Feb 28, 2023 / 08:00PM GMT
Colin Hamilton -
So from uranium in Canada, we're now going to move to rare earths in the U.S. And for those of you who are on lunch session here today, you've already heard great stories about the wider market and some of the automotive offtake from MP Materials from Jim Litinsky.
James Henry Litinsky - MP Materials Corp. - Chairman, President & CEO
Been a long time, Colin.
Colin Hamilton -
It's been a long time since we (inaudible). But so for those who don't know, MP Materials, it's a large rare earth producer, roughly 15% global market share and really a leading producer outside of China. We're seeing a company here, which is moving downstream into rare earth separation and refining and looking towards in-house permanent magnet motors. So Jim, just to kick things off here on our chat, give us the MP story, give us a background to those in the audience.
James Henry Litinsky - MP Materials Corp. - Chairman, President & CEO
Sure. So the quick -- let me give a quick background for those who don't know what rare earths are. Rare earths are inputs into magnetics, that go into typically motors or any kind of electrified motion. So, the rare earth materials are the things that power the electrification economy. The key thing about them is rare earths are not particularly rare. They're pretty ubiquitous actually. We've seen recent announcements of -- I joking these, countries trying to get into NATO that announce huge fines, and it's very easy to find rare earths, but it's very difficult to make money selling rare earths into process them, and we'll get into that.
But so people understand the key ingredient that we make is the key one is NdPr, neodymium-praseodymium, and that goes into, again, high-powered magnets. So the story -- our story is actually -- it's been a long time coming. For those of you who know the space, there was a predecessor that had a great story. This was before they went public before the Model S was even on the road. They had sort of a rise and fall that is somewhat notorious. I ran an investment firm for about 15 years, a hedge fund, and I'm not a minor originally by trade by any means, but I got involved in 2015, in anticipation of this predecessor entity going bankrupt.
And in 2017, after I could -- we could be here for hours to talk about the story of us, taking control of Mountain Pass. But suffice to say, when I founded the company in 2017, MP Materials, we had 8 employees, Mountain Pass was in care and maintenance. The widespread view of the experts was that, this site could never be successful. Fast forward to 5 years later to today, we just reported a few days ago, in the year 2022, we did just under $400 million of adjusted EBITDA. We're now 530 people. We have a $6 billion market cap. So it has been hopefully, a great American success story that others will be repeating in this up cycle.
But just to give you an idea of what we've been able to achieve in our young life as a company. We, again, started with 8 people in care maintenance. We relaunched the site. Last year, we produced 43,000 tons of REO. To put that in perspective, that's 3.5x the best quarter annualized the predecessor ever did prior to their bankruptcy, were profitable -- we'd be profitable at any price that NdPr was at, when they went public. So we've really turned around this site and then someone have created what is, if not the one of the low-cost producers of rare earth materials in the world.
As you said in the beginning, we have approximately a 15% share aside from one Chinese producer, we're the largest in the world. And the remainder of our business, so right now, we sell a concentrated product. Our second stage, which is essentially now physically complete, is to produce separated rare earth. So the key thing with rare earth magnetics are, is you get a concentrated price, you get the rare earth, you get a concentrated product, you then refine it and then you turn it into a magnet.
Just in the concentrated product, that's the -- those are the financial results we've already achieved. We are in the process of turning on those separation facility that's in commissioning. And so our expectation is to hit run rate by year-end. That will be the second stage. And then the third stage is we're building a magnetic facility. We have a long-term contract with GM. That facility is in Fort Worth. You can actually, if you look at our Twitter, you feed, you can see our recent earnings, you can kind of see that building as complete.
Now we have to do all the insides, but our expectation of that deal is that we'll be selling GM alloy in 2023, and magnets in 2025. And then the last thing, I would just say is that it has been extremely important to us, and I have a feeling we'll get into some of this, but we have a fortress balance sheet. We have $1.2 billion of cash. We have $500 million in net cash. We have a very cash flow positive business.
