as we have with our brine treatment circuit. As all circuits are commissioned and troubleshooting proceeds, we will then feed the circuits more continuously and add increasing throughput. The volume of material dedicated to the production as oxide versus concentrate will ramp up as we reach stability. The time lag between concentrate production and the associated rare earth oxides will be longer than we have historically seen. And there will be a relatively small permanent investment in work in progress. But once a greater level of stability has been achieved, we should see this gap begin to normalize. As Jim mentioned, we expect commissioning to be a discontinuous nonlinear challenge for the balance of the year and into 2023. And we will not sacrifice long-term sustainability and product quality to hit near-term production goals. So we cannot and will not try to predict our exact trajectory, and we will need to overcome a series of expected problems, known unknowns, and without a doubt, certain amounts of rework and remediation. However, what is also known is that we have an outstanding, dedicated team, many with hands-on experience in successfully operating the legacy process that is up to the challenge. We also have a stable and highly profitable core business that can largely continue while we work through the commissioning process. With that, I'll turn it back to Jim.

Thanks, Michael. Hopefully Michael's commentary offers a more detailed view into the complexity of the challenges involved in completing one piece of our mission. It may sound daunting, but it actually speaks to the culture we have built and the value of the long-term franchise we are building at MP. As I said earlier, This is probably the most challenging global operating environment most people working today have faced in their careers. Despite this, we have steadily increased Stage 1 production. Mountain Pass has never operated better. This means we are generating an enormous amount of cash flow in our upstream business. Against all that, we have fought our way through construction and other challenges to begin Stage 2 commissioning. Simultaneously, and maybe because we really like moving multi-billion dollar supply chains, take a look at slide 11. This picture is awesome. In what was an empty field in Fort Worth seven months ago, now stands the future center of the American magnetics industry. This building looks big on the page, but in real life it feels a lot bigger. As I mentioned earlier, we already have a completed building shell and are starting the build out of the utilities and infrastructure. This is the most obvious sign of Stage 3 progress, but under the surface, we are doing much more to make sure MP becomes a vertically integrated magnetics champion. In addition to developing our people and capabilities, we remain committed to our buy, build, and or JV approach to Stage 3 growth. We continue to spend time with prospective customers, potential partners, and of course, GM. We are fortunate to have a high-volume, committed customer in General Motors. Beyond electric cars, new growth opportunities will emerge. Wind turbines are set to accelerate thanks to geopolitical considerations, as well as the recently signed IRA bill. It seems obvious to me that there will be a robot in every home one day, just like a computer and a phone. It seems obvious to me that drones and other forms of electric transportation will eventually become much more pervasive. These technologies and many others will drive incremental demand for permanent magnets for decades to come. MP's control of one of the world's preeminent rare earth resources is a source of great strategic competitive advantage. The synergies between our stages two and three are also very important to consider. In the manufacturing process, as much as 30 to 40% of magnetic material may be lost as byproduct. Absent the ability to recycle that scrap, the economics and sustainability of magnetics manufacturing is very challenging. Our stage two and three teams are working now to define and pilot the optimal point across the entire flow sheet to reintroduce that material. They are doing the same with end of life magnets. Our vertical integration frees the team to evaluate these fundamental concepts from a first principles perspective. Long term, The importance of recycling and closing the loop is obvious. Developing the know-how and scale to lead this space now is enormously valuable. So to conclude, we are proud of what we achieved this past quarter, and we are very bullish about MP's prospects. We know we have a lot of challenges to overcome in the months ahead as we commission stage two and then begin refining at scale at Mountain Pass. And in what feels like a treacherous economic landscape, We have a cash-flowing upstream business and a fortress balance sheet. This really matters as the cost of capital is becoming an even bigger risk for many. Most importantly, we have a strong owner-operator culture that is battle-tested and focused. With that, let's open it up for questions. Operator?

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you do change your mind, please press star followed by two. When preparing to ask your question, please ensure your line is unmuted. Our first question comes from Corinne Blanchard from Deutsche Bank. Please go ahead. Your line is now open.

Hey, good afternoon. Thank you for the update and thanks for taking the time. My first question would be on 4Q, really focusing on the near-term. I think you made pretty clear that volume would be similar to 2Q just on schedule maintenance. But I would want to get more detail on the pricing that you're seeing. I believe you mentioned 25% sequentially done when looking at spot price. If you can just remind us on the timeline that you have at the spot and maybe any color that you can guide on the pricing. And then my second question would be just trying to understand already the timing of the commissioning for stage two, if anything that you can give us. Thank you.

