MP Materials Corp.

Good afternoon, and thank you for attending the MP Materials third quarter 2023 earnings call and webcast. 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 queue for a question on today's call, please press star one on your telephone keypad. I'd now like to pass the conference over to your host, Head of Investor Relations, Martin Sheehan. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Welcome to the NP Materials Third Quarter 2023 Earnings Conference Call. With me today from NP Materials are Jim Litinsky, 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 give you a brief overview of today's call. To begin, I will discuss the third quarter and recent highlights. Ryan will then run through the financials and KPIs, followed by Michael, who will review operational progress. I will then provide some closing commentary before Q&A. So let's begin on slide four. I'm going to start in the middle of the slide with our midstream business. We produced 50 metric tons of on-spec NDPR oxide and commenced shipments. Producing at scale is a massive achievement. Let's put that amount of production in context for a moment. 50 metric tons of NDPR as feedstock could make approximately 100 metric tons of neomagnets, which would power over 100,000 or so EV traction motors. In the U.S., sales of EVs are averaging a little over 100,000 units per month. So being in just the early innings of our production ramp, we are clearly already doing amounts that are significant from an economic security perspective but also with a very long runway for domestic and global growth. We expect to produce multiples of our Q3 output of NDPR in the fourth quarter and expect further step change improvements in 2024. Michael and the team are maniacally focused on improving reliability, increasing throughput, and maintaining our low-cost position. They are making great strides. Michael will expand on this later in the call. MP's NDPR will be delivered to customers in the first quarter as either NDPR oxide from Mountain Pass or NDPR metal from Southeast Asia. So our transition from an upstream to midstream or a refined products producer is officially underway. It's an exciting time for us and our customers. As a reminder, and as we have consistently stated, Commissioning processing facilities and ramping production is an extremely challenging process with nonlinear results. I have tremendous confidence in our team though. Now let me shift back to the left side of the slide in our upstream operations. This was our 10th consecutive quarter with over 10,000 metric tons of REO production and concentrate. Stage one continues to hum along. we must remember that achieving great results in the upstream stage of the business is critical as that is a key driver for the cost structure of the operation. I wanted to note that we did not sell all the concentrate we produced this quarter as significant amounts were sent along into our stage two midstream circuits for refining. We have now completed the line fill of concentrate needed to charge all our downstream production circuits. The takeaway here, is that we are now at the stage where feeding product into the front end of stage two means that the finished product is going out the back end. Ryan will go into more detail on this later. More importantly, I have some exciting news to share. Many of you have heard me say that the nearest term highest return on capital and lowest risk source of incremental American rare earth supply would be brownfield improvements and capacity increases at Mountain Pass. Well, our stage one maximization and expansion efforts are yielding fruit. Today, we are announcing upstream 60K, which is our strategy to drive towards the goal of a 50% increase in REO produced within four years with modest incremental capital investment. This suggests that we have the potential for enormous enterprise value creation over the next few years. Michael will provide more details. Lastly, on the downstream business, we have officially moved into the office portion of the magnetics factory in Fort Worth. This is remarkable as we only broke ground 18 months ago. Our first major piece of process equipment has been installed in the factory and we expect a lot more progress in the coming months and throughout 2024. Despite the treacherous macro environment, We believe the commercial landscape provides opportunity to grow our magnetics business. We are making substantial progress towards a high return on capital expansion of this facility, but we expect only to do so if it can be done in a risk managed way. We are always thinking like owners and we'll update you on that accordingly. With that, let me turn it over to Ryan to run through our KPIs and financials. Ryan?

