MP Materials Corp.

Good afternoon, ladies and gentlemen. Thank you for attending today's MP Materials fourth quarter and full year 2022 financial results. My name is Tia, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to your host, Martin Sheehan, head of investor relations with MP Materials. You may proceed.

Thank you, operator, and good day, everyone. Welcome to the NP Materials fourth quarter and full year 2022 earnings conference call. With me today from NP Materials are Jim Lutensky, founder, chairman, and chief executive officer, Michael Rosenthal, founder and chief operating officer, and Ryan Corbett, chief financial officer. 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 today's earnings release and the appendix to today's slide presentation. Any reference in 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 an overview of today's call. I will begin with the highlights of the year. Ryan will then review our financials and KPIs. Michael will then provide an update on our Stage 2 optimization at Mountain Pass. I'll return with a brief update on our Stage 3 magnetics business and some closing comments, and then we'll open it up for Q&A. So let's get started on slide four. Since founding MP in 2017 and in our two plus years as a public company, we have been unwavering in our mission to restore the full railroad supply chain to the United States. And we made substantial progress on our mission in 2022 and so far in the early part of this year. Operationally, the team executed. We produced and shipped record volumes again in 2022. Mining and ore delivery outperformed our updated mine plan. Maintenance teams stayed focused and relentless, which was reflected in outstanding uptimes. The stage one operations and engineering teams continue to drive improvements in mineral recoveries while also increasing our feed rate into the mill. Execution at this level requires lots of unsung heroes working in tandem, taking on challenges, anticipating future ones, and ultimately, thinking like owners so to the entire mp team we stayed safe and we had another excellent year great job and thank you for 2022 the price of ndpr oxide and therefore our concentrate product improved nicely versus the prior year the combination of better realized pricing and the record volumes produced by the team resulted in a 59 increase in revenue and a 77% increase in adjusted EBITDA. The Stage 1 business generated $353 million in normalized Stage 1 free cash flow. That is a 67% cash flow margin just for the Stage 1 business. The Stage 1 business, therefore, generated more cash flow than our entire capital expenditures for the year, most of which consisted of our significant downstream investments towards Stage 2 refining and Stage 3 magnetics. We believe these transformational moves to achieve our downstream mission will improve our profitability, reduce the volatility of our business, and significantly expand our long-term enterprise value. Our ability to pursue such an important and exciting opportunity while self-generating the resources needed to do so is amazing. More importantly, it means we continue to maintain our fortress balance sheet with over $1.2 billion in gross cash and roughly 492 million of net cash at year end. In a rising cost of capital and bifurcating economic environment, platforms with a high return on capital opportunity set and a capital structure like MPs are scarce. But as I always say, we must execute. And I am proud of what the team has achieved recently. We started commissioning our stage two assets late in the third quarter and began producing roasted concentrate in the fourth quarter These were critical first steps in the complex stage two commissioning process. We also advanced the heavy rare separations project at mountain pass with continued progress on the front end engineering design and long lead procurement. To remind you, the heaviest project is the one where we were honored to receive a $35 million grant from the department of defense, which was announced live by the president of the United States himself last February. Next, Our stage three magnetics efforts are accelerating. Recall that at the end of 2021, we reached an agreement to supply General Motors with NDPR alloy and magnets to support their entire Ultium EV platform. We signed the GM definitive supply agreement and also broke ground on our initial magnetics facility in Fort Worth early in 2022. We have made rapid progress and our goal remains to begin delivering alloy to GM late this year, followed by magnets in 2025. And finally, earlier this week, we announced a distribution agreement with Sumitomo Corporation. Japan is the largest producer of neomagnets outside of China, and thus the largest market for refined NDPR products outside of China. Sumitomo will serve as our exclusive distributor of NDPR oxide in Japan, and we will collaborate with them on the supply of rare earth metals and other products. We believe this agreement is an important and beneficial development as we now position for stage two sales. There were many other success stories of the company throughout 2022, including the extension of our positive environmental and safety record, the creation of over 120 new jobs in California, Nevada, and Texas in support of our mission, and the publishing of our inaugural ESG report. All in, we have been busy. I will have more on Stage 3 and Market View shortly, but first, let me turn the call over to Ryan to run through our financials for the year and quarter. Ryan?