Hey Corinne, it's Ryan. I'll take the first part and see if Michael has anything to add at the end on commissioning. As it relates to the fourth quarter, you're right. We covered a bit in the prepared remarks, the fact that we expect production to mimic our last non-shutdown quarter. From a sales perspective, I think there's a couple of things to think about. Namely, we made the point that we will have been and will continue to divert certain product away from sales and into the charging of circuits. It's somewhat impossible to predict exactly what that will look like over the course of the quarter. But to give you a rough sense of how to think about it over time, we could end up taking up to two weeks of production for use of charging all of the circuits as we make our way through commissioning. So I would just think about that taking place over time as sort of the permanent investment in working capital that Michael referenced in his remarks. As it relates to pricing, you're right, we did mention what we see at this point if pricing were to hold with a greater than, 25% decline in sequential realized pricing. It's a little bit difficult to perfectly match up our concentrate price to the spot price of NDPR you guys see on your screens. It moves very, very similarly, but not perfectly. Obviously, there's a unique and discrete market for concentrate versus oxide. But from what we see at this point, as you guys can see on your screens, both with the Chinese domestic price and the movement in FX, you know, the peak to trough pricing decline was almost 60%. And so when you've got 16 sequentially in this quarter that we just reported here, certainly we're going to feel the remainder of the impact primarily in Q4. So hopefully that gives you some color. Michael, I'll flip it over to you if you have any thoughts on stage two timing.

Thanks, Ryan. Thanks, Corinne. As we said, we're excited to be starting the commissioning process, and soon we'll be converting from somewhat construction mode to all-out commissioning. Like we also said, it's difficult to predict the exact trajectory, so I probably can't do it right now. But every day we're closer to starting to produce oxides.

Thank you. I mean, I know it's difficult to give like probably like a timing, but are we talking about, and maybe you have commented like in the previous quarter or so, but are we looking at three to six months? Are we looking more like, you know, end of next year to be fully commissioned and ramp up or just trying to get an idea there?

Hey, Corinne, this is Jim. How are you doing? Oh, I was going to talk about it. I was just going to say that, yeah, I was going to say, Michael, you and I are probably going to say the same thing. But I think the way to think about it is we still remain confident that we're going to reach our run rate goal next year. But we just want to be thoughtful about, you know, what the next, you know, three to six months look like. You know, we make clear that this is a transition. We want to be mindful of that. But with everything that we see, you know, we remain confident that we're going to hit that run rate. If you want to add in, Mike, go ahead.

That was what I would say.

Thank you. You were going to say the same thing, yeah. All right. All right, next question.

All right, thank you. I would take the rest offline. Thank you, guys.

Yeah.

Our next question comes from Matt Somerville from DA Davidson & Co. Please go ahead. Your line is now open.

Thanks. Jim, in your prepared remarks, you'd mentioned just the IRA, and I just want to get maybe your most updated views, you know, big picture on how MP is positioned to benefit from a handful of things that have happened legislatively and just the overall policy backdrop, the latest of which, you know, you at least mentioned, but maybe do a little bit of a deeper dive holistically on all that.

Sure. Thanks, Matt. So there's two major provisions of IRA. The first is 45X, which is a 10% operating expense credit for critical materials. And so we're confident that Mountain Pass will be covered by that. So that's a very, you can look at the expenses there and take 10% and that's that credit and that's quite a bit of money. So we're excited about that. The other, and by the way, that is a perpetual credit. um and and so that you know doesn't sunset like some of the others mentioned in the bill um the other is a 48c which is an investment tax credit which is a 30 credit uh for uh for you know supply chain um and so we are looking at that very closely i would i would caution in saying that the final regulations aren't out yet so we you don't exactly know how it's going to be implemented um but We feel good that we should be able to find an opportunity with all of the stuff we expect to build that that'll be a pretty large benefit for us. And again, that's just 30% of spend. So if in theory you go out and spend a billion dollars on a magnet facility, a 30% credit would be a $300 million credit. The other thing I would just say, which is we've seen historically bipartisan introductions of of tax credits for permanent magnet production. And so hopefully after the new year, when the new Congress is in, maybe we'll see something on that front as well, which would be an added benefit. So that's sort of the backdrop.

