MP Materials Corp. / DE Q1 FY2021 Earnings Call

Ladies and gentlemen, welcome to the MP Materials financial results conference call and webcast. My name is Charlie and I will be coordinating your call today. I will now hand over to your host Head of Investor Relations, Martin Sheehan to begin. Martin, please go ahead.

Thank you, operator, and good day, everyone. Welcome to MP Materials First Quarter 2021 Earnings Call. With me today are James Litinsky, Chairman and Chief Executive Officer of MP Materials; Michael Rosenthal, Chief Operating Officer; and Ryan Corbett, Chief Financial Officer. To follow along with our discussion today, we encourage you to download our slides from our investor website.

Thanks, Martin, and thank you to everyone joining us on the call this afternoon. I’m going to cover a few things today. First, I will recap the highlights of our outstanding first quarter results. Second, I will provide a quick update on our Stage II optimization plan at Mountain Pass. Then I will turn it over to Ryan for some more color on our performance. And finally, I’ll make some closing comments before opening it up for Q&A. Let’s start with the first quarter highlights on Slide 4. We achieved record first quarter production and sales volumes. These numbers show the significant operating leverage we can achieve when higher NdPr prices meet best-in-class production costs. Our revenue nearly tripled year-over-year. Adjusted EBITDA was up more than six-fold. And our adjusted EBITDA margin more than doubled year-over-year to over 57%. I will talk more about our record sales and production volumes in a minute.

Thanks, Jim, and hello, everyone. Jim already covered a few of the financial highlights, but let me give you some additional thoughts on the quarter and I'll begin on Slide 8. As Jim pointed out our year-over-year revenue nearly tripled, but we also saw over 40% growth compared to Q4. This was driven by 46% growth in realized pricing to nearly $6,000 per metric ton of REO. Meanwhile, our adjusted EBITDA increased over 80% from Q4. Jim also mentioned the leverage of our model from NdPr pricing. Our REO product margin increased from just over $1,200 per metric ton a year ago, and $2,500 in Q4 to over $4,400 in Q1, driven almost entirely by the price of NdPr and its impact on the price of our concentrate.

Thanks Ryan. Before Q&A, I would like to take a moment to summarize why we believe MP is so well-positioned to become a Western champion of the electrification and sustainability revolution. First, we have a co-located set of unique world-class assets. These are our ore body and our nearly $2 billion state-of-the-art processing and separations facility. Let me start with our ore body, we have the bastnaesite ore body which contains north of a 7% mix of rare ores, one of the highest anywhere in the world. Most mines are in the 1% to 2% range and some speculative mines are well under 1%. That means our competition must mine three to seven times more total rock to get the same REO output out of the ground. And that in turn means more reagents, more processing and more time, which all means much higher operating costs. Additionally, a bastnaesite ore body allows for roasting without the use of additional chemicals at lower temperatures and with fewer potential emissions. We also do not have the radioactivity issues you may have read about elsewhere. These factors compound our early advantage from both a cost and environmental impact standpoint. And then we have a $2 billion state-of-the-art co-located facility in California. There are a few such facilities of this scale and none in the world that are co-located with the mine like we have at Mountain Pass. This further reduces transportation, shipping and environmental costs. We believe the quality of our ore body plus this state-of-the-art facility positions us to become the world's lowest cost producer of separated NdPr assuming we execute. Second, we have structural and financial advantages. Those advantages are scale, time-to-market and scarcity value. All are aligned with a compelling long-term demand outlook for our primary product. Remember that just building a plant with enough scale to compete will take years and bear significant costs, especially with escalating materials prices like we talked about on our last call. Hopefully we gave some of you an early hint at this emerging industrial trend that was subsequently confirmed by many companies this earning season, including Berkshire Hathaway, this past weekend. Materials and labor inflation is happening across the economy, which means the replacement costs of many things is headed much higher. We believe this trend is a powerful tailwind for MP’s structural advantage beyond simply a reasonable expectation that the price of NdPr should move up with inflation and then some due to demand. Other than a competitor potentially building a refining plant in Texas, which is still not financed or permitted, let alone broken ground and begun construction, we do not see any material Western supply coming online anytime soon. There has not even been any significant fundraising for such projects, despite NdPr pricing climbing north of $85 a kilo. The often-told joke is that rare ores are not rare. That's true, but it misses the bigger point, which is that what is extremely rare is a scaled, economically viable deposit, and the time, costs, and expertise to bring any such deposit online only compounds that scarcity. Third, our Stage I process is profitable and cash generative. We did go public years back and our business is levered to electrification. One could simplistically bucket MP with the hyper-speculative electrification group, many of which we believe will not generate cash flow for years, and some others, which also may have very aspirational projection targets. Yet our existing operations are not speculative and we have materially outperformed the original Stage I projections we laid out at the time of our go public announcement in July of last year. In addition, our Stage II is fully funded and expected to come online sometime next year. Obviously, our expectation is that this will accelerate our financial performance. Fourth, we have an owner-operator culture with a sustainability focus. From my earlier discussion on the green bond, you know that we believe our platform gives us a competitive advantage. Every qualifying employee was granted shares when we went public and I remain the largest shareholder of the company. We are committed to our vision and our incentives are aligned with you. And lastly, we are at the ground floor of what we believe will be a decade-long transformational growth opportunity. Some of you may have seen a cover story in The Wall Street Journal on Tuesday about the evolution of the auto supply chain for the age of electrification. We also tweeted it the other day, in case you missed it. The auto industry faces existential risk from the past practice of just-in-time manufacturing. This new era is one where the ability to vertically integrate the supply chain is a source of strategic advantage. Companies are now competing for the kinds of scarce resources that are exactly what we have at MP. This is why you're seeing companies like Tesla and others talking about mining in response. The semiconductor mess makes this an even hotter topic, and we see it now in conversations. Our Stage III efforts continue at a furious pace. I know many of you want lots of details, but we will share with you what we can when we think it’s appropriate. I would point out though, that regardless of the path we take our mission is to restore the full domestic supply chain. And remember, this is not just about the auto supply chain, whereas permanent magnets are also important to so many growth industries of tomorrow, like wind turbines and drones, and then maybe some currently unexpected ones like air taxis. Who knows exactly what will come next, but the opportunity is ours. With that, let's go to Q&A. Operator?