Thanks, Jim. Let's start the discussion on slide six. This slide has a bit of a new look from prior quarters as we've added NDPR production volumes to the far right. As we've talked about in the past, our operating metrics will evolve as we shift from concentrate production and sales to NDPR oxide and metal production and sales. So, over time, you will see certain upstream-related metrics fall away with updated metrics that represent our transition into separated products. I would also point out that you will see slightly different revenue headings on our P&L, which will also likely evolve over the coming quarters. What remains clear is the strong production volumes for Q3 on the far left of the slide at 10,766 metric tons is very consistent with both Q2 and last year's Q3 production. Sales volumes dropped about 1,499 metric tons compared to Q3 2022 and 1,094 metric tons sequentially. These declines were primarily due to the work in process line fills that Jim just mentioned and that we spoke about on prior calls. As a reminder, operating equipment at each stage two process circuit as well as intermediate product storage needed to be filled with upstream product. We have now absorbed all of that concentrate into these circuits and transitioned to converting some of that upstream volume into separated products with 50 metric tons of NDPR outside produced in the quarter. As we've also previewed, our transition to separated products comes with a change in the duration of our sales cycle with a slightly longer time to revenue for separated products than with our concentrate product. Early NDPR production is primarily being used to build inventory at our tolling partners to begin production of NDPR metal, which is further extending the time to revenue on the products produced this quarter. So, this one-time transition is reducing our upstream sales and earnings without yet seeing the benefit of the midstream revenue and earnings, but we will quickly lap this impact as we move into 2024. On realized pricing, highlighted in the middle of the page, you can see what the impact of lower NDPR market pricing had on our realized price of REO and concentrate, down just over 50% year over year. Sequentially, pricing declined about 8% to $5,718 per metric ton, a bit better than expectations as pricing stabilized and recovered late in the quarter. Lastly on this slide, our production cost per metric ton, excluding stage two related costs, was essentially flat sequentially at about $1,600. Including Stage 2 related costs, the cost per metric ton was a little over $2,000. As you'd expect, we brought on a tremendous amount of incremental maintenance headcount that mostly flows through the P&L and makes up a large portion of the $400 per metric ton that is Stage 2 related. With these changes to our operations and with the launch of scaled separated product production, we will evolve our reporting of cost metrics going forward. Moving to slide seven, on the far left, you can see the combined impact on revenues from the lower realized pricing and our lower sales volumes. In this instance, lower sales volumes of concentrate is counterintuitively a bit positive for us, as it means more internal consumption for NDPR production and eventually sales. As you can see, with most of the revenue decline driven by lower pricing, we see this flow through to our EBITDA in the quarter. Despite weak pricing and additional Stage 2 costs without corresponding sales, we reported a still solid EBITDA margin of 30% in the quarter. And moving to the far right, most of the change in adjusted EBITDA flowed through to our adjusted net income and therefore our adjusted diluted EPS. Positively impacting the comparison was the significant interest income of roughly $14 million we are earning on our large cash balance. I would also point out that despite the challenging pricing environment, as Jim said, Stage 1 continues to generate a modest amount of free cash flow as our cash from operations in the quarter was roughly $11 million, which includes significant investments in Stage 2-related costs and working capital, while our non-growth CapEx was only $4 million. I'll talk more about CapEx shortly, but to finish the thought on our P&L, we did see about $6 million of higher startup costs compared to last year's third quarter, understandably driven by the final push of commissioning of stage two ahead of production of separated products within the quarter. Now that the majority of these assets are achieving commercial production, this line item should start to decline beginning in Q4 as it relates to Mountain Pass. but there will still be some costs related to the startup of our Fort Worth facility expected in that line item until commercial production there. In addition, depreciation, depletion, and amortization increased to just under $17 million in the quarter, in line with our comments from our last earnings call. The year-over-year increase of nearly $15 million was driven by over $350 million of assets put into service over the last 12 months. most of which were related to Stage 2 and other investments in Mountain Pass. We do expect this will continue to climb as we put more assets into service in the coming quarters, including portions of the Texas Magnetics facility. Lastly, on the P&L, relative to last quarter, our full-year expected gap tax rate is up a couple of percentage points, which you will see reflected as a slight increase in our year-to-date tax rate. This is partially driven by ongoing updates to our calculations of the 45X production tax credit and its impact to 2023, as well as our ongoing prioritization of minimizing cash taxes in the near and medium term versus optimizing the gap rate. Similar to last quarter, small updates in the full year rate had an outsized impact on the current quarter's book tax rate, given the small pre-tax net loss. Turning to the balance sheet, our cash balance remains very robust at nearly $1.1 billion of gross cash and just under $400 million on a net basis. Total CapEx in the quarter was about $59 million, while growth CapEx was $55 million. We now expect to spend up to $270 million in total CapEx this year, down from the $300 million we were expecting a quarter ago. Growth capital of approximately $250 million primarily consists of Stage 3 heavy rare earth separations, as well as other investments in mountain paths. The reduction in our forecast is primarily due to the timing of payments, as well as a strong focus on capital efficiency. With stage two capital spending behind us, our expectations for the overall budget on our other major projects, heavy separations and stage three, remain generally intact with our prior views. In addition to upstream 60K, the stage one expansion goal Jim mentioned, We continue to evaluate other exciting but smaller investment in Mountain Pass. And additionally, are evaluating a high return on capital expansion of capacity at our Texas Stage 3 facility. We expect to provide further details on our 2024 capital plans on our Q4 call. But as always, we remain extremely focused on cash on cash returns and maintaining our Fortress balance sheet. Taking a quick look at Q4 for you. Upstream and midstream production volumes will be affected by our typical one-week plant turnaround. We may sound like a broken record when we talk about how this was our most thorough shutdown to date, but this is especially true this time around, with work performed on all of our Stage 1 and Stage 2 circuits and all supporting infrastructure. Note that we expect concentrate sales volumes will decline a fair amount quarter of a quarter as we ramp our NDPR production and consume a greater portion of upstream production internally. But as we stated last quarter, much of our initial output of NDPR oxide is going to Southeast Asia to build inventory at our metal tolling partners. And therefore, we don't expect material sales volumes from our NDPR production to begin until Q1. Concentrate realized pricing will likely be flat to slightly up sequentially, assuming recent NDPR pricing stability holds in the coming weeks. Importantly, as I stated in my opening, as we get through this transition period of shifting from concentrate sales to NDPR oxide and metal sales, and with line of sight to hitting our full production targets, we would expect to see results start to improve off of a likely trough from our transition impact in Q4 as we move through 2024. Needless to say, we expect the success of Michael's team will begin to become more evident in the financials as we enter 2024. With that, I'll turn it over to Michael to give you a more detailed update on those successes.