And in fact, last year, we were able to make all of these growth investments and still generate some free cash flow above the growth investments that we made. So, we believe we're creating a true Western -- or really a global champion in magnetics, and we've got a fortress balance sheet to make it through the hiccups and an exciting growth opportunity, which I'm sure we'll talk about.
Questions and Answers:
Colin Hamilton -It's interesting. You commented at lunch that you're very confident in the supply and demand. I didn't like you elaborate what the demand was, if you want? Where NdPr goes into, in terms of the magnet side? And then, I mean, how do you see that being balanced perhaps by the supply and the importance of China?
James Henry Litinsky - MP Materials Corp. - Chairman, President & CEO
Absolutely. So not to reference to another firm, but they're not a bank so. But if you look, there's actually a great report by Adamas, which is -- does pretty good rare earth research that put out a 2035 rare earth magnets report. That talked about the market, the demand for rare earths NdPr in magnets to be 3x what it is today by 2035, which obviously, for those in commodities markets understand that, that kind of growth is just enormous that you could have 1% or 2% in copper would just completely blow out prices.
So, in a commodity with a lot of inelasticity that can be an enormous amount of demand. But if you break those numbers down even further, roughly 20% of the market today is for EVs and wind turbines, the ultra-high growth areas. The rest are some mix of GDP and exciting growth areas like robotics, drones, power tools, there's a lot of HVAC, there's a lot of electrification stories.
But, if you kind of assume that 80% grows at GDP or even declines, that 20% of just EVs and wind turbines, if you compound that out at 30% a year, that is likely that the demand for just those 2 verticals will be 3x, what the market is today by 2035. And, so when we think about that, just to put that in perspective, when you consider that Mountain Pass is approximately 15% of rare earth production today, and you kind of do some fancy math around what might be recycled and whatnot, it's fair to say we estimate that you probably need 15 Mountain Passes by 2035 to satisfy that level of demand.
And of course, as I said earlier, the thing about rare earth is, if you had the economic ore body today that was viable, if you had all the human capital and the financial capital, you're still talking about 3 to 5 years, to build it. So, I think that -- the practical reality is that the backdrop over the next decade, who knows about the next 2 weeks or a few months, but over the next decade is extremely bullish for demand in our space and there needs to be a lot more supply.
Colin Hamilton -
So, I mean just on demand, if I think about, I mean, people will start to look at a substitution in the elasticity. But in things like an offshore wind turbine, you want the highest quality. Is that going to..
James Henry Litinsky - MP Materials Corp. - Chairman, President & CEO
And that's a great question because ultimately, there's a price for everything. And you want to think about, okay, well, where is that substitution effect? Well, if you think about the better -- the materials, so again, a magnet is in the motor. The energy gets to a motor and it's just EVs, but I'll do turbines in a second, but it's same concept. The energy gets to the motor, the magnet moves the motor. So regardless of how that energy gets there, you need a magnet. You need most like 90% chance into rare earth magnet. But the bill of materials on that battery is much more expensive. Typically, EV maybe $15,000, $20,000 -- $10,000 to $20,000. If your rare earth magnet, it's a few hundred dollars. To lose 10% of your efficiency, you're talking about multiples in price where it begins to even think about substitution, if you have the size and torque issues because the rare earth magnet is much more efficient, it can be smaller, it can be shaped in different way. It's much easier to do.
So before you even begin to really consider those trade-offs, prices need to be substantially higher than here. When it comes to offshore wind turbines, the rare earth magnets really dramatically extend the time line, for which there needs to be maintenance or a full takedown of the thing. So, I think it's like nearly 100% share in offshore wind turbines because of the scale of having to replace that 10-, 20-story building tower with -- that has a magnet -- the cost of that versus just, okay, I'll pay up for the magnet is that is just an enormous differential.
Colin Hamilton -
Coming back to you, I mean, you mentioned a 3-stage strategy before. So Stage 1 kind of done, Stage 2, the commissioning? Just elaborate on where you were and what it means to the business?