Thanks, Jim. We'll turn to Slide 6, and as Jim highlighted, 2022 is another very strong year of operations for the company. Our production volumes increased for the fourth year in a row to a record 42,499 metric tons of REO and concentrates. The operations and maintenance teams continue to perform, with our uptimes remaining at roughly 95% for the second year in a row. In addition, we continue to improve our throughput while optimizing our mineral recoveries. We believe there is incremental room for improvement here, but in the near term, the majority of our focus is on commissioning our Stage 2 assets. We shipped a record 43,198 tons of REO and concentrate during the year, a 2% increase over 2021. The increase is generally due to the timing of shipments. As a reminder, concentrate shipments have generally tracked our production volumes over time. Moving forward, there will be some lumpiness as we transition to Stage 2 products, which I will discuss in a moment. On the top right chart, you'll see that our realized price per contained REO time increased 55% to $11,974, driven primarily by the strong demand for NDPR feedstocks in the market. Despite Chinese macro volatility over the course of 2022, continued EV penetration supported rare earth pricing. Lastly, on the bottom right graph, our production costs, when excluding the ramp in expenses ahead of our Stage 2 commissioning, increased a little over 5%. Despite some fairly significant inflation in 2021 and 2022, we were able to increase production efficiencies enough to maintain a fairly flat cost per ton for our concentrates. Note that this operational KPI, as reported, focuses purely on our concentrate business, so we will evolve these KPIs over the course of 2023 as we ramp our downstream products. Moving to slide seven, on the top left, you will see revenues increased 59% to $527.5 million, driven by the P times Q effect of both higher realized prices and slightly higher shipment volumes. And given the significant operating leverage we get from higher pricing, you will see on the top right that our adjusted EBITDA increased 77% in the year. That impact is also shown on the bottom left graph, where our adjusted EBITDA margin increased 8 percentage points to 74% in 2022. And finally, on the bottom right, the significant impact this leverage creates on adjusted diluted EPS, which increased over 102% to $1.68 per share. I will discuss some discrete tax items that impacted Q4, but for the full year, our strong earnings demonstrate both our enviable operating leverage and cost structure, but also our strong tax position as a domestic producer of critical materials, which will only get better as we transition to Stage 2 and take advantage of some of the benefits of the IRA bill. Moving on to Slide 8. and our fourth quarter operational KPIs, you will see in the bottom left that our production remains strong in the quarter of 2% versus last year at 10,485 metric tons of REO. Keep in mind that we have a regular one-week maintenance shutdown early in the fourth quarter, which was the driver of the 4% decline in sequential production. Sales volumes on the top left increased 12% versus last year's fourth quarter and 1% sequentially. Again, simply driven by the timing of shipment. We mentioned last quarter that we would ultimately be diverting about two weeks of inventory into the Stage 2 circuits, or a little under 2,000 metric tons, which would occur over several quarters. So while we began this process in the fourth quarter, the impact was not material to our sales in the quarter. As Michael will discuss in a moment, we will have some roasted concentrate available for sale in Q1, but we do expect to begin more significant charging of our circuits as Q1 progresses. Moving on to the top right, you can see realized pricing, albeit very solid, at $8,515 was down compared to both Q4 2021 and Q3 2022. About half of the year-over-year decline was due to unfavorable changes in foreign exchange as the yuan weakened versus the dollar. In addition, Chinese COVID lockdown and the impact on the Chinese economy likely reduced demand for NBPR slightly. Looking at the volatility in the price of NBPR over the last year from a high of approximately $175 per kilogram and a low of 83, it's very important to note that fairly modest changes in supply and demand can move the market price fairly substantially. This is one of the reasons we are so confident in the long-term growth trajectory of our business. given forecasts of NDPR demand over the next decade or so, are three times today's output. The challenge of the world producing enough rare earths to keep up with this demand is clearly a favorable indicator for NDPR pricing over time. I note that some of the positive leverage we saw in concentrate realized prices as NDPR prices went higher in recent quarters ended up going in the opposite direction as prices declined. This is in part driven by the variability in the implied discount we have to take in selling an intermediate feedstock to refiners overseas. While this effect will be moot once we are selling our own separated products, it's important to note that the realized price growth or decline in our concentrate sales over the course of this year, as always, will outperform as NDPR market prices rise and generally underperform as they decline. And of course, there is also the timing and volume of shipments which impact our average pricing in any given period. Moving to the bottom right graph, you will see that our production cost per metric ton increased 26% year over year and 17% sequentially, driven by the timing of maintenance costs during the quarter, as well as higher payroll expenses, including an increase in employee headcount to support the expansion of stage two operations and the impact of cost of living adjustments, which we talked about last quarter. The year-over-year comparison was also impacted by higher fuel costs as well as the recommissioning of our CHP plant at the beginning of the year, which is running suboptimally until we get to full Stage 2 power demand. Excluding the Stage 2 related costs, Stage 1 production costs were roughly $1,600 per ton in the quarter, impacted by the same factors just discussed but primarily driven by the timing of maintenance events across our mining fleet and our crushing facilities, which we view as discreet. Flipping to slide nine on the top left, our revenue declined 6% compared to the fourth quarter of last year, as the 12% increase in shipping volumes was more than offset by a 16% decline in the realized price shown on the previous slide. Similarly, our quarter over quarter revenues were impacted by a more significant decline in sequential realized pricing. And on the top right graph, while adjusted EBITDA declined 23% year over year, mainly due to lower realized pricing, we still produce a very solid $55 million of adjusted EBITDA on the quarter. And although not on the page, $32 million in stage one normalized free cash flow. The lower realized pricing also flowed through to our margins, which were nonetheless a healthy 59%. Importantly, on the bottom right, you will see that our adjusted diluted EPS increased 40% over last year's fourth quarter and 17% sequentially. These changes were driven by two factors. The first was the impact of the higher interest rate environment on our strong cash and short-term investment balance. In the quarter, we generated nearly $11 million of interest income versus virtually zero a year ago. These totals show up on the other income net line of our P&L, which you can find in the appendix of our slide deck or in our press release. The second factor was a large tax benefit in the quarter. The timing of new assets coming into service for GAAP purposes drove a change in the full-year effective tax rate, which was recognized in the fourth quarter. We generally benefit from material tax deductions, including foreign-derived intangible income and depletion in excess of basis, which we had initially forecasted would not apply for this tax year, but indeed end up providing us permanent tax benefits recognized in 2022, in addition to the temporary benefit of bonus depreciation on the assets we did place in service. Note that the timing of certain assets entering service may continue to drive some volatility in book and cash tax rates as we complete our investment program. Absent this impact, I'd expect our tax rate to remain in the high teens until our geographic mix materially shifts. Turning to slide 10, we generated $353 million of normalized Stage 1 free cash flow in 2022. As Jim mentioned earlier, that more than covered the $308 million of growth CapEx during the year, which covered the significant completion of Stage 2, as well as material investments in the Stage 3 building shell, engineering, and early equipment costs. Very little spend remains in 2023 for Stage 2, with the overflow as discussed in prior calls relating mostly to timing of payments. Importantly, our strong cash flow this year has allowed us to keep all of our powder dry, even as we've made tremendous progress on our mission. We expect CapEx this year to be roughly in line with 2022, with about $300 million in expected growth capital, primarily supporting Stage 3, in addition to our other growth projects. From an earnings perspective, as we have talked about for some time, 2023 will be a transition year. As we work to ramp the separation facilities, we will continue to self-concentrate into the market with the revenue and cost profile you are used to seeing. Michael will discuss our commissioning progress in more detail in a moment. But as it relates to our annual results, I'd continue to expect stage two separated product sales to begin in the second half of the year and be back loaded in part because there will be added time to recognize revenue as we build out our sales channel and qualify product with customers. These sales would also initially come with a lower margin profile ahead of us scaling to run rate volumes and profitability. And of course, some of our initial production will be shipped to Texas to begin the metalmaking process, delaying the actual recognition of sales until we deliver the end product to General Motors. Importantly, we will continue to prioritize the long term and make the right investments in our mountain pass people and processes in 2023 to support separated product production for decades to come. In addition, we expect to grow our headcount and spending for Stage 3 with revenue for magnetic products not far away. Regarding cash flow, we discussed our spending plans a moment ago and have already flagged the working capital investments we expect to make at Stage 2 ramps. On that note, we are thrilled about the distribution agreement we announced Tuesday with Sumitomo to facilitate oxide sales into Japan, and we'll continue to invest in broadening our geographic reach as our markets grow. With that, I'll turn the call over to Michael for a more detailed update on our state shoe progress.