Thanks, Ryan. Turning to slide eight, you could see some of our October production waiting to be shipped off-site. It was a solid operational quarter for our upstream business. Concentrate production was down just slightly year over year, primarily due to higher unplanned downtime, but both periods were generally within normal ranges. In the quarter, we produced concentrate at a record grade, which gave us an opportunity to experiment with operating at a slightly higher end of the grade versus recovery curve. We also advanced two exciting flotation circuit upgrade projects that we believe will, over time, drive further improvements in concentrate production. First, we started up a long-awaited froth camera and automated float control system that incorporates both manual parameters and AI to make adjustments to the flotation circuit. Like an experienced set of human eyes, we now have a camera mounted atop each flotation cell. The cameras are collecting data on flotation speed, bubble size and color, and probably other things we haven't even thought of. As we learn, the system learns, and our team learns how to learn from it. For now, we are still in trial operations, but we expect this trove of data and computer learning to help gradually improve flotation circuit consistency and performance. Second, we began construction on a significant enhancement to our grinding circuit. We believe this will unburden our current grinding mill while ensuring more ore is ground to the optimal particle size and bastion site liberation. Given the enormous disparity we observe in the mineral recovery of different sized particles, we are optimistic that this will produce a notable recovery uplift after it comes online next year. The Stage 2 midstream operations continue to grind out progress day after day. Operations are by no means as smooth and predictable as we would like, but by now we have worked through the vast majority of the initial mechanical issues and instrumentation challenges that were most disruptive in previous periods. To be sure, quite a few areas for improvement remain. The performance of our separation circuits has largely exceeded our conservative expectations and should continue to improve as our technical and operational teams gain experience. The addition of redundant QC vessels and isolation capability in our NDPR production circuits as part of the stage two optimization project has increased our resilience to minor process variability and ensured greater first pass on spec capability. In 3Q, product finishing of NDPR suffered from several premature failures caused by poor construction workmanship. These held back 3Q production and bottleneck the circuits upstream, including separations. This has been restored in October, and we are confident that we are over the hump of most of these types of issues. As we look to 4Q and beyond, we are increasingly confident in our ability to reach our production targets. With enough operational time now under our belt in most plant areas, we are encountering fewer entirely unexpected problems, and now spend most of our time addressing our known pain points. In the next few quarters, we will continue to focus first on increasing process stability, next on ensuring longer uninterrupted run times, and then on increasing plant throughput rates. We believe this approach satisfies our business needs and commercial commitments while we finalize product qualification and testing with our customers and complete the same for told metal. I expect several more quarters of hard work and ups and downs before we hit our stride, but we have a more clear line of sight to our production goals and feel optimistic about our progress. Once again, I'd like to thank our teams for their hard work. We completed another quarter without a lost time injury and are working unwaveringly through commissioning. I'm really proud of our team's achievements and I'm confident that we have the technical and operational talent in place to reach our goals. Before I turn it over, I want to provide a bit more detail on our upstream 60K expansion strategy. Although we've been heavily focused on Stage 2 for the past three years, we've never lost sight of the high return opportunity in our upstream business. Over the past several calls, I have described a strategy of building upon our stable Stage 1 operations by targeting modest growth from operational improvements and certain low-cost projects, while pursuing more step change growth from larger investments. Our efforts towards step change growth have been picking up steam over the past 6 to 12 months. Over the past year, our growing team of metallurgists and technicians has been working in conjunction with our geologists, plant operators, and process engineers to expand our understanding of our ore body and flotation performance. They have engaged in extensive R&D and piloting efforts, to develop high return process improvements to our existing concentrator facility, while also evaluating more ambitious growth opportunities. I highlighted two of these incremental projects earlier, and I believe there are many more behind those. The teams have been working diligently to develop a plan to better utilize the entire Mountain Pass resource. Our site is blessed with a truly world-class ore body. The richness and ease of processing is perhaps second to none. Because of this, the sulfide clean deposit has been somewhat taken for granted over the past 70 years of mining. As an example, we have calculated a 2.5% cutoff grade for our resource, while many development projects with much more complicated mineralogy, flow sheets, and geographies publish reports with cutoff grades below 1%. In fact, for much of Mountain Pass' recent history, the cutoff grade was 5%, which gives a sense of what might have been ignored as uneconomic in the past. Over the past 18 months, we have piloted small and commercial-scale equipment with marginal feedstocks from mountain pass and also on slipstreams pulled from our flotation plants. While it is early days, we really like what we see. At this point, we have enough real-world pilot data to take the next steps of project development. Adding it up, We are confident that between reagent optimizations, operational improvements, small capital projects in our concentrator, and the investment in additional beneficiation capability targeted at underutilized resources, in four years, we can increase our overall REO produced in concentrate by approximately 50%. With that, I will turn it back to Jim.

Thanks, Michael. Let's wrap up on slide nine with this gorgeous picture at Mountain Pass. Please take a moment to enjoy this pretty view of revenue on a mountain landscape. As we look around the world, though, the picture is not so pretty at all. I think it is fair to say that most of us are seeing things we never expected to see. The sad truth is that nothing can be taken for granted at such a perilous time. With major conflicts in Europe and in the Middle East, It is possible that a third theater or region of war erupts, or just that things continue to devolve materially from here. We certainly hope it does not. At MP, we believe that despite her faults, America has been the greatest force for good in the history of the world. We pray that that continues. In our industry, it has been a very difficult year, and that started before the events of October. There are concerns about the pace of electrification and EV adoption. Interest rates moved higher, and Chinese industry and the global industrial economy remain challenged. Specifically, commodities prices and the company's leverage to the materials for electrification are out of favor right now. But despite near-term turbulence in the market, the long-term secular cycle we believe is largely intact and bodes well for the price of our products and the value of our company, which makes our share price at current levels something we are very surprised to see. And as Michael and I discussed earlier, we've been laying the groundwork for further long-term and high return on capital enterprise value creation at MP. In essence, it is likely that no rare earth project in the Western world would make sense again if you do not think our set of assets demonstrates incredible and asymmetric value from here. In the meantime, recent global events remind us that what we have achieved at MP is important for America. We are proud of that. With that, I will open it up for questions. Operator?

We will now begin the Q&A session. If you would like to ask a question, please dial star followed by one on your touchtone 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 is from the line of Matt Somerville with DA Davidson. You may proceed.

Thanks. Hey, guys. First, I obviously want to talk about the big announcement you're making regarding stage one. And I guess I want to understand, as you look out over the next four years, is this a linear ramp from 40,000 tons to 60,000 tons? Do you think about, on a commensurate basis, adding more, realizing stage two is still ramping, but adding more Stage 2 capability alongside that, or maybe that capability is already inherent with the asset base you have on the ground. Maybe if you can just talk through that to start, that would be helpful.