James Henry Litinsky - MP Materials Corp. - Chairman, President & CEO
Sure. So right now, we sell a concentrated product. The separation facilities are in China. So our downstream companies are buying magnets from China. And the Chinese industry has a 90% share in magnetics. Even, if we had all of the rare earths in the world in the U.S., we'd still be sending them to China to be made into magnets. But instead of refining and making magnets in China, our entire mission is to restore this full supply chain here.
So what we're commissioning now is that we're making approximately last year, we made 43,000 metric tons of con. You can look at the split of what percentage are the various REOs but approximately 16% of that is NdPr. We will then -- instead of shipping that concentrate to China, we are going to send that through our facilities and separate it. So what we have previously stated is the run rate target is a little north of 6,000 tons -- metric tons of NdPr that we'll be producing at a Mountain Pass at the end of this year.
We will then -- we'll still for the near future, have to sell to China, Japan elsewhere in Asia, while we finish our magnetics facility, the facility in Fort Worth, we've said it with the current capacity that we've stated that can take about under 10% of our upstream production from Mount Pass. So we will then -- once we get that under our belt, our intention is to move even further where we'll produce what we call 10x of where we are and then potentially beyond. So, we'll be able to grow our magnetics business with our upstream fee, but we've got a ways to go to do that.
Colin Hamilton -
And, so I suppose just what did you mentioned Fort Worth -- I mean, I don't touch it up here. I mean where are you in the construction? What are the key milestones for you?
James Henry Litinsky - MP Materials Corp. - Chairman, President & CEO
Sure. So we -- just to give perspective, we broke ground on that facility in April -- last April. We completed the Shell towards the end of last year. So what, I will say our partners in Texas who are building for us, they did an incredible job. Fort Worth, things happen fast there. They want our industry. It's gone incredibly well. We were able to get the Shell, and this is a 250,000 square foot building, 70 acres. It's a pretty big site, but it's our baby site. It's a small site, but we wanted to make sure that, have we wanted to kind of go out and build something much larger. The demand is certainly there, the interest is there, but we wanted to make sure that we walk before we run.
I'm the largest shareholder of the company. We are maniacal about return on capital. We wanted to make sure that, if we made mistakes, they're lower case m, not Capital M. But, where we are today is we will soon -- later this year, we will make an alloy product that will sell to GM. And then by 2025, we'll make magnets for GM. It will take us some time to finish out the inside of the building, get the magnets that we make qualified for GM and then hit run rate production in 2025.
Colin Hamilton -
Well that's -- because it's a very different thing. I mean, going from the -- I mean, going from the mining side and then actually into the downstream side and integrating that value chain. I mean, again, it's a whole different set (inaudible) have you put a different structure in place in terms of operations to do that?
James Henry Litinsky - MP Materials Corp. - Chairman, President & CEO
Yes. Well, absolutely. We are an execution-focused culture. We're an owner-operator company. As I told you our story, our history, I certainly had essentially no knowledge of mining, when I got involved in buying the distressed debt of the predecessor mass. But, I think what we've been able to do as we've shown over the last 5 years that we've been able to execute really well operationally, and it's a function of we have an incredible team.
So yes, I have a financial investment background, my COO Michael Rosenthal. He essentially went to the site the day we closed on in 2017, and has almost not left, he sleeps there often. And so we are maniacal about execution. I think we showed we -- there were a number of skeptics, the conventional wisdom and the experts was that, again, Mountain Pass could not be saved and operated. I think, obviously, the financial results and the operating results speak for themselves.
And, so I think, we have a very healthy measured skepticism of any kind of pulling -- bringing online any operating asset, but we're confident that we'll be able to execute in these businesses. We're now commissioning our Stage 2. We said on our last earnings call, which was a few days ago that we're now making a roasted concentrate, which is a key step along the way to making separated warehouse and that everything that we've seen from the data, and this is the actual physical plant data that the yields, and what we expect of reagent usage, et cetera, are sort of on track that we feel very good.
No showstoppers that we'll be able to get to a run rate production. And then magnetics, when we took the -- I hope that we have been thoughtful with the public markets about, although, we have this enormous opportunity, executing this methodically. And when we went public, we didn't even have a magnetics team. We said to investors, look, here's our long-term vision. This is a 2025 plus event, assigned no value because this is years off. But meanwhile, it's not 2025, it's 2023, we've got a building almost done. We've got a long-term contract with GM. By the way, I'd add, it is not an exclusive. We expect to build a bigger, broader business.
We'll have other OEMs, and we'll also have a number of other verticals, whether it's robotics or power tools. And so we're building -- we are building a magnetics champion, and I think this is just an enormous opportunity.
Colin Hamilton -
So, I mean Stage 3, I mean, you're being obviously modest at the moment perhaps. I mean how big could it go? I mean what sort of -- do you have enough space (inaudible)?
James Henry Litinsky - MP Materials Corp. - Chairman, President & CEO
I think the analogy is -- and it's a good analogy, but not a great analogy, but the analogy is the semiconductor industry in the 1970s. Where -- if you think about the world in the 1970s, there were some people doing some stuff in Silicon Valley, there were mainframe computers. But, we didn't have a -- this is before Apple even existed. We didn't have a computer in every home, right? But you knew computers were going to be big 1 day in a decade or 2. You knew that like, it was the future.
I think electrification, again, it's not the same. I'm not trying to say this is as grandiose or in any way of that scale of an opportunity. But electrification is now obvious. Industry has committed. The world has committed, frankly, China has committed much more than in Europe, too. But where -- we're catching up, and our industry is catching up. I think there'll be a robot in every home. If you look out 20 years from now, and who knows what the use case will be. But all roads lead to, I think, magnetics will be an enormous opportunity.
And one of the things about magnetics, and why I think it's a decent analogy is it's not like software where you can just say, hey, I've got an idea, stuff of a bunch of people in a garage with some soda and whatever in outcomes. So this is a scale business, right? It requires capital expertise. You have to -- and then -- but once you've got that scale, the barriers to entry are enormous, for a very long time. And so we've got this advantage of Mountain Pass, this asset that allows us to be in business in a way that nobody else can in a way that allowed us to earn a customer like GM, where they recognized that there is such a huge amount of this that needs to come into the world. And they want it to be first and they wanted to be a good partner to us.
They wanted to -- I mean, how often in life do you have the downstream saying, this is so critical that we're willing to help someone go into business, right? That is an incredibly, frankly, humbling burden. We've got to execute for them well. But what it means is that this is an extraordinary opportunity. And frankly, because of those assets, we're able to take advantage of it. But it also means that for others coming in, other than what's happening in China, there's an enormous barrier to entry. And so as we execute this right, the franchise that we build, is going to be very attractive.
Colin Hamilton -
So let's talk about the GM deal. And the more because, I mean, this entry technology will change. But GM, I'd imagine working with you on what they actually need. And I mean, again, do you think that will be done -- once you get that established position is that then you go, well, OEMs, you have to come to us.
James Henry Litinsky - MP Materials Corp. - Chairman, President & CEO
Well, the -- I mean, I think our attitude will never be like you have to come to us. The customer is always right. And just wondering the last panel you asked about what made you successful with -- we didn't get to it, but what made you -- and what popped into my head then is we have not yet been successful with GM. We have earned the right to have a chance to be successful with GM. We have a long way to go.
But I think that what we have done is this deal was the culmination of a year-long deep due diligence dive into us, a lot of back and forth. And ultimately, we were talking to a lot of other parties, and we ultimately felt comfortable that they would be a good long-term partner to us, as we wanted to build a business. They recognize that we wanted to build a business. This wasn't an exclusive situation. They know that we want to build a bigger, broader business.
And -- but frankly, they also had the right culture about it. They -- the same way that we weren't going to say, "Hey, you need our product." And otherwise, it's China, we recognize that that's not the kind of attitude that we're going to take. We want to create a champion and then we'll have a very attractive business, but we're not crazy. We recognize that the customer is right, and we've got to serve them and provide low cost.
Colin Hamilton -
So when you're scaling it, you will get a deal in place like you had for Fort Worth to be able to add the next.