Michael? Thanks, Ryan. It has been a productive and fulfilling few months of operation and commissioning, though of course not without its challenges. On the stage one operational front, During the quarter, we experienced considerable external headwinds from construction, commissioning, and weather. But our teams have done an excellent job remaining focused, and we were able to achieve continued improvement in mineral recovery at the mill. Circuit uptime was slightly below the prior year, but exceeded our conservative estimates. We made good progress in pre-commissioning and initial commissioning activities at stage two. This also included completing the remaining upgrades and pre-commissioning work of legacy circuits that are now all ready for use. We completed our first quarter operating the new concentrate filter, dryer, and roaster, a great picture of which is shown on slide 11. Broadly speaking, this process is playing out as previewed last quarter, with certain expected challenges proving easily resolved, a large number of instrumentation nuisance issues that are also easily resolved, a certain proportion of known unknowns that have readily identifiable resolution timetables, a few reliability issues that will be worked out over time, and then a small number of unexpected issues that generated the greatest headache. Through it all, we made great progress. The primary process equipment is running quite well, and many of the initial bugs are in the rearview mirror. Even as we experiment with and tune the equipment, we are able to consistently produce roasted concentrate that meets our desired specifications. The initial testing of the roasted con suggests that it should achieve the leach yield and cerium rejection that we are targeting. This is critical to our cost competitiveness and production throughput. Initially, the vast majority of this product will be sold, but as the subsequent circuits in the flow sheet are brought online, more will be directed or invested towards making oxides. There are a handful of remaining issues that we are addressing before we are able to run at our full desired run rates through the calciner. but we will continue to attack these over the coming months as we head full steam into commissioning the balance of the Stage 2 assets. As we approach the end of the first quarter, we have commenced commissioning all the remaining Stage 2 assets, though of course some are farther along than others. The most critical next step is putting into operation our leach circuit. This includes legacy equipment that will be operated under new process conditions alongside newly installed equipment and processes. Continuing the process flow, the impregnated leach solution will then pass through legacy purification and separation circuits. The legacy equipment have already completed their recommissioning activities, while new additions are currently being commissioned. As with leach, we expect a period of troubleshooting and rebalancing when the new feed begins to flow. The last circuits in the process will be NDPR finishing, a portion of which can be seen on slide 12. I will reiterate that commissioning is and will be a nonlinear process. It is a series of two steps forward and one step back. As it pertains to our production ramp target, we would not expect commercial scale production of NDPR oxide yet in the first quarter, but we look forward to providing additional updates on our ramp on the Q1 earnings fall. It is important to remember that the startup of any one circuit does not determine the timing and ramps towards the final run rate of production. Certain circuits will be commissioned and troubleshot quickly and reach our desired run rates of production. Certain others will overcome problems but take longer to ramp up throughput. And others will achieve run rate production easily but struggle with reliability and uptime. All in all, however, we remain confident in our targets. We are more excited than ever to be putting four years of planning of Stage 2 into operation. While we expect 2023 to challenge us to a greater extent than any time since 2018, I remain extremely confident and proud of our team and look forward to progressing and communicating our production ramp in subsequent calls. With that, I'll turn it back to Jim.