Sure. Hey, Matt, it's Ryan. I'll start, and Michael, if there's anything I missed, please jump in. As it relates to upstream 60K, we don't expect this to be a linear progression to 60,000 tons upstream. We laid out our over four-year timeframe, given that we think there will be incremental upgrades to our current production and our current mill and flotation circuit that will come to pass in the much shorter term. but there will also be the opportunity for step change that will come a little bit later in that period. You know, I think one of the things that's pretty exciting about this is that some of this step change growth may actually come from, you know, let's call it alternative sources, if you will, material that we classify right now as waste. Some are cutoff grade. We actually have had really exciting results um from that uh tailings some of these other opportunities where you know we expect this to be incredibly value accretive not just because we're growing our upstream production by 50 but also because of the sources um of that reo so we're incredibly excited about that um you know i i think in terms of your question on the stage two capacity What I'd say there is our focus is on delivering the 6,000 tons that we've committed to first. And so I don't want to make any promises to you about exactly how and when this upstream material may get separated. But I think it's safe to say that as we designed the circuit, The downstream circuits, we did incorporate, you know, plenty of engineering factors and things of that sort. So we will continue to look at that opportunity to add even incremental value above and beyond what we're talking about with the upstream expansion.

Got it. And then just to Jim's last point, you know, with the stock price where it is, realizing you guys want to maintain a very healthy balance sheet, Having said that, does that change the way you're thinking about capital deployment? Obviously, plenty of growth projects on the drawing board here, no doubt about it. But do you think about share repurchase differently given market conditions? Thank you.

Sure. Thanks, Matt. And yes, as I said on the remarks, I think we're very surprised to see the share price where it is. And I think you've generally heard my views with respect to capital allocation on prior calls. But, of course, I think it's always worth repeating that, you know, we are owner-operators. I'm the largest shareholder of the company. You can imagine that we spend every waking moment thinking about allocation of capital and, you know, how to create value for all shareholders. What I would say, I think, just to sort of put in, you know, my kind of terms, what we've announced today with Upstream 60K, you know, If you look at our valuation today, and of course, commodities businesses are volatile, they are cyclical. And, you know, let's, let's say hypothetically that you believe this is a, you know, cyclical trough valuation. And, you know, we're, we're just around 3 billion. Okay. What we basically announced today is that with modest incremental capital, we can expand over, you know, the next call four years, 50% REO, which in theory means that assuming we do that right that's that is just a 50 increase in enterprise value right that should be worth one and a half billion at trough levels if you assume a normalized value over the last few years you know that's probably worth double that or more several billion and the the point is is that that when we think about our assets the return on capital is just enormous if you can invest you know a modest amount and get many multiples Those are the kinds of investments that we want to make sure that we have the flexibility to make, because particularly given the environment that we're in, you know, first and foremost, we must have a fortress balance sheet that, you know, has been, you know, sacred to the company from the very beginning. And we've been clear about that. But then from there, we want to make sure that we can do all the sequencing thoughtfully, you know, with that all said, I, you know, I, kind of look at the screen here and scratch my head. And so, you know, with that all as a preface, I reserve the right to do anything here. So, you know, stay tuned. But again, just the, you know, what we've announced today is what we believe is going to be some enormous value creation for shareholders.

Appreciate the call. Thanks, Jim.

Sure. Thank you. The next question is from the line of Lawrence Alexander with Jefferies. You may proceed.

Good afternoon. Two questions. First, just to follow on that, can you sort of help narrow down what you mean by, you know, incremental or, you know, sort of capital required for the expansion either in terms of to capital you expect to spend or, you know, including working capital and also or in terms of like payback at some kind of normalized price? Can you just, you know, help people sort of frame that?

Sure. I didn't get a great line on that. Could you repeat that, Warren?

Sorry. Sure. How much do you expect to spend for the REO expansion?

At this point, what we expect is sort of order of magnitude about $200 million. And as we laid out, you know, this plan occurring over the next four years, you know, I don't expect that spend to be linear either. But, you know, I think that probably gives you a sense. We're talking about, you know, a 50% expansion in our upstream production. And obviously, you've seen how profitable that business is. is and can be. And so, you know, with that level of spend, I think this sort of speaks to exactly what the point that Jim was trying to make a minute ago. And I think it's just important for us to highlight, you know, the embedded value of our assets here, being able to spend that quantum of capital to grow our business at that scale. It's something we're very excited about.

And then can you give a little bit of a more granular update for how your thinking has evolved around the cadence or the financial metrics for the magnet business?

Sure. There's really no change in cadence there. You know, the thing that I would highlight is we did mention in our prepared remarks We're looking very closely at, you know, similar in a lot of ways to, you know, what we laid out in the upstream, very high return on capital, potential expansion of the downstream business, given the scale that we, you know, that we've gotten by making the initial investment in that facility. We see a lot of interest from customers and a very good opportunity to expand scale there. And so there's really no change in how we think about you know, the go-forward plan or metrics on the Stage 3 business.

And then just lastly, on the regulatory front, can you just give a quick update on what you're seeing, particularly in the U.S., around sort of any chance of movement on any of the magnet bills?