Thank you. And then just as a follow-up, Ryan, can you help me understand how Stage 2 production costs actually retreated a little bit on a quarter-on-quarter basis, and then Is there any sort of bandwidth range that you can maybe help us out with what you think that might look like in Q4 or into next year, the run rate of those costs?

Sure. The biggest change when you look at things sequentially is moving out of a quarter with a shutdown. So you get sort of the double whammy in quarters where we do our planned turnaround of both lower production and sales generally from a denominator perspective, in addition to the fact that you tend to have increased costs from onsite contractors and other maintenance expenses hitting at the same time. So if you sort of track production costs over time, you tend to see that effect between the quarters. So hopefully that also answers the second part of your question, which is, you know, I would look more towards how things looked in the second quarter for the fourth quarter with the understanding that you know, costs have continued to, you know, move up over time as we've seen throughout the year. And in addition, as we start to commission stage two, we are continuing to bring headcount on pretty rapidly, both, you know, specifically at Mountain Path and elsewhere. So hopefully that gives you a little bit of a sense of how to think about things sequentially.

Yes, perfect. Thank you, guys. Thanks.

Thank you. Our next question comes from Robin Feidler from BMO Capital Markets. Please go ahead, Robin. Your line is now open.

Hey, guys. Question on CapEx. Maybe you can elaborate on what exactly caused the push out for spending for some of the state's three long lead items there. And does that mean that maybe the commissioning might be pushed out of it as well, at least for the metals and alloys part of it?

Hey, Robin, it's Ryan. I can take that. I would not read at all into the timing of capital as relating to any change in schedule. We obviously have to make a lot of assumptions pretty far out when we set our overall capital guidance for the year. And given the scale of projects that we've got going on, it's often difficult to be able to predict whether a cash payment is going to hit on 1231 or January 1st. And that obviously makes a big difference for capturing the calendar year. And so what I'd say in terms of the way to think about CapEx for the remainder of this year and sort of why the bit of a push out is as we complete the stage two commissioning, as you'd expect from us, You know, we are pretty maniacally focused on maintaining retentions and holdbacks in areas as we get to the finish line. And so all that means is that in areas where we're putting the finishing touches on, you will actually see the cash come, you know, probably right after that. So that drives some of the effect. And then as well, for the stage three long lead equipment, We just have not had the same level of requirements for upfront down payments on some of these long lead items as we've seen in the past and as we had seen in stage two. And so we continue to make very good progress. We have no change in expectations from a timing perspective at this point, but it's purely a timing of cashflow as opposed to a real change in schedule.

Okay, thanks. And just as a follow up, this is a bit more of a, you know, forward-looking question, but with everything going on on the legislative support and what could be coming from that, how do you think about, I know this is early to say, but scaling out the magnet business across the decade? I know, Jim, you talked about goals for potentially 10,000 a ton at some point of magnets. Again, with what's going on on the with political support, is there an added incentive to maybe speed that up, assuming that things go smoothly initially?

Yeah, thanks, Robin. So here's what I would say. We, and this goes back, obviously, the last few months, the rancor, if you will, about getting this supply chain home and expanded just continues to grow with everything we see legislatively, geopolitically, etc., But it's also been that way for a while. We have not been demand constrained, so to speak. The level of demand just continues to grow. But demand has not been our constraint. Really, the key constraint is execution. There's a lot of people out there that like to talk. We like to build stuff and get it done right. And so we are moving as quickly as we possibly can, but making sure that we get things done right. know if you just think back and i know you've probably heard me say this a couple times but when we went public a couple years ago we made clear that we thought the magnetics business was was certainly a key strategic vision but a 2025 plus event and now look at slide 11 um you know it's it's november of 2022 and um you know we've got we've got the shell built i mean so on i think on every front we've been been really accelerating this mission and will continue to do so. And you know, as the demand grows, obviously that makes the, that increases the value of, of the strategic value of what we have, but also just the, you know, the value of all of our in place assets. So we will keep at it.

Great. Thanks. Yeah.

Thank you. Our next question comes from Carlos de Alba from Morgan Stanley. Please go ahead. Your line is now open.

Thank you very much. Good afternoon, guys. A couple of questions. Could you comment on the trends that you expect to see on the feed grade and recovery in stage one? Obviously, things are, as you mentioned, going to be bumpy, but you alluded to that in your comments around production. What should we expect in the coming quarters?