Thanks, Michael. Turning to slide 13, this is a recent aerial picture of our Texas magnet manufacturing facility. You can see a lot of construction activity And most of that action is now taking place inside the building, given that the shell is complete. Since we last talked in November, most of the key public utility infrastructure has been installed. Gas, water, and with electrical finishing up shortly. We are also beginning to see some of the long lead equipment arrive, including the HVAC systems, which are now being installed. And the procurement of other long lead production equipment continues. We also now have a fully functioning magnet research lab in place, enhanced by a number of key recent hires and with more to come as we continue to expand the team. Our magnetics team should all be able to move into the new Fort Worth facility by late summer. If you look closely in the picture at the top right of the facility, you will see where sizable office and lab space connects into the factory. Our goal is to make this site the center of the most cutting edge magnetics efforts in the world. To update you on the market and conclude the prepared remarks, I would like to reiterate that I remain bullish on the outlook for our business. In 2022, despite an overall market contraction, global sales of passenger EVs climbed more than 50% to approximately 10.3 million units. There has been a profound global surge in EV adoption and action in the United States, which has trailed China and Europe, is accelerating rapidly on the back of policies like the Inflation Reduction Act, and a dramatic increase in new models available to consumers. And bear in mind that EVs are just one of several downstream applications driving growth. We also see growth and opportunity in wind turbines, robotics, consumer electronics, and even power tools. When you put this all together, looking out to 2035, with analysts predicting a three-fold increase in demand for neodymium magnets and strong corresponding growth for NDPR, A threefold increase in NDPR demand would mean the world likely needs the equivalent of more than 15 Mountain Passes coming online over the next dozen years. Keep in mind that Mountain Pass is one of the largest producers of rare earths in the world today. Assuming such economically viable ore bodies were identified and cleared multi-year permitting processes, it would still take years and multiple billions of dollars to bring that supply to market. Therefore, Even though the macro economy will usually drive short-term volatility in pricing, we remain convinced that there are huge tailwinds for our sector. MPs in place assets are therefore extremely valuable. And our vertical integration strategy, coupled with our fortress balance sheet, will enable us to leverage all aspects of our platform to create additional value. With that, let's open it up for Q&A. Operator?

We will now begin the Q&A session. If you would like to ask a question, please press star followed by one on your touch-tone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly to allow questions to generate in queue. The first question comes from the line of Matt Somerville with DA Davidson. Please proceed.

Thanks. A couple questions. I guess I wasn't aware that between stage one output and actual oxides that there would be an intermediary product in the form of roasted concentrate available for sale. Can you talk about, you know, what sort of quantity we might be looking at over what kind of timeframe and how much value does that particular process step add to stage one output, i.e., how is that priced in the market, and then I have a follow-up.

Sure. Hey, Matt, it's Ryan. I can take that, and then we'll have Mike talk a little bit about roasted con and what it means for us and our progress. As it relates to the roasted concentrate, there's not a material difference in economics in terms of selling price vis-a-vis the incremental cost of getting through the roasting step. And in fact, you know, the way I would think about the available volumes is it's not going to be a material departure from what you've seen in terms of regular concentrate sales over the next quarter or so. As we mentioned, you know, we should be and we are all preparing for incremental volumes to begin charging the downstream circuits over time. But this is a relatively short stop on the way to production of finished oxide products. Mike, do you want to talk a little bit about roasted con and what that means for the process?

Sure. Thanks, Ryan. Producing high-quality roasted con may be the most important single step in ensuring the cost competitiveness of our separation and finishing asset. The production of roasted con is an important, very critical transition point for stage two, but itself as a product itself is not the aim. But as I mentioned in the prepared remarks, the initial testing on that roasted con give us really high confidence that the yields that we'll get out of that when we proceed into leach, meaning yields of getting NDPR recovery and rejecting the serum, which is a critical part of our process, are going to be in the ranges that we're targeting. And this is really important for reducing reagent expense and improving the quality of the feed that goes to the purification and separation stages. There are also minor energy savings and maintenance savings from that as well. So it's an important product, but not necessarily an important long-term sales product.

Understood. And then just as a follow-up, one of you guys mentioned in your prepared remarks that you're feeling more and more confident about incremental mineral recovery coming out of stage one, but maybe taking a pause on that for obvious reasons as you're ramping stage two. Timing-wise, how should we be thinking about when you can go attack that opportunity, and I guess how much upside relative to the output you generated in 22 could we be looking at based on your domain knowledge at this point around that?

This is Michael. I'll take that as well. I think I've mentioned this in the past before. We do have a lot of optimism that there's significant opportunity to improve the way we do things in our flotation process, our beneficiation process, and the results of that. We have a team, growing team, dedicated to that effort. We'll continue to work towards that irrespective of the progress of stage two. So that's not hindered by the progress. Maybe some of the implementation could be impacted just by overall distraction, but we're pressing ahead with that. And I think there'll be incremental steps, incremental progress. We hope at some point there's greater progress, but we can't exactly predict the timing. Some of it is just incremental process improvement and some is more small investments that we believe could have a significant improvement. Hopefully that addresses your question mostly.

Yes. Thank you, guys.

Thank you. The next question comes from . Please proceed.