Sure. Well, we finally have a Speaker of the House, so that's progress. you know, I think we're heading into an election season. And so, and particularly given what's going on around the world, you know, I'd be, you know, I think it'd be aggressive to say that we expect anything in the very short term. What I would say I would look out for, I think one big area from, you know, from the magnet standpoint would be there's a bipartisan committee in the house, the select committee on China, which is, you know, discussed doing something on that front. And so I do think, that we will see something on this front. But, you know, again, I mean, you see what's going on in Washington, you know, on both sides, you know, on all fronts. And so, you know, we're certainly not relying on that with respect to the magnet business. But we do think that as something happens, it's, you know, a strong possibility that something helpful there gets tacked on. But to get to the heart of your question, just kind of adding on to what Ryan was discussing before with the magnet business, we understand that we're building a business from scratch there. And the governor is, again, making sure that we are proceeding thoughtfully and in a way that is a high return on capital and that we're managing risk with respect to building out that business. And so, you know, we... We aren't just going to kind of go out and aggressively spend. And frankly, even if there were legislation as such, we are going to do things that make economic sense. We're not waiting on government help there, but we want to continue to hit sort of base hits on that front before there's anything much larger. And of course, obviously, what we've got, if you see the scale of what we have in Fort Worth today, it's a pretty big start.

Thank you.

Sure. Thank you.

Next question.

The next question is from the line of Carlos de Alba with Morgan Stanley. You may proceed.

Hello, guys. Good afternoon. So the question I have is, you talk about potentially increasing by multiples the production that you had of NDPR oxide in the fourth quarter, and you feel, I think Michael said that you guys feel very comfortable in reaching your guidance for your production targets for the fourth quarter. I wonder if you can maybe quantify a little bit more this and narrow the range of possibilities, just given how important it is, the cadence of how you guys ramp up the oxide production. That would be my first question.

Thanks, Carlos. We're pretty excited with the progress we're making. I'd be reluctant to give too much clarity on what we expect, but we do expect continued progress in the fourth quarter and even more notable progress into the next year. We are seeing more stability, more reliability, and we're going to continue to focus on stability, reliability, longer uninterrupted periods of uptime, and then focus really on throughput.

Yeah, and Carlos, the only thing I'd add there is, Ryan, I think, you know, importantly, what we're also focused on here is ramping production profitably and sustainably and not just chasing volume at all costs. And so I think Michael and his team have done an incredible job achieving that so far. And so, you know, we probably expect to have a few more quarters of ramp before we hit our stride, but we're very, very happy with where we are today.

All right. Okay. And I heard you correctly in saying that you expect to have already sales of NDPR oxide and or metal in the fourth quarter?

What we mentioned is expecting the majority of sales, even of the Q3 production, to occur in Q1. So certainly not ruling out Q4 sales, but in thinking about the sales cycle and the timing of that sales cycle that I've laid out in the past, particularly because this initial set of volumes is building up a set of inventory and tolling partners. So this early production is a uniquely slow sales cycle in terms of the transition from concentrate to oxide or metal. You know, I don't expect the sales cycle to always be exactly this pace, but I think that's important as you guys look at your models for Q4 and Q1.

All right, good. And my last question is, on the $200 million, give or take, that you expect to spend in the Offstream 60K project, how should we think about the cadence or the pace of the disbursement? Is this something that might take, maybe start next year and accelerate over the next four years? Or how do you see that disbursement?

Sure. What I'd say on that front is, I think the exciting thing about this project is there are many different pathways for us to hit that target. And so we've gotten enough confidence in the initial test work to lay out this strategy. But like I said, a couple of different ways to get there. You know, I'd expect that the outlay may start, you know, very modestly next year and then be a bit backloaded as we likely look at those step changes towards the back portion of that guided four years.

All right. Great. That's good. Congrats, guys.

Thanks. Thank you. The next question is from the line of George Giannarchos with Canaccord Genuity. You may proceed.

Hey, guys. Thank you for taking my questions. First, I'd like to ask about the pricing environment. And a couple of few quarters ago, Jim, you talked about $60 a kilogram kind of being a bottom for NDPR prices globally just based on profitability of China Inc. And it seemed to be or it seems to be somewhat prescient because we seem to have bounced off that level a couple of times despite a weakening EV market. Any update in your thinking there and whether or not we can continue to at least bounce around these levels for the time being before EV sales accelerate?

Sure. Thank you, George. I always like a question that starts with giving me credit for being prescient. So thanks on that. So, you know, NDPR is sitting roughly around 70. If you think about the world today versus several months ago, it's correct that we've seen We've seen a lot of the pricing has pretty much held in. But in that time period, if you think about it, we've seen deteriorating trends, you know, whether if we if we look at this quarter, you know, across electrification and whether it was the OEMs themselves, both the new ones and maybe what some would consider legacy ones, the research analysts or some of the semiconductor companies feeding into the supply chain. You've sort of seen this feeling around, you know, a a slowdown in electrification relative to what people thought simultaneously you've seen some wind projects canceled you know some major wind turbine projects canceled and so relative to what people thought and actually though even with all of that prices have held in very well and so i think it does speak to the fact that we are we have been bouncing around the bottom because the economics just really require i mean there's only so long that parties want to lose money. And so certainly it makes zero economic sense at these levels for any incremental supply, really anywhere in the, you know, at least in the non-Chinese world outside of our upstream 60K, which also makes our upstream 60K, you know, so exciting because we, for very little incremental capital can, you know, create what we believe to be very large long-term enterprise value and have very attractive economics out of the gate. And so I think that will, I think, hopefully that will prove prescient as well that, you know, that, um, we, we have positioned ourselves to be able to make these kinds of investments at times like now where, you know, you'd have to be crazy to invest in a green field, you know, sort of elsewhere in the world with prices here relative to frankly buying MP stock for sure. Um, and then lastly, what I would say, um, is, is just, as I think about trends is, is we can't, we can't forget about the reality of October. Um, and, you know, what has happened this past month in the world. And what I mean by that is, of course, there's going to be, you know, global macro impacts. And I think all of us see that. But I think that that is a further strengthening of the theme. You know, there's a theme that we've talked about on calls over the last couple of years about, you know, deglobalization, you know, people starting to think about supply chains and making sure there isn't single point of failure risk. But now I would actually add another piece of that theme, which is a remilitarization along with deglobalization. And I think we see that certainly in, unfortunately, the procurement that must happen around weapons globally. And so that trend, I think, and obviously that's just beginning, but I think you have to think about whether it's robotics, guided missiles, some of these other things, that that actually is going to be a significant source of demand in the coming couple of years. And I think that that's actually a kind of demand that will favor our supply chain for obvious reasons. And then lastly, I probably should have touched on this with respect to electrification and slowing down, perception of slowing down because the interest rates are higher and there's some weakness. But you saw a big announcement from Toyota recently about investing more in hybrids. And let's not forget that if we do go into a world where hybrids have higher penetration along the way to electrification. You know, hybrids typically utilize two-thirds of the amount of incremental NDPR that, say, a straight EV would use. And so that's also just bullish for growth relative to just, you know, slower penetration. So anyway, adding all that up, what I would say is, you know, certainly I think that the bottom I called several months ago remains intact. I think that The short term, the economy is challenged. I think people are very nervous, so who knows what the next couple months look like. But all of those trends are very bullish for a year or two out, particularly the remilitarization, which is a totally new theme that I think is going to become very powerful in the capital markets in 2024.