Thanks, Carlos. I guess I would just start off by saying that we're pretty pleased with the production in the third quarter. That was the second-best quarter ever. compared to last third quarter's record, and that our current production is consistent with our 6,000-ton NDPR plans. As you mentioned, this year our third quarter had slightly lower feed grade compared to last. I think we mentioned in relation to the SK-1300 that we're looking to long-term optimize the value of our reserve base, and that does include including some additional lower-grade materials. in our feed. But we have a good idea of what will come out of the ground over the next 35 years. But what comes out in any one period and what we blend to while in a relatively tight band varies slightly quarter to quarter. But we're always working to optimize our reagents and our processes and experimenting. Some periods, everything comes together perfectly. Some periods, you know, it's just more normal. But in general, it's going to continue to improve on an apples to apples basis. So I would say the same is true this quarter. You know, we, you know, compared to where we would have been with the same type of feed in the past, you know, this quarter was better. I've mentioned a couple times in the past, you know, we're really optimistic. We are optimistic about the ability to continue to improve our concentrate production volume as well as quality. So we would expect that to continue also in a nonlinear fashion. So little bits of ups and downs, but generally getting better.

All right. Thanks, Michael. And does this affect your realized pricing in any way? Or are you able to concentrate the lower feed to the traditional average standard that you typically do?

Yeah, Carlos, we price on a contained REO. Sorry, Mike, just to talk about pricing specifically, the metrics that you see are on contained REO, which obviously is what people are after and what we get paid on. And so I wouldn't expect any of the changes to impact a price on a per ton of REO basis. Mike, if you want to add anything else, please go ahead.

Yeah, part of the improvement we make is the ability to upgrade to the same or higher rare concentrate grade irrespective of what the feed grade is.

All right, excellent. And just a last question from me is, Can you comment on how the restart of the combined heat and power plant is going, and if you see the impact on energy costs that you mentioned in the present days continue, or is this just more something that you saw in the third quarter and we should not count on that repeating in the coming quarters?

I can talk operationally, Ryan, if you want to handle the cost. began operating the site off the Combined Heat and Power Plant in the first quarter of this year. It was a pretty large and in-depth process of recommissioning, but we're really pleased with how it's operating. It's operated very reliably. It's provided also steam to our process, so we're really pleased with how it's going. We look forward to it supplying the Stage 2 assets as well when and as we're commissioning them.

And from a cost perspective, Carlos, part of what you actually saw on a quarter-over-quarter basis in the element of the cost that we flag as sort of pre-stage two commissioning costs is the fact that we were able actually to bring down our cost per MMBTU pretty significantly quarter-over-quarter by, you know, looking at managing our natural gas exposure and hedges. From that perspective, that was part of the reason that was brought in a bit. But in general, what you see is we are operating the CHP somewhat purposefully and efficiently at this point by overproducing due to the fact that we wanted to get this asset, to Michael's point, ready and operating very reliably ahead of bringing the Stage 2 assets online. And so we have to, you know, purposefully really run it on a derated basis, which drives some level of inefficiency. And so that inefficiency will decline as we bring the load from stage two online.

All right. Excellent. Thank you, Ryan and Michael, and congratulations on the commissioning, start of the commissioning of stage two. Thank you, Carl. Next question.

Our next question comes from George Genericus from Canaccord Genuity. Please go ahead. Your line is now open.

Hi, everyone. Good afternoon. Thanks for taking my question. I was wondering if you could possibly update us as we're approaching stage two on your offtake agreements for oxide going forward. I mean, can you help us understand where your oxide will land geographically? Is it mostly China, is it outside of China? Any color would be appreciated. Thank you.

Sure. Hey, George, it's Ryan. I can start us off. We continue to see really strong demand for our oxide. Obviously, we've been on this mission to bring separated products to the United States for many years now. We're very excited that we're well on our way to that. And we see no impediments to selling our stage two products. And key to our mission really is developing the ex-China supply chain. In some ways that takes time, but at the same time, we continue to see really strong interest for ex-China customers. As you're well aware, there remains an ex-China magnet business predominantly in Japan. And we continue to see strong demand for our product there and a growing ex-China market who, frankly, are relatively starved for diversity of supply. They've had one answer to date. And so we feel good about executing into that opportunity. Obviously, there will be a mix of destinations that our products will go to. And over time, of course, hopefully more and more of our upside will be used in our own vertical integration strategy. So we continue to see a nice and exciting market opportunity ex-China. We obviously will have a mix of sales into China and certainly will grow our own vertical business as well.