Congrats, Jim, Ryan, and Michael. I appreciate you guys taking my questions this afternoon. Thank you. Happy to do it. How you doing, David? Thank you. First, I just wanted to start off on the Sumitomo Agreement, obviously a landmark agreement. Trying to understand, I know it's early, but if you could give any sort of guidance around the potential volumes that could be sold here. Should we think about this as sort of consuming all of the available NDPR oxide that you would have for sale, not consumed in the Stage 3 operations for now? And would there be an inherent premium that you would expect in terms of pricing relative to what you would sell into China?

Sure, David. It's Ryan. I'll take that. Obviously, we're pretty excited about our deal with Sumitomo, an important step, as you mentioned, to your also market in Japan, which, as you know, is the largest magnetic center outside of China. The way I think about this agreement is it's a distribution agreement You know, this is a relatively proven and efficient way to get to market in Japan. I think it's pretty clear that there's a growing need for diversity in Japan sourcing. And so, you know, what we see is with their desire to grow production and our view of an expected demand supply imbalance coming in the market, we and clearly Sumitomo are confident there's going to be a fair amount of demand for our outside there. So overall, it's an exciting first step for us with a major player in the market, as we talked about, you know, certainly an opportunity, hopefully, to expand the relationship over time. I think the other thing I'd say on the economics part of your question, you know, as you've heard from us, you know, just a minute ago, we certainly believe in the demand picture in our market. And so, you know, we do expect to transact on market-based prices. And so importantly, I'd say the terms that are offered to the end customers in Japan remain in our control. We haven't locked ourselves into any particular model. And so from that perspective, we'll continue to do what's best for the business.

Thanks, Ryan. I have maybe kind of a follow-up for you. You talk in your prepared remarks about the IRA benefits. Perhaps 10 days ago the Treasury kind of defined what would be eligible under 48C. Can you give us a sense on the line of what you think is eligible at this point in terms of your capital being spent on expansion projects for 48C and what you would certainly see on the production tax credit side and when you might think that the timing of those benefits would be realized?

Hey, David, it's Jim. So we're watching all of the 48C stuff like you are as well. It's still preliminary. The government's coming out with stuff, and then there's going to be a period of submitting. And so it's still early to make sort of any kind of specific predictions or thoughts or guide you as to how we're thinking about that. Obviously, we're watching it very closely.

The only thing I'd add on 45... Yeah, just real quick on 45.

Yeah, the difference there being obviously different data production tax credit versus based on capital. And so from everything we see, I think the guidance there is a bit more clear and straightforward. And we will be producing a product that we believe clearly qualifies into the uh the 45x framework and so um as we ramp our our oxide production we expect to start benefiting from that um you know by default as we produce those products sounds good guys thank you thank you the next question comes from domano corinne blackguard with dosia bank please proceed

Okay, good afternoon. Thank you for taking my question. Just to understand better maybe what could be one cue and maybe, you know, the cadence of production sales and EBITDA for the year. And I know you don't give defined guidance, but maybe if we go from consensus, how comfortable or do you feel with a straight-ass, you know, most flat price? I think you mentioned obviously going through a transition and I mean, maybe lower margin towards the end of the year. So just trying to frame like, you know, a cadence for the year.

Sure. Hey, Corinne. This is Ryan. I'll take that. You know, what I would say is our expectation, obviously, that we laid out in our prepared remarks was that you should expect us to begin the transition to oxide sales in the back half of the year. Obviously, there'll be a little bit of a gap between as we bring production online versus when we're recognizing those sales into the P&L. And so we wanted to importantly make that distinction. I think to your point, as we look out at the way several folks have modeled the business, one of the reasons we flagged to you all, the margin profile is Certainly, we feel, as Michael laid out, after the results that we've seen from our roasted concentrate, we're more confident than ever in what our eventual yield and results will look like as we get to run rate. But the important thing to keep in mind is just, we've said this over and over again, 2023 is a transition year, so you can't expect our first kilogram of oxide to come out at the same cost profile as the kilogram that's coming out once we hit run rate. So from that perspective, hopefully that gives you a little bit of color. I'd say that while we make the transition, certainly we've got our concentrate business and the roasted concentrate business in the background, but we'll continue to build the team and get operators online ready for production and commercial production of stage two as we get further into the year. So those are sort of the puts and takes from a production and sales perspective.

Thank you. And then sorry if I missed it or so, but did you provide any commentary on the market itself in terms of China pricing and kind of maybe where you think it could go over the next six, 12 months?