Our first question comes from David Deckelbaum of Cowen. Your line is open. Please go ahead.

Good morning, Jim and Ryan, Michael, thanks for taking the questions.

Sure. How is it going?

Sorry about the connection.

No problem.

I just want to discuss, just I'm clear on trajectory through the year, the first quarter looks like there's some delayed sales to the shipments. You talked about the ports still having some issues, but was this a global issue, did the canal at all have had any impacts on slowed shipments in 1Q? And should we naturally see a catch-up in the second quarter?

Hey Ryan, why don't you take that?

Yeah, sure. Hey David, I'd say our original expectation that we flattened on the last call was that just given the congestion we had seen in the LA ports, given we ship out of Long Beach and LA port, that shipments frankly are lumpy. We're only able to get product to the port within a certain period of time of that product planning to leave the port. And so when there is congestion, that limits our ability to ship our product. What we did see was a pretty heroic effort from our operations and logistics teams to get out from what you saw, a very significant portion of our production did sell in the quarter and that's why production volume and sales volume are matched pretty closely this quarter in an even better shape than what we see typically seasonally in Q1, given we tend to see a seasonal Q1 slowdown on the shipping side from Chinese New Year on the import side. I'd say the ports have become a bit less congested, but it is still something that we watch very closely. So what I would say is that it's something that we have on our radar that we continue to monitor. We think it should improve over the course of the year. And certainly, we think on a medium long-term basis our full year of sales and production should match very closely. We just want to be clear that in any given quarter shipping can impact revenue recognized, just given that lumpiness.

Got it. Thanks Ryan. I'll try to just stick with two questions here, so it can be kind to others. But Jim, you talked about sort of progressing on Stage III and I guess I just wanted to square your comments with – you talked about the success, obviously in the green convert. When we think about those proceeds, do we think about that as being sort of held for investment in Stage III or do you look at those converts as being flexible beyond what you've already outlined between Stage II and Stage III, perhaps for other potentially accretive opportunities that we're not thinking about?