Thank you. If I could just, with one follow-up, any visibility on China quotas? Obviously, this year, we already know what happened. They increased by 25%. I'm curious, because it's so opaque, if you could help us understand a little bit how you see that progressing over the next few years at the extent you have thoughts on that and what sort of capacity you see them having over the next, call it two to three years.

Thank you.

Sure. So China, as you hit the nail on the head with, China is opaque. It's always hard to fully understand China. what is going on there. We do think they'll continue to move quota reasonably with their industrial demand. You may have heard me talk about this, but just to kind of clarify, reiterate, we've seen what we believe is a sea change in the general industrial psychology, where if you kind of think about the last 10 years versus the forward 10 years, the key the key focus is making sure that there's enough product for their downstream, particularly as you see some of the major manufacturers expanding globally. There was some announcements this quarter, actually, about some of the Chinese OEMs launching sales in Germany. And so I think the way, I mean, this is, again, this is our house view. It's opaque. But I think the way to think about it is that that quota will probably grow comfortably with Chinese industry. But then the question is and why we're so confident that we have such a tremendous opportunity here is that the rest of the world demand, supply chain demand, is going to need a home. And so when we think about that math with respect to what we produce and the availability and how challenging it is to get things online, We feel very confident that, again, it's a commodity, so I say that with all of the usual caveats I say, but we feel very confident that pricing will be stable and continue to grow quite a bit. And so, again, for what our opinion's worth on that, we just think there's so much ex-China growth to happen that it's a very bullish backdrop for our business. of course you know this quarter last quarter china is essentially uh shut down europe is obviously in a very deep recession and so you're seeing you know you've seen this pullback um but uh i think that whatever the extent of this pullback in price is that we see out there um it just creates it you know it's sort of reflexive it just creates the jump back effect for when things get going again, demand-wise, that SNAP Act should be pretty powerful.

Thank you. Yeah, sure.

And the next question comes from Lawson Winder from B of A Securities. Please go ahead. Your line is now open.

Thank you, operator. Good evening, gentlemen. Thank you for the update tonight. I wanted to ask about the natural gas hedges. It seems like those were a very timely and wise thing to do. Can you share any color on the tenors, volumes, or percent of total volume and price to which those were applied?

Well, thank you for the kind words about our management of costs there. Ryan, if you want to give some color. disclose a lot on that, but why don't you maybe just help contextualize what that is?

Sure. I'd say that we locked in probably about half of our demand today, which would step down a bit to about a third of our demand over the next couple of months as we start to commission things. Relatively attractive prices in sort of the low to mid $5 per MMBTU. We've also looked at certain incremental hedges starting once our demand for gas starts to pick back up that would sort of bring us back up to roughly half hedged at a similar price point. Those are about three years in duration. And so overall, when you sort of look across the board, that's kind of roughly what I would think about.

Okay, that's great. Very helpful. from this point forward, do you have any sort of sense on a per unit of NDPR where you think the sort of cost will settle out once you're up and running? So maybe 2024, 2025?

Yeah, Lawson, we haven't updated any of our sort of outlook or guidance on that. I'd continue to point you to you know, the context that we've given over time and, you know, when we initially went public. So we don't have anything sort of, you know, more specific to point to at this point. Obviously, there are lots of puts and takes there. Certain input prices have changed quite a bit. Our efficiency has gotten better. And so certainly puts and takes and a lot of known unknowns. But at this point, I would stick to what we've already put out there.

Okay, thanks for the call. Thank you.

Thank you. And the next question comes from David Dekelbaum from Cohen. Please go ahead. Your line is now open.

Thanks for squeezing me in, guys. Jim, I'm actually interested in hearing some of your thoughts on just some macro movements right now. Have you seen any behavior changing on the part of Chinese refiners with where they'd be sourcing feedstock from? or attempting to, you know, preparing for MP, you know, processing their own concentrate and separating their own at Mountain Pass?