Sure, I'll take that. So we don't typically provide any commentary on pricing just because, you know, ultimately it's a commodity and it is volatile. I think China has been, it's been really tough, as it always is, to read the tea leaves in China, you know, because it's China. And in particular, given the opening post-COVID, as well as Chinese New Year and all the moving parts. And I think if we look at the markets over recent months, there was sort of some excitement just in advance of the Chinese opening, with the expectation that there would be sort of an explosion of growth out of that. And then sort of a pullback around New Year and sort of maybe a settling in as far as sort of the world figures out what it means. My guess is that, you know, some of the things driving pricing in the very short term are probably the non-critical areas for the long term. And what I mean by that is, and I just think you might find this helpful, Corinne, if you listen to, if you remember my prepared remarks I referenced analyst research that, you know, kind of talked about the market for NDPR in, in magnetics being three times the size it is today by 2035. And that that's actually, I can, you know, for, for people who are interested, it's you know, that's not my data. That's an Adamus intelligence research report, kind of looking at the rare earth magnet market outlook. What's really interesting about that. And the reason I mentioned it is that, you look at the the market today for ndpr demand um in the growth what what are the current high growth areas which of course there will be some others but in evs and wind turbines that today is only you know a little under 20 percent of the overall demand and the rest is kind of you know standard things in in general auto or consumer electronics or some of the others and so that other 80 percent might be you know some of it will be much more volatile impacted by the economy um in the short term but then if you think about the 20 and and i think many have heard me say this before but if you think about that 20 that is the ultra high growth um growing you know compounding at say 30 a year or whatever as you look out a decade from now you know just those areas get you to maybe three times the market um you know in 15 years from now or so uh that today you know let alone the fact that that other 80 that's kind of like a gdp influence area also may have some other areas that are high growth like robotics or power tools or so again my my you know my guess is that the very short term is that we've sort of seen a very you know um uh weird chinese opening and sort of general malaise in the economy but um the the areas of growth that we think are critical for long-term pricing and even by long term i mean just you know a couple years out are are you know through all this are growing extraordinary. And so, you know, we feel really confident that that's a great trend for us.

All right. Thank you, Father Carter.

Thank you. The next question comes from the line of Carlos Villalba with Morgan Stanley. Please proceed.

Yeah, thank you very much, gentlemen. Congrats on all the progress. A couple of questions. Just coming back to the Sumitomo Agreement, Is there any color that you can give? Is this agreement a take or pay? Are there any specific volumes attached to the deal? Any color that you can provide there would be useful. My second question, it is around CAPEX. So 300 million guidance for this year, similar to 2022. I think I remember you mentioning that 700 million was the comprehensive CAPEX that you saw for stage two and stage three. How do you see then the overall 700 million balance? It still remains in place, or has there been any shift on that number?

Hey, Carlos, it's Ryan. I can probably hit both of those quickly. In terms of the Sumitomo agreement, this is a pretty standard type of distribution agreement. And so volumes and pricing is going to be market-based in consultation with our end customers. As I talked about, clearly there's a desire and need for incremental volumes and diversity in Japanese sourcing. So we are confident there's a fair amount of demand for our offsides there. And so ultimately, as I think you're probably referencing some of our existing distribution agreements, you know, ultimately over time we're going to have different contract terms and contract types. And so, you know, ultimately that's the most efficient way for us to sell into the Japanese market at this point. As it relates to your CapEx question, What I would say there is, in terms of the overall $700 million guide, which you are right, that was an all-in number, thinking about the completion of Stage 2, bringing online the Fort Worth facility, as well as the heavy-roar separation facility at Mountain Pass. And so if you take that $700 million that we guided you to, I guess almost exactly a year ago, I would say in terms of what we see in those projects, other than sort of the normal inflation that I think everybody has seen from materials and things like that, there are no material departures from that guidance. So we still feel good about that number. And so you saw that of the CapEx we reported this year, about $308 million was growth capital for this year. We're talking about another $300 million in 2023. And so we continue to expect to be on track with the investment program that we communicated to you guys.

All right, great. Thank you very much, Ryan.

Thank you. The next question comes from Delana, George, Giancarlo. Please proceed.

Hey, good afternoon, everyone. Thank you for taking my questions. So recently, China, according to certain press reports, has begun restricting the export of several technologies related to NDFEB magnet production and rare earth refining. And I'm curious as to whether you think that'll impact your ability to make magnets here in the United States.

Sure. Hey, George. So, no, we don't think that will impact our ability at all. We've been focused on this mission for quite some time. You certainly see the pictures of where we're at, and we have a long way to go, but we've got a really incredible team. And, you know, I think if anything, it just speaks to the importance of what we're up to and how important it is to have diversity in the supply chain for no other reason than that single point of failure risk. But to directly answer your question, there's no specific magnetic technology that we're counting on out of China or anything like that. So it should have no impact on us. Thanks.

And as a follow-up here, I'm sure you've noticed that there have been It seems like every day there's an announcement of some OEM or some larger company taking a stake in outright buying mines related to lithium or other metals. And I'm curious as to why you think we haven't seen that flurry yet when it comes to rare earth material and whether you think that that's possibly on the come. And I will give you some credit here that this is something that you talked about over the last couple of years is happening and it's finally here, but we haven't really quite seen it impact of your sector yet? Any thoughts? Appreciate it. Thank you. Sure.

Well, yeah, sure. Great question. I mean, as you know, I've kind of been talking about this for a while, what I call the AOL Time Warner moment of the auto supply chain where people realize that, you know, that these worlds need to collide. I think it's still early innings. So when you say it's here, I mean, I think that this is sort of a just beginning process. i would argue as far as rare earths i mean the the practical reality is that you know there aren't that many parties out there you know lithium is pretty widespread uh around the globe so you know so our copper nickel some of the you know the other commodities that you might think about um but with rare earth you know you know who the the key players are um and i i think you know we we executed our definitive agreement with gm about a year ago and and um so certainly um You know, GM is now has recognized the space and is very early. And, you know, as I've said repeatedly, we've had conversations with lots of OEMs. Our deal is not exclusive. And, you know, we expect to build a bigger, broader magnetics business. So I think the answer to your question is it has touched the rarest space. I think what's a little bit unique about us is that, you know, we have, we have a remarkable asset that we are cash flowing today. So in some of these other deals, you have essentially greenfield sites that need a lot of financing. They need to get potentially government capital, other equity capital. And so some of the deals that you may see are offtake slash financing type deals. And every deal is going to look different. But so for ours, You know, we're obviously very proud and excited of the deal we have with GM. And I think you'll see a ton of a big variety of deals in this space. And, yes, certainly you're seeing some of the same rumors that we're seeing. But I think all roads lead to it speaks to the value of the franchise that we're building. So we're obviously excited to see all that. And obviously, it feels really good to, you know, have. predicted something happening and seeing it come true. And I'll, you know, continue by saying that I just, I think that, you know, you're going to see a lot more of that.