Well, so you know that obviously, if you look at the business, we have a cash flow positive business today in our core. Stage II is a limited amount of capital relative to our cash balance. I think the way to think about it is we have a fortress balance sheet and a platform that is increasingly becoming the thought leader in this Western supply chain in our space. And so what I would say is that convert really created a lot of optionality in our capital structure to take advantage of what we see out there. If we don't find a very attractive way to utilize that capital, we can return it to shareholders. And again, we are – we've come at this from an investment perspective. So we're fully aware of returns on capital and making sure that things make sense. We're going to stay on mission, I mean – we're not, if the question is whether the capital is going to be utilized to kind of go in some other direction or something like that, we are plenty busy with our near-term plans of executing II. As I've said, we have a pretty great Stage III team that I work closely with sort of material scientists and technologists, and business development folks. And so we are looking very closely at a number of viability and our JV opportunities as I've said. You can imagine that the chatter up and down in the supply chain has just dramatically accelerated. It was already very loud back last year, I think that just again, look at the Wall Street Journal a couple of days ago and think about what's happening in the supply chain with semiconductors. The fact that we now have positioned ourselves as not only a credible counterparty, not that we weren't, but I think that this just sort of adds to the momentum with respect to that. But also, which shows that we are holding ourselves to account in the capital markets with the kind of standards that both consumers and our industrial potential partners would want to hold us to just creates value sort of writ large and so that's sort of the logic behind it. But again, I would remind you that we are the large shareholders here. So we're not looking to go on sort of fantasy directions and other ways. We're really looking to complete our mission, do so in a proper way and make a lot of money for shareholders.

Thanks for the responses guys.

Sure.

Our next question comes from Timna Tanners of Bank of America. Your line is open. Please go ahead.

Hey, good afternoon guys.

Hi Timna.

Yes, definitely. So wanted to circle back on the longstanding guidance you had in the past of 250 million EBITDA by the time that Stage II is fully ramped up similarly full-year 2023. And I might've heard this wrong, so I just wanted to clarify I thought others might appreciate it. There was a comment saying that when Stage II is fully up and running, EBITDA could be double at current prices. It wasn't the first quarter. And first off, I guess, I just want to clarify if that's true and if that were true, then the run rate would be about, I want to say 264 million. So can you just let us know if that wasn't the right way to think about those comments?

Yes. Go ahead, Ryan. Well let me just say, the number that you're referencing refers to the number that was in the go public transaction from July of last year. And that represented a number based on a midpoint of potential NdPr prices with specifically $70 NdPr. We obviously are sort of in the mid-80s today. You can do the math. We also said on the last call that we believed that we were able to make some improvements on our potential operating costs from what we see with respect to a normalized 2023 on an apples-to-apples basis versus last year. We haven't updated guidance for new prices, but I think with those moving parts, you can probably put together numbers and think through the significant operating leverage that we have. Ryan, I don't know if you want to add on to that?

Yes, Timna, I think there's some confusion on just talking about product margin versus total EBITDA, so I think that's the disconnect. We were talking about product margin looking at our current production in Stage I, if we were separating at that product margin would double, but to Jim's point, no change in our guidance whatsoever in terms of what we think the cost structure looks like pro forma for Stage II. So as Jim mentioned, that midpoint of $70 of NdPr, we had guided to approximately $250 million of EBITDA. If you look at the slides and information that we put out at that time, we did sort of a low and high NdPr case as well just to sensitize for you what that looks like in that $90 case that's in our slides was $362 million of EBITDA, absolutely no change from that guidance.

Okay. That's super helpful. Thank you for that. And then if I could ask – our second question is just, I recognize that you talked about Stage III, but aren't prepared to elaborate on what that might look like, I appreciate that. But just wondering if you can comment on any thoughts about heavy rare earth and separation or production there and when we might get any update on timing for Stage III, please?

Sure. So, on the heavy side, the only thing that we have put out publicly was that we have a project with DoD and that release sort of was late last year and that speaks for itself. We haven't said any – otherwise said anything with respect to heavies. So I'll just let that speak for itself. And then as far as Stage III updates, obviously, as you can imagine, we understand the investors want to know as much as they possibly can and we'd love to be as transparent as we possibly can, but we have to just kind of keep moving forward and do what we think is right. We want to make sure that whatever it is that we sort of tell you or share is heavily vetted and real. We're not looking to kind of put out a bunch of stuff until it's appropriate. So that's really all I had to say on that front. Obviously, we'll make Stage III announcements as soon as we possibly can when appropriate.

Understood. Thanks guys.

Yes, of course.

Our next question comes from Sathish Kasinathan of Deutsche Bank. Your line is open. Please go ahead.

Hi, thanks for taking my questions. So my first question is on the commercial side of Stage II – that doesn't make us for any potential off-take agreements for your Stage II products.