Hey, David. So, great question. I think it's just so opaque in China right now, given, you know, given the fact that things are mainly shut down. We historically have seen and haven't seen any change in the fact of there are a number of refiners that want our product. Um, and, and so obviously, you know, at any point in time, there's a number of them that are bidding for our product. Um, as far as, you know, how, how some of those businesses will react when, um, they don't have our product. Yeah, we, I don't really, we don't really have good color into that. Um, I'm certainly, I would imagine it's, you know, top of mind. Um, and, um, you know, it's, it's, it's certainly, uh, a concern and it means that our product will come out of the overall, obviously when we switch on and are making oxides, that will come out of the current market there. But we don't really have good color into what people might be doing specifically, other than I would say that historically we have a lot of people who reach out to us wanting wanting various things, long-term off-takes or whatnot. And that remains the case, but nothing major has changed on that front recently.

Fair enough. And speaking of people reaching out to you, just wanted to ask on stage three, obviously you have an anchor customer with GM. As you guys have built this facility and very impressive timing, at least in the show, we talked about all the IRA incentives to accelerate potentially stage three. It sounds like you're getting inbounds from potentially interested customers. Are all of those customers, one, coming from the automotive segment? And two, how do these customers, do they ever bring up a price and how they're thinking about what they would be willing to pay relative to global baskets? Or is it just specific to what they would agree to pay you on sort of a negotiated basis?

Sure. So what I would say on that is it's definitely not just auto. It's a number of the verticals. I mentioned some of the key ones, but it's a variety of verticals, whether it's wind or some of the others, even some that you might not expect so much. So there's definitely a diversity of of reach out and parties who want to understand, you know, what it would take to buy from us and are, you know, getting educated and lots of conversations that we're having with a variety of them. I would say that there's certainly a range. We have noticed a material change over the last year, certainly even in just in the last six months, where before there was, you know, I think post-COVID and the semiconductor shock, there obviously was a lot of interest. Then, you know, Russia, Ukraine happened. And, you know, a lot of the supply chains have not gotten better. And I think that the practical reality of de-globalization is really setting in in a lot more of the companies than, you know, aside from, frankly, just like the GMs that were sort of the first thinkers on this. And so there's a lot of discussion and interest And then, of course, the IRA bill set that into, you know, into added interest. And, you know, we feel like we're in a great position in these conversations because we have a unique amount of product and there's only so much we can execute. And so we, and I know you've heard me say this, but I think it's just really worth repeating is that We believe that our constraint is only in our time and our ability to execute. And we want to execute in a very high return on capital thoughtful way. We want to make sure that the stage three business is not robbing Peter to pay Paul where we have an attractive product and we want to make sure that we capture that value. But then if we're going to make investments downstream, we should have a very attractive return on that capital. And frankly, No one really disputes that. I think that when you have conversations with people, people understand that if we're going to invest capital, we should get a return on that. We've positioned the company to have the Fortress balance sheet that we have. Sometimes you'll see people have to enter into deals that maybe are half deal, half financing. We just don't have those considerations. We've positioned the company to think solely about what are the most thoughtful ways of by building and or, uh, JVing, um, to, to get this done right. And so that's a long winded way of saying, you know, we, we continue at this, um, there, it's not a demand constraint. It's just, you know, what, what we think we can thoughtfully execute for, um, our customers and partners. And, you know, I've made very clear that I, I believe that one day our magnetics business will, um, you know, will exceed the current expected implied output of, of today. So when you say, you know, 10, if you look at our 2023 run rate number and you say that that could be a 10,000 ton magnet business, just, you know, give or take kind of spitballing there is no reason why we couldn't grow a business beyond that. Once we develop the, the leadership that I think we are developing in the magnetics business, again, that will take a lot of time, but the team is, is really amazing and growing by the day. And, and I think, again, just back to this slide 11, um, I'm very proud of if we just think about everything that's happening in this world and you look at, you know, on the left, there's an empty field on the right. You know, we've got, you know, we've got now the shell and now there's a lot of hard work to go. I don't, I don't mean to belittle that, but, um, we, we are moving really quickly and, and, um, just building the scale that will give us leadership in this space in the West, um, really globally. Uh, so, Hope that answers your question.

Thanks, Jim. It does. Thank you, and good luck with the rest of the commission and final construction.

Thank you.

Thank you.

This concludes our Q&A session for today, so I'll hand the call back to Jim Litinsky for closing remarks.

Okay. Thank you, operator, and thank you, everyone. It was a great quarter, and we've got a lot to do, so we'll get back to work, and everyone have a great night. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.