Maybe just as a quick follow-up to that, and thank you, can you kind of illuminate us as to what your – production cost per kilogram will be as you reach steady state production for NDPR?

Sure, George. It's Ryan. I'll take that one. Certainly with our initial production this quarter and ramping that as quickly as possible and as profitably as possible, it's a little bit early to home in on exactly what cost per kilogram will be given where we are right now. What we want to do is see operations at you know, full scale, efficient run rate production, you know, before we start making, you know, other promises here. What I would say, though, is when we went public, we gave some rough guidelines on our expected cost of production at that point. And as you can imagine, at that point, Those numbers were based on an amount of estimates as to exactly how the chemistry would work in the in the plant. And so I think what I've talked about in prior calls is what we see there. We're very, very pleased with. So we think our assumptions there will prove correct or conservative. The other thing to keep in mind, though, is. Stage two, in particular, on a variable cost basis, is heavily dependent on commodity reagents. And those have seen pretty significant price increases, as has labor and energy. And so our hope is that as we get up and running and add scale and efficiency, that those eventually offset each other. But it's a little bit early days to give more definitive information at this point. You know, however, I close by saying with everything that we've seen to date, we remain confident in our ability to maintain our position as a low-cost producer in this industry.

Thank you.

Thank you. The next question is from the line of Abhishek Sinha with Northland Capital Markets. You may proceed.

Hi, this is Kailash on behalf of Abisuna. So we saw the recent news on Malaysia's export ban of rare earths and we just wanted to know what your outlook is on that and if you sort of want to ramp up production based on that supply squeeze.

Well, the Malaysian news I think just had to do, I think there were a lot of headlines. I think actually the Malaysian news had to do with the Malaysian government wanting to capture more of the value chain, aside from just sending some material, you know, they wanted to kind of have actually more industry. But, you know, obviously we don't operate in Malaysia, and that really doesn't impact how we think about things over stateside right now. So I really see no impact with respect to us from that.

Sure.

As a follow-up, we just wanted to know what premiums you sort of experience with NDPR oxides over NDPR4? I'm sorry, can you repeat that? We are curious to know what premium you experience for NDPR oxides over NDPR4?

Got it. Yeah, I assume you're talking about sort of, you know, the bridge from concentrate to oxide. You know, I think, you know, the way we think about the uplift in moving to separation is, you know, it's not just a focus on the price and the revenue side. The focus for us, obviously, is on incremental margin dollars. And so, you know, obviously, both, you know, con and oxide are quoted in the market. And so you guys can kind of do the math there. But as we ramp the plant and get what we expect to be a fairly consistent cost of production once we hit target levels, the amount of NDPR in our con is about 15.7%. And so you can sort of do the math there on expected cost of production for the oxide versus con. But You know, putting that all together, you know, we're very pleased with, you know, what we expect to be a nice uplift in both revenue and profit dollars as we move to separation.

Thanks.

Thank you. The next question is from the line of Corinne Blanchard with Deutsche Bank. You may proceed.

Hey, good afternoon, guys. Could you maybe talk about the shipment time and delivery time for the NDPR oxide and the timing of when the worldview would be recognized for the shipment?

Sure. Hey, Corrine. It's Ryan. I'll take that. I'd refer you back to, you know, our comments in the last call and, you know, what we talked about a little bit earlier, which is that these initial shipments of oxide, you know, particularly the Q3 production as well as early Q4 production. We are prioritizing building an inventory level in the tolling channel. In order for tolling to start in earnest, there needs to be a visibility to consistent inventory on site to get the electro winning process started and running efficiently. And so what that causes for us is given the fact that we maintain title of the oxide all the way through the production of metal, it really just slows the recognition of revenue because we will sell it for our purposes once it is turned into metal and at the port or location of delivery. after being converted and so that's why we've said for you know these q3 shipments and q4 shipments early q4 shipments you know we don't expect to see um you know much impact until q1 um you can expect you know certainly our our intention is to also sell oxide as oxide and so you know there are a variety of different contracting structures we have you know some are a little bit shorter turn some are longer turn um but This transition as we go from effectively selling 100% of our con to consuming a significant amount of our con and then needing to get through this initial filling of the channel is what's driving this change. And so if you think about why it takes as long as it does, I'll just give you sort of a rough walk If you think about, you know, getting it to port from Mountain Pass could spend a week at port, probably about three weeks at sea. And then, you know, then it needs to get converted if we're talking about metal. So that could take up to a month. And then we got to get it to the customer. So that, you know, that's two to two and a half months. Once we fill that channel, though. that impact for us gets lapped very quickly. So, that's what's occurring, you know, in the background right now, and we look forward to getting that channel filled so we can start showing you some oxided metal revenue in the P&L.