So it cut out there, but I think you asked, do we have any off-take contracts for Stage II?

Yes, yes. Have you had any discussion about that?

Well, you can imagine that – I mean from quite a while ago, but you can imagine that conversations are particularly hot these days given everything that's happened in the supply chain and specifically semiconductors, and frankly the importance of our space, I've referenced in the IEA report that just recently came out. We actually also tweeted that and then there was a follow-up around critical materials. We really do see what we have as being extremely strategic to the downstream OEMs and frankly other industrial participants as the world electrifies. I take in the view, and frankly I think it's fair to say we got a little bit of – maybe criticism isn't the right word, but questioning last year about why we wouldn't sign off-take contracts and what I'd sort of consistently said is that I believe that we are headed into a game-changing regime here. We have a very strategic asset and the world wants what we've got. We want to make sure that whenever we do contract that we do so in a way that we think maximizes value for all of us. To the extent that we wanted to go out and sign a contract, I'm highly confident we could do so, but we have not done anything at this time and obviously never say never, we could change our minds tomorrow and you could see something, but we have not to date done anything on that.

And then…

Yes, go ahead, Ryan.

Yes, and just real quick I think I'd flag also, obviously the thing that I think people lose sight of is this is not new supply, right? The supply is being consumed in the market today. So we have all the confidence that this can be consumed on the spot market. To Jim's point, the reason we're not trying to lock in prices here is because we're incredibly bullish, the future pricing and the materials obviously never say never as Jim said. I think the other thing to keep in mind is we do have what we view as a very strategic asset and our current off-take arrangement and marketing ability into the Asian market. So, I think, we can continue to leverage that as we would like to – with Stage II product, it's not limited to Stage I product.

Okay. Thank you. My second question is on the market. So one of your peers talked about Chinese players looking to expand capacity over the next three years. Do you have any insights on whether these processing capacities or just on the demand side or what it means to the overall market?

Yes. I’m glad you asked that. I found that some of that commentary out there, whether it’s companies or analysts or media, I find a little perplexing. I have a totally different view of it. So for, let me first say, nobody knows what’s going to happen in the next month or couple of months on pricing that in the short-term commodities can be obviously extraordinarily volatile. So with that caveat, I think when it comes to China, you really have to think instead of looking at sort of Western media or sort of Western protagonists if you will. I think it’s best actually to look at what they’re doing and saying inside China. And in March, the current Head of The Ministry of Industry and Information, MIIT, who’s also the previous Chairman of Chinalco, the largest – one of the large state-owned aluminum and rare earth producers, made some very interesting public statements. The MIIT is the primary regulator of the rare earth industry and much of China’s overall industrial development. According to the reports, he stated that rare earth producers face a number of environmental problems with excessive mining and refining kind of creating low prices. He actually went on to say that the prices reflect earth, not that they’re rare. I was surprised this didn’t get further coverage. He went on to say that over the course of their – the Chinese dominance market dominance, rare earth had been over-extracted, resulting in environmental devastation, and that prices for these and this is a direct quote, industrial gold doesn’t reflect their full value. For the Head of MIIT, an organization that’s really focused on economic development to talk about externalities in such a strong way was fascinating. I actually believe, and our team believes. And again, it’s China, we’re just kind of trying to understand, but why would the Chinese government want to subsidize industrial gold for the rest of the world when they’re competing against the rest of the world? I think that because the last cycle was really sort of a quick boom-bust around a demand shock, and there’s obviously the debacle of our predecessor that really had nothing to do with China. There’s sort of a lot of talk in the media. I think people are missing that the bigger picture thing of what’s happening here. And I always like to say that the next decade very rarely looks like the last decade. So I think people are backward looking and analysts like to just sort of slap a $70 number on NdPr and say, oh, okay. At $70, that’s the price of a marginal development. Therefore prices can’t go beyond that. That’s just not how things work in the real world. This is painstaking work. We’ve been at this for quite some time. These are multi-billion dollar facilities. Even if you had unlimited capital and unlimited human capital and you had the ore body, and you had the permitting, none of which exists in scale right now in the Western world, this still takes several years. China in our view has already shifted to a policy of profitability because they’re not focused on the last prior decade. They’re focused on the forward one. And so I just think that people are missing that again, it’s our opinion. It’s what we see. Things could always change. But that’s really our perspective on this. I think that we are headed into, again with the caveat that the short-term is always potentially not certain. We are headed into a 2.0 cycle. I do believe I’ve said this repeatedly, that prices in the new cycle typically go to the inflation-adjusted prior peak and then some, and I believe that.