James Henry Litinsky - MP Materials Corp. - Chairman, President & CEO
Sure.
Colin Hamilton -
Yes. Got it. Got it. Just an interesting question coming in on the atlas here. Are there any parallels in China or else where to give an indication of ramp-up times at magnet facility or any teething issues that they might have incurred?
James Henry Litinsky - MP Materials Corp. - Chairman, President & CEO
Well, a lot of the -- so to set the stage, 90% of the magnetics business is in China, approximately 10% is Japan. These process -- these are -- there's a handful of processes to basically take an oxide, you metallize it, you I'm skipping -- but you metallize it, you alloy, you turn it to magnet. This is not -- the good news is this is not like rocket science where we're landing shuttles on a platform in the middle of the ocean.
This is reasonably understood metallurgy and magnet making and -- and so we're pretty confident that we can execute that well. But the way it's done in China today is not necessarily high tech. We think that there are enormous number of -- there are a lot of ways where our business is going to differ where we think we can actually build a true champion, make some significant leaps forward in intellectual property.
And really, that's why -- by the way, in our earnings call, I referenced there's a picture in our slide deck, where I kind of showed the shell of the building that we built. The top portion of that building connecting into our factory is a research lab. We're creating the center of magnetics, really in the world. And when I mean research lab, it's not like a think tank. This is a highly focused commercial organization on making money, but we will have the talent.
And, I think that the good thing is that this because of the balance sheet we have, because of the business -- the attractive cash flow business that we have, this is not like a franchise bet. Like if we make a bunch of mistakes in this facility, hopefully, we'll still be profitable with it. But the good thing is, is that we're going to have incredible human capital, coupled with this facility, coupled with a great long-term partner in GM that has structurally understood that we need to make money in this business.
And so the ability to communicate with them to develop further IP and take this industry a leap forward. I think some incredible things are going to come out of that. And then that's when we'll start to do 10x and really scale.
Colin Hamilton -
So let's talk the Inflation Reduction Act. I mean, hot topic and clearly an opportunity for you. I mean, two questions, actually one on the up like minority Chinese SOE shareholders, are you placing a Reduction Act compliance, you can address that one maybe. But I mean, secondly, how is it going to help you?
James Henry Litinsky - MP Materials Corp. - Chairman, President & CEO
Yes. Well, I'm the largest shareholder of the company. We have the General Counsel of Lockheed Martin on our Board. We have the former Chairman of the Joint Chiefs on our Board. We trade on the NYSE. And so we're pretty much as American as any company. I -- My guess is that we're more -- sort of more American employees, as a percentage of our employees than 90% of the S&P or something like that. So yes, we have a 7% shareholder in Shanghai, but it's -- our stock trades on the New York Stock Exchange, anyone can buy our stock.
So certainly -- and in fact, I think that actually, there's part of the Inflation Reduction Act that was written specifically for us, and others like us, but there's 2 major provisions that matter. 45x, which is a perpetual, not -- there's no life, a perpetual tax credit for critical materials, operating expenses. And so we are very confident that Mountain Pass qualifies for that. So that will be whatever our operating expenses are, take 10% of that per year in dollars, not a deduction in a credit back to us. So that is an enormous amount of value that we will achieve right away at Mountain Pass.
And then, of course, there's 48C, which magnetics facilities will qualify for that. We're watching that. That is a little bit more uncertain because the regulations are still being formed. There's still a kind of common period, and so we don't exactly know and who knows what other pieces of politics might get in there, such as -- I know this morning, they announced that for semiconductors, they were going to require childcare provided. And so we're watching that unfold to see kind of where and how that might be attractive for us.
But then, of course, I keep going back to the reality is this that anything we do we are focused on a great risk-adjusted attractive return on capital. And so -- and we have the balance sheet that we have. So we can form capital in whatever way we think is most effective for our shareholders. And that is an incredible position to be in. We were talking in the last panel of a lot of the companies that are trying to build out this supply chain have to think about their businesses with offtakes, and effectively those offtakes can very often take on the nature of extremely expensive financings.
We are totally agnostic. We do not need to think about financing with respect to selling our product. And when we think about our product in Stage 2, if it's going to Stage 3, we think about it that, we look in a deal as if it's going in and market price. We're not going to rob Peter to pay Paul. So we are able to build out a franchise with attractive returns on capital, be totally agnostic, as to how we're going to form that capital and have 2 very attractive verticals growing.
By the way, last thing and I mean -- but I think this is important, is having those verticals, having the balance sheet and having the franchise that we have, I do think, and we want more of the supply chain to exist. But as many of the investors in this room know, I always jokingly say, if you're building a project, go out, get 3 bids, add them up, that's how much it will cost, whatever the time line is that you think it is, double it, and then start kind of thinking about it.
And so, my guess is that as we enter this boom period, and it's just the beginning is the second inning is that there's going to be hopefully a lot more capital formation, but I think that there's probably going to be a number of projects. And again, this is 2, 3, 4 years, 5 years out, that will end up in a similar situation, as the mess that we cleaned up with great success. And, I think, that we'll have the ability with our platform to rinse and repeat that in a number of ways.
Colin Hamilton -
So 2 very quick questions for you to finish up. I mean, people think rare earth and the visions of China and big pits in the ground and lots of dust and pollution. I mean, how do you address that various environmentally unfriendly?
James Henry Litinsky - MP Materials Corp. - Chairman, President & CEO
So I could give you a lot of stats, but I'd love to just say we operate in the state of California. And so we are proud to operate in the state of California, but let me give you some of the important things. 95% of the water we utilized is recycled. So we repurposed, we have a dry tailings process. So what that means -- and by the way, I believe it's approximately 3% of new mines in the world have it. There's not a single rare earth mine and processing facility in the world that has this other than us.
But what essentially means is that our tailings go back into dry into a line impoundment. If you recall, I think, like a little over 2 years ago, there was a bunch of hoopla around Tesla Battery Day, where they talked about going into lithium mining, and they were going to return the material to the ground exactly as it came, but for the lithium. Well, in rare earth, we do that today. That's dry tailings.
And, so I could go on and on about attributes, but suffice to say that we operate in the state of California, when the President of the United States announced a DoD grant to us, about a year ago, to work on heavy separation. The Governor of California joined that announcement. So, I think it's fair to say that we are, hopefully, a source of great pride in the state of California of a success story in mining that's also doing things the right way.
Colin Hamilton -
And then just one last minute here on capital allocation. You've got a strong balance sheet. I mean, what your thoughts on capital allocation? What's your thoughts on, I mean, any other land packages that you have, what you spend in the mining side?
James Henry Litinsky - MP Materials Corp. - Chairman, President & CEO
Well, we are -- we work for the shareholders. I'm obviously the largest, but we've also -- we are an owner-operator culture. When we went public, we made sure that every employee of the company had an opportunity to be a shareholder. It didn't matter from a janitor or maintenance technician whomever, everyone, it thinks like an owner. And, so we are maniacally focused on creating value. We are totally agnostic, as to what form that takes and it leaves us free to change our minds because we do not want to do anything stupid with the money because it's our money.
And so I think, hopefully, we've earned the right to say that we've been -- created great returns for people. If you look at sort of where we were at when we went public, what we said we would do and what we've done, we have not only created great returns, but, I think we've been able to exceed expectations on a number of levels. And, so I think, if we can continue to do that over time, it's going to be a great result.
Colin Hamilton -
Wonderful. Thank you very much for joining.
James Henry Litinsky - MP Materials Corp. - Chairman, President & CEO
Thank you.
Colin Hamilton -
Thank you.
James Henry Litinsky - MP Materials Corp. - Chairman, President & CEO
Thanks, Colin.
Call participants:
Corporate ParticipantsJames Henry Litinsky, MP Materials Corp. - Chairman, President & CEO
Conference Call Participants
Colin Hamilton
Refinitiv StreetEvents Transcript
Mp Materials Corp at BMO Global Metals & Mining Conference
Feb 28, 2023 / 08:00PM GMT