All right, thank you. And then maybe as a follow-up on the expansion, and maybe you touched on this before, Apolojah, as you did, but where do you think you would be placing the volume? Meaning, like, how does that fit that extension with the demand?

I apologize. I apologize, Corinne. Can you ask that again?

Yeah, like, about the extension that you were talking about, like, you know, 50% extension by over the next four years. Just wondering what the capacity of the market to absorb those additional volume. So just high level, like, you know, how do you view this?

Sure. Yeah, sorry. We were just having a little trouble hearing you at first, but I think you're asking about the expansion and where we expect to sell those volumes. You know, I think the important thing to keep in mind is as we transition to selling oxide and metal from concentrate, You know, those volumes that over 40,000 tons of production that we are making today historically has been sold primarily into the Chinese market and no longer will be as a con product. And so, you know, there is absolutely separation capacity for an additional 20,000 tons. We have no concern about that. And then, you know, we're also pretty pleased with what we've seen in terms of development of various, you know, ex-China sources. And so, you know, we feel very good about the ability to place that volume. And just given all the dynamics that Jim touched on, you know, Given the timeframe that we're talking about, you know, we feel very good about, you know, bringing that incremental volume to bear into the market.

Okay. Thank you.

Thank you. The next question is from the line of Bill Peterson with JP Morgan. You may proceed.

Yeah. Good afternoon, and thanks for taking our questions. I wanted to come back to the market that, you know, Jim was describing as related to the question around pricing. So you, yeah, clearly EVs and wind is challenged, but I think you've also kind of seen some challenges and, you know, even kind of the more traditional uses, which I think accounts for like you talked about 75%. So assuming that's still week two, where do you see pricing being held up by? Do you see pockets of supply coming offline? And then I guess looking ahead, your peers' recent permanent extension in Malaysia, do you think that could lead to further supply discipline for China as they think about first half 24 quotas?

Well, as far as quotas, I would tell you that it's always difficult to read the tea leaves in China. We try to do our best, but I don't I don't have a view on that for next year. I do think, you know, I've said historically that, and I think that their behavior has followed this, but if you think about the evolution of the electrification world, specifically EVs, and you see there was a big BYD price cut announced in some markets just, I think it was today or maybe it was yesterday, but with the Chinese having moved downstream, I think that you are seeing a transition of a strategic transition to focus on making sure that there's supply growth to feed their downstream industry, but not enough supply growth to subsidize the Western competitors. And so I do think that that speaks to, again, sort of continued discipline, um, you know, but for discipline around, they will make sure that there is a reasonable amount of supply for their own producers and those producers are growing quite substantially. As far as and hopefully this is a great question, Bill, I think on as far pricing now with all of these headwinds, I view that now you have to take me with a grain of salt because I run a rare company. But I view that as very bullish in that the shocks that this market has absorbed this year, when we think about the vast majority of demand still being, you know, these straight GDP industries. that have been severely impacted in China. And we think about the slowdown in recent months with EVs and the wind turbine projects canceled. And so I think, though, it does speak to the reason. You asked me what the reason is, and I think the reason is the map, right? It's just there is a lot of demand for this stuff and support. supply meets demand somewhere. There's demand destruction when prices get too high, but then there's, you know, also more demand when prices go lower. Um, and, and those meet those curves meet. And so, you know, I meant what I said when I think that there's, you know, down here in the sixties and the seventies, it's just really difficult. You certainly at these prices in the seventies, I frankly don't think, you know, if, you know, if I were looking out certainly anywhere in the world outside of China, and then China has its own realities, but anywhere in the world, I think you'd have to be crazy to be an investor in a rare earth project, a greenfield, you know, unless you, NDPR prices were, you know, at least 120, 140, substantially higher from here, if you want any kind of reasonable return on your capital for the risk and the time. And so to me, that just speaks to, there's just going to be, you know, Western world supply constraint and it speaks to the economics down here. And so I do think, again, we're kind of bouncing along this bottom. I don't know if it lasts, you know, another month, another year or two. But, you know, those are my general thoughts around kind of medium and longer term tailwinds.

No, yeah, thanks for that. Thanks for those insights. Sure. I wanted to ask about stage three with my second question. So, you know, I guess, how do we think about the latest progress on the construction equipment setup? I may have missed it, but are you still expecting to begin alloy production by the year end this year? And I guess, what are the key sort of milestones we should be looking out for with stage three?

Yeah, no, great question. So things are going really well in stage three. We've made a lot of progress. One point of note for those who don't know, there's the big pieces of, you know, when you take oxide, the big pieces that get to a magnet are metal, alloy, and then magnet. And actually, in working with our primary customer and other discussions, we actually, uh, shift the focus to metal internally produced medical, because that's really more of a, a saleable broader product. And actually we, we are in, we are making, uh, in pilot scale metal today. Um, so, so that is a big, uh, achievement for the stage three team. So we, we, we are on track and then, you know, certainly with respect to alloy that that's never sort of a long-term business. The, the, the goal is magnetics, right? The goal is to make magnets. Um, Metal and alloy are just intermediate products that are nice. It's nice to get revenue to satisfy customers and broaden the market of people who can receive things. But the goal are magnets. On that front, our magnetics team is about 60 people. We just moved into that. As we said earlier, we moved into the building. And it's really an incredible site because what we've done is we've set up the research and engineering to really be connected to the factory. And so we're just going to have a lot of great interaction between our research, our engineering and the operators. And so, um, you know, that all is happening. It's going to take us a while, obviously to be producing magnets and to be doing it at scale. But I am, um, I am very pleased with, with how that's been been developing. And of course, with the caveat that with anything we do in, particularly in building a business from scratch, You know, these are painstaking things, and we want to make sure, particularly because it's our capital at risk, that we're doing things methodically and thoughtfully, and, you know, it's going well.