Thank you.

Next question. Yeah.

The next, the next question comes from Delon and Kello Woodbear. Please proceed.

Hey guys. Along the same lines, Jim, I guess for you, how do you think about offtake agreements? I know that you guys want to maximize the value before signing offtake agreements, but just with the volatility we saw this year and all the OEMs coming in, locking up lithium or other materials, has anything changed in your view on long-term agreements?

sure ben um i think it connects into um and i think i can expand on on what i was saying a little earlier um but you know often there's often there's a variety of offtake agreements and so i think some of the the recent deals you might be seeing it's always hard to tell what component of that offtake is a financing versus what component of that offtake is just offtake right and i think the good thing about the strong position that we're in with, with the fortress balance sheet that we have is that we don't need to view offtakes as any form of financing, right? We can be totally agnostic. As far as that goes, we can look at an offtake or, or any kind of structure as to what is the highest return maximizing value option for shareholders. And so, you know, as I've said from the very beginning we'll continue to do that. And, um you know we're in a really good position and i think particularly in our space and maybe i should have touched on this earlier but we'll because of the platform that we have i do think and maybe it's you know a little early uh but but maybe not um we're gonna have some exciting opportunities given our platform um you know to to to be in situations where maybe you know sort of earlier expectations of of things didn't work out so much and we can kind of come in and provide solutions, and so I think that's sort of an exciting opportunity for us, but we're in such an early stage of growth in the space that who knows, but I would also just say, obviously, I kind of say this repeatedly, and I appreciate the ask, but we're not going to telegraph those before they happen, so if we do something, you'll see it announced. We're not going to you know, sort of say, Hey, we're pursuing this offtake or that offtake or whatever. We'll, we'll, you know, we're going to, you can imagine behind the scenes, we're having conversations and trying to do the best that we can do to, to create value. And, and you know, it's, it's, it's, it's exciting.

Thank you. And Michael, you mentioned the lead team a couple of times. But if we think about the flow chart from the dry roasting to separation that leads you in between, I think, is there one more difficult step than another? I think you said this in your opening statement there, but I think separation gets people tripped up. Is that wrong? Or what do you worry about most, I guess?

I think... It's important that we do the leaching right if we want the other parts to be stable. But I don't think I would say one part is easier than another. Obviously, they all ultimately have to work the way we need them to. But we're optimistic about all. We're very excited to be receiving the leach the way we think it should be.

All right. Thanks, guys.

Thank you.

Thank you. The next question comes from Delano from Lawson Winder with Bex America. Please proceed.

Thank you, operator. Good evening, gentlemen. Nice quarter. Maybe just one question from me. The research center, I mean, developing a cutting-edge magnets research center in Fort Worth in a matter of years sounds very, very exciting and also potentially very expensive. Maybe you could give us an idea of what the annual run rate cost of running a cutting-edge research center would be, and then are there challenges in staffing that? Thanks.

Sure. Well, the good news is there's nobody positioned really in the Western world, really outside of China, to lead in this effort. So, you know, unlike a lot of areas that might be sort of more competitive out there in the world, given our set of assets, we have that unique position where we can, you know, we can, as I like to say, talent against talent, scale against scale. We're sort of in the early days of this. And so it's an extraordinary opportunity. You know, as far as where the talent getting the talent. I mean, the good news is if you're, you know, if you're in metallurgy or magnetics, um, MP is the place to be right. We, we are, um, we, we've had a lot of talent and, uh, that that's reached out to us. We've brought some incredible talent on board. Um, it will continue to do that. And lastly, what I would say is, I mean, with this cost, it's the, it is nothing compared to the opportunity. And I hope that we've at least earned the right to, you know, have you believe us when we say that we are maniacally focused on shareholder value. And we, you know, we're not looking for a research project. We're looking to create a magnetics champion. Um, and, and so everything that we do is geared towards that. And when we think about research, um, these are not, this is not like a, you know, a think tank. This is research oriented towards, uh, creating a franchise that's going to be enormously valuable in the, in the decades to come. So, um, it's a great question because we do ask ourselves that question. Every person that we hire, every penny that we spend, but it is a commercially focused resource organization. And I'm very confident that over time we'll yield extraordinary returns from that investment, but it may take some time, right? This is very long lead stuff. And so you'll, you know, those impacts are, In the company today, they'll be in the company in the near term, but, you know, I'm very comfortable that they're going to, you know, pay off in many, many multiples and be, you know, we'll be glad we did it.

Okay, fantastic. Thanks, Jim. Sure.

Thank you. The next question comes from Delana. Bobby Sinha with North Capital Markets. Please proceed.

Yeah, thanks for taking my question. I think Ryan touched upon this, and I apologize if I missed it. I just wanted to get the production cost in terms of dollar per ton, the 1928 figure. How should we think about, like, how do you keep up as we move on to 2023 as you get better efficient CHP, or, you know, how should that flow, and what should we be looking at the run rate for the production cost as we move forward?

Yeah, sure, Avi.

What I would say, we don't provide specific forward-looking guidance, but just to give you some color on what's in that number. So looking at the reported metric that you mentioned a moment ago, the largest drivers there, as you'd expect, are costs related to stage two that find their way into COGS even at this point before we're producing. And so, for example, certain personnel expenses as we build the team. You mentioned it's a combined heat and power plant. that is running suboptimally until we've got the full stage two power draw. One of the things we talked a little bit about last quarter was our gas hedge position. And a significant portion of that did not come into effect until January 1st. So we were exposed on some gas prices and California gas prices with all the weather there for a good portion of our burn in Q4. And so that had an impact that we don't expect to repeat. I guess pulling the onion back a little bit more and just trying to pull out the costs that I just mentioned that are, you know, not related to Stage 1. The Stage 1 standalone costs were closer to $1,600 in the quarter, a little bit higher than what we normally see in the $1,400, $1,500 range. And that was predominantly due to two items that showed up in the quarter. Firstly, an impact from just really timing of maintenance. As we've talked about, we take our biannual plant shutdown in the fourth quarter. And in addition, in this fourth quarter, we incurred some costs in relation to maintenance activities on our crushing facilities as well as our mining fleet. And so those just kind of happened to hit all at once with enough scale to kind of be noticeable in the quarter. But when you look at the frequency and scale of these events over time, the cost burden of those are generally captured in what is kind of our more normal run rate cost. So if you look at the adjusted stage one only cost growth year over year over the course of the whole year, which is in that mid-single digit range, I think that is much more representative of the stage one business. But as I mentioned, of course, the cost related to stage two, as we get closer to stage two ramping, will continue to pick up a bit as we bring new heads on board, new maintenance team members and things like that. So hopefully that gives you some color on the moving parts and what to expect.

Sure.

Thank you.

And just one more, if I could. You talked about in terms of production volumes, that was like being adversely impacted by some lower feed grade and mineral recoveries. I just want to get some color on that, if you could elaborate, like, you know, where are you getting lower feed grade and mineral recoveries? What's about that?

Yeah, I think maybe you might have misheard part of that.

What we saw in the quarter actually was slightly lower feed grade, but improvements in mineral recoveries. And so I would say when you put all of the moving pieces together, Obviously, looking at the results, there was not really a meaningful or material change from our overall sort of production cadence. And so, you know, we don't expect anything particularly material to change here over the next year or so. Michael gave a nice idea of the various items we have in the hopper to hopefully tackle mineral recovery and improve what we believe is certainly won't pass levels.

over time but you know nothing nothing really material to to report there right sure thank you very much that's all i have thank you the last question is from the line of lars alexander with jefferson please proceed good afternoon just a couple one is can you talk a little bit about how you expect staffing to evolve over you know over the course of this year and then over the next few years and where that would take your SGMA to once you have the magnet production up and running, once you finish the vertical integration. And secondly, as you've been discussing with various customers about the move into magnet production, is the expectation or the baseline for discussion about any potential agreements that you would have a return on capital at current magnet prices? Or is it that you would to the current market to get adequate return on the capital you will be investing?

Sure. I can take that. So in terms of the growth in staffing, you know, I wouldn't attribute, you know, all the growth in staffing certainly to SG&A. What I would say is that, you know, a significant portion of the staffing that we expect to bring online for, Stage three, as we get closer to production, we'll eventually find their way in production costs. In the early days, they'll be, you know, they won't find their way into COGS. But to give rough numbers, you know, in hiring plans at stage two, so at Mountain Pass, we'll probably bring another 60 to 75 people on board. You know, over the next year for stage three, it will probably be shy of 100 incremental folks So hopefully that gives you just a rough sense, but I would just caution on sort of attributing all of that to one particular line item in the P&L. On your second question, Jim, do you want to start off on that one?

Yeah, sure. Yeah, I mean, I'll just, hey, Lawrence, point blank and very clearly we have said consistently over time that we look at the stage two and three businesses as separate businesses that certainly benefit that we're on the same platform, but that we have to make sure that incremental investment has a very attractive risk adjusted return on capital. And so we, you know, we, we have no interest in, you know, shifting money from the stage two business to the stage three business and lose capital. You know, as I, as I like to say, um, we're not going to rob Peter to pay Paul. What is great about our platform, though, is that it does allow us to think holistically about the verticals and ultimately where and how we choose to structure whatever deals may be. We're going to think about the fact, the baseline of, okay, well, we have a commodity in stage two that we can sell at a market price. How should we think about this incremental opportunity? And if that incremental opportunity is attractive, that is how we're going to think about it. So, you know, I want to reiterate that that is of the utmost importance to us because we, you know, as you've heard me say, we think like owners. We're large shareholders, so we want to make sure that any growth in the business is driving value. We're not in it for charity.

Thank you.

Okay.

Thank you. I will now hand it back to the management team for closing remarks.

Yeah. All right. Well, thank you, everyone. Congrats to the team. It was a great quarter and a great start to the year, and we will get back to work. So have a great night, everyone.