Thank you. That’s helpful color.

Our next question comes from Ben Kallo of Baird. Your line is open. Please go ahead.

Hey guys. Hey, James.

Hey Ben, how are you doing?

Great. Good. So I’m fired up.

Yes. Hey, we are on a mission.

It’s good. It’s good. I mean our two weeks of heavy earnings and I’ve been there before. Replacement comes up with bonds and labor and the – what are you talking about Stage II, Stage III. I guess my question is just about at Mountain Pass where it is? How you like – how labor is just I guess getting people to work at your company? I guess that is my first question. And then supply chain like through China, and you talked about a bit is there more onshoring like a greenfield is better opportunity than to do something else to require something in China, because of knowledge about trade tensions. Thanks.

Yes. So on your point on inflation, it’s a great question. I believe you’re on our last call and I think we hopefully can get credit for giving folks an early kind of view on this before it became commonplace in this quarter. We were seeing significant rises in prices across materials, across lots of things. And we worked furiously to get our Stage II optimization contracted. I think that was a great strategic asset that we achieve for our shareholders. I think that and you’re seeing this in the capital markets, there’s a bit of a regime change where you’re seeing the commodities producers really starting and it’s not obvious, it’s not rare earth, it’s steel, it’s copper. Where you’re seeing some of these things get going and there’s – I think people aren’t realizing this is a new cycle, right? We’ve had a decade-long market. In the real world, things are just not as easy to just slap on new supply. It’s not all simple. The way to think about it is these kinds of businesses typically actually have the most upside operating leverage to that phenomenon. To the extent that you believe inflation is here to the extent that you believe commodities prices are higher. These are the kinds of companies you want to be investing in. If it’s a cycle just getting going, it’s just getting going. That’s my personal view as far as our labor to answer your question, it's – when you look at the math, it’s very small relative to the operating leverage that comes from pricing as the sort of the cycle kicks in. I would say from a talent perspective we’re looking, we’re actually growing quite a bit. We’ve sort of stated that, but I think our going public, and frankly the importance of our mission, both from an environmental and national security standpoint, really sort of strikes the passion of a lot of people. I think that we’ve seen a lot of really talented people who want to come join us, and then obviously we’ve been hiring them. Our team just continues to grow. I think that our ability to kind of build talent is still there. We have the benefit of again being such a unique company, unique set of assets. But I would imagine it is sort of very hard to keep track of the general outlook for what that opinion is worth. I would also say that again speaks to the strategic advantage we have, because whoever is out there trying to raise capital, and again we have seen no capital formation in the Western world for this stuff, whatever they thought it cost last week, it’s a lot more expensive and it’s going to be a lot more expensive next week. That just sort of speaks to the reflexivity of kind of what we’re facing today. Again, yes, labor costs can go up, but I think that we have attracted a lot of talent. I hopefully will continue to attract great talent. If you have friends that are engineers, send us their resumes. We’re always looking for great people, but I think that’s what we’re seeing those trends that you’re witnessing or a tailwind for us we believe.

And then the…

The only thing I’d add on that – yeah. Go ahead, Ryan. Go ahead, Ryan. Ryan, you may begin.

Yes. Ben, I think – yes, I think some context too just on sort of location. I think, we obviously are proud of the fact that we have really what we think is the only co-located asset and we’re in the Mojave. When we say that, people think of us being in the middle of the Mojave, but we’re 45 minutes outside of the city of Las Vegas. Our ability to attract talent, it has not been an issue at all. We’ve been able to grow pretty well both on the corporate side and the operation side. I think you can see in the results the reason we continue to be able to drive pretty significant efficiencies, growing production despite many fewer production days this quarter year-over-year is the fact that we have been adding for example, probably the best maintenance staff that we’ve had plant maintenance ever. We expect that to continue and we’re gearing up ahead of Stage II, and then we expect to be able to kind of extract efficiencies out of that as well, just given the quality of the folks that we’ve been able to attract, so that has not been an issue. To Jim's point importantly, if inflation is here, the leverage for us is just right where prices on our product will go up. We’ll have a bigger impact than the impact to our costs from a labor perspective. The one thing I wanted to hit on your second question about sort of the onshoring and is it better to do something greenfield in the U.S. versus having some sort of JV or something. We’re obviously not going to comment on specifics of Stage III, but I think your question hits on exactly why we think we have such an incredible competitive advantage both in our current business and in our potential Stage III, where we are the only co-located asset of scale. Absolutely our customers and the end-users of these products, the industrial end-users are seeing what has happened with the supply chain with semiconductors. Having a mine on one continent and a processing facility on another continent. It’s just not an acceptable risk for some of these customers. We’re just absolutely in the pull position, given our co-location and the scale of our asset. I think that'll sort of – that is the competitive advantage when we think about Stage III and moving into magnetics is access and secure access to raw materials.

Maybe on that front is just we had – so we had some lithium drives report today. And the question always is like how difficult it is to get lithium. And there's a bunch of, I think, Jim, you talked about like the juniors out there trying to make a mine. So you got lightest out there in Australia. And how long did it take to make a mine you guys have, if you guys have had guests from your engineers.

Yes. I mean, well, that's – it's a great question and we try to make that point, because there's – this is hard, it takes years. You need an ore body to start, right. If you don't have an economic ore body, oftentimes you'll hear from juniors, we'll have this new technology, right. We have – we're going to have a smarter way to process that. I'm typically skeptical of those claims. I mean, you might as well think if someone came out and said, I have a new way to make some guy in his garage, that I have a new way to make a computer chip, and I'm going to compete against Intel to build a fab and it's only going to cost me a billion, I think people would be a little skeptical with some of these juniors out there that are making these claims. I think there's a little bit of that, we're just – it requires significant capital raise, but really does require – this is a chemical plant. I mean, it's complex and difficult to do. And so one, you've got to start with an ore body and if you have a 1% ore body, you just can't be economic, again, unless you change the laws of chemistry. But then from there, you got to get financed, you got to get permitted. And then by the way, you have to go out and hire tons of people who know what they're doing. Frankly, the only people in the Western world who have any experience doing this is that our MP Materials. We just think that this is really just such a powerful source of strategic advantage for us. We’ve also said that we believe the lowest risk, nearest term, highest return on capital, source of new supply would be one – us getting more efficient at Mountain Pass, that's obvious. But it is also making some kind of expansion at Mountain Pass, where we made an investment. Now, obviously, I'm not saying anything today we would obviously kind of be very specific, if we were to make an announcement on that front, but that would be likely the nearest term sort of source of Western supply, at least as far as we see it today. Again, I just think that there's a lot of stuff here. You have – you basically have people, I get this question all the time. Well, Jim, rare is on rare, well, yes, that's totally beside the point. What's rare is actually having an ore body that can be done economically, then having the human capital, the financial capital, the expertise, and then going out and making it happen over a number of years. That's, again, I just – I think people miss that, and so we try to hopefully that's helpful color. Ryan, do you want anything on that?

Yes, good. Yes, that’s a good thing. Please, Ryan.

Yes. I mean, the only thing I'd say is – to your point on lithium, I think that's why we're so incredibly bullish about our particular piece of sort of this electrification materials is the supply demand function in rare earths. It is just much more difficult to add supply than many of the other materials. I think we're all incredibly bullish all of these materials, given the demand that we see, but I think the critical differentiator, all of us likely will see this demand boom, but the supply and how difficult it is to add supply is what's very unique and pun intended rare in our space.

Yes. And just – I'm glad Ryan addressed the lithium point, I guess I forgot to do that. Lithium, just as an example, there are – you have a lot of production in South America, then you have sort of the North Carolina area and Nevada, there are lots of areas where, to the extent the investment is made over time, you can get product online. Again, as Ryan said, we're bullish all of this stuff. I think just the game changer that's happening in the commodity space with respect to electrification is pretty amazing. But this is very different than lithium for the exact reason that you have to find an ore body that can be economic just to get in the game. And we don't know of one that exists in the Western world today.

Thank you. That's helpful.

Sure.

Our next question comes from Serena Rocha of Morgan Stanley. Your line is open. Please go ahead.

Hey, everyone. Thanks for taking my question. I'll apologize in advance if this was already asked, I got disconnected for a minute from the call. But wondering if you could give us some additional color in terms of the pace of CapEx, either as we think about the rest of this year or thinking Stage II overall. How do we – do we assume just a steady pace within that budget and the timeline minus what was I spent this quarter. Or could it be more weighted towards the