Thanks again for the color and insight, sir.

Sure. Thank you. The next question is from the line of Lawson Winder with Bank of America. You may proceed.

Thank you, operator, and good evening, gentlemen. Thank you for fitting me in. I appreciate it. I wanted to ask about heavy separation, and I'm hoping you'll be prepared to provide a little bit more specificity around the heavy separation project. I wanted to be clear, is it designed to process only ore from Mountain Pass, or is the idea that it would take both Mountain Pass and third-party ore? And then to get a little bit more to the specifics, When do you expect the expansion to be complete? How long do you expect it to ramp up? What will be the main products, and what's the capex? Thank you. Hi, this is Michael.

I'll start with that one. First of all, we're very pleased to be producing high-quality SCG Plus, the key feedstock for our heavy-earth separation facility. um but the facility is designed to to accommodate third-party feedstocks as well um perhaps even a majority of the feedstock would be expected to come from third-party feedstocks in terms of the progress the engineering work is advancing through detailed engineering certain separation equipment is on site and a lot more is on its way um you know continuing a theme From earlier in the call, from a procurement and build-out standpoint, we're committed to delivering the project in scaled and flexible capacity in the most capital-efficient way possible. So we're really looking at that very, very carefully. Yet we believe we're very well positioned to deliver the project more efficiently and more quickly than any other project outside of China.

Yeah, and Lawson, I would just add, sorry, go ahead. I was just going to add, you know, we mentioned this on the last call, but when you think about, I think this is just relevant so you can sort of understand thought process here, but if we go back to 2022, the DOD actually made awards to both MP and Linus, and then there was a substantial follow-on award earlier this year, and, you know, we We made clear on the last call that we had requested a level playing field and had every expectation that DOD was going to continue to support our project. And so I would just say that the government moves at their own pace, and it's never as quick as we would like. But to reiterate Michael's words, we certainly think we're positioned to be the quickest on line.

Jim, just to complete the thought that I missed, the priority products are dysprosium and terbium from that, although we'll produce other heavywares as well. And our biggest priority is to support our Stage 3 customer and the customers of our Stage 3 business.

Okay. Thank you for taking my question. Nice quarter.

Thank you.

Thanks. Thank you. Our last question today comes from David Deckelbaum with TD Cowen. You may proceed.

Thanks, Ryan, Jim, and Michael for taking my questions today. Maybe just to put a pin in everything in this conversation, I'm curious, just Ryan, if you could kind of put bookends just how we think about capital progression or spending progression in the ensuing years. You guys highlighted a lot of projects that appear to be of low capital intensity and high return on capital. When we think about the 300 million or so of growth capex this year, in the foreseeable future, should we think about that as a peak year of growth capital? And I guess, how much do you see that stepping down in the years ahead?

Sure, David. Yeah, so the one thing I would flag just to highlight one change in our guidance for this year As I did mention in the prepared remarks, and you'll see it in our filings tomorrow, that we expect to spend $270 million now this year versus the $300 million that we had previously expected. That's primarily from some of the initiatives that Michael talked about, about just trying to be as capital efficient as possible as we progress these projects. We obviously have continued to earn a pretty nice return on our cash on our balance sheet, so we just want to be thoughtful about timing and pacing of capital. You know, you're absolutely right that we talked about a lot of exciting, you know, relatively low capital intensity, high return projects. It's a little bit early for me to provide multi-year guidance or specific 2024 guidance. We do intend to provide 2024 guidance on next quarter's earnings call. But, you know, what I would say is This year's capital plan includes a pretty significant chunk of Stage 3 CapEx, which is quite a big project. And so I think that's important to think about what a normalized spend profile would look like. We just want to reserve our rights to do other very high return on capital projects. And I spent a lot of time with Michael out of Mountain Pass trying to find those. And there's a pretty long list. So we will continue to, you know, keep you updated on that. But certainly, you know, we are very focused, you know, as Jim laid out in terms of our alignment here on, you know, making this a very high pre-cash flowing business. And so, you know, we are always, you know, stacking up our projects and potential organic projects and making sure they meet a pretty high return threshold.

Thanks, Ryan. I appreciate that. And I just wanted to confirm, Michael, as you guys think about targeting this expansion to 60,000 tons a year on the upstream side. Is it fair to say that you don't necessarily intend to become a concentrate producer or rare earth concentrate producer and distributor, that you would be doing this with the visibility of being able to convert that material over time?

I think our mission will remain the same, which is to support the X China supply chain. And we will look at the most efficient way of achieving that, including optimizing our existing capability of Mountain Pass. But it's certainly several years in the future, and we want to be focused first on ramping up stage two and developing this 60K project.

Well, best of luck, guys. Thanks so much. Thank you, David.

Thank you. That concludes our Q&A session. Thank you, everyone. I'd now like to turn the call over to Mr. Latinsky for final comments.

Well, thank you, everyone, for joining us. I know it was a long call, but it was a lot of exciting developments with MP, albeit we are in a tough environment in the global economy, and certainly in our sector, but we feel very excited about our business and we'll keep executing. And so everyone stay safe and we'll talk to you all next quarter. Thanks.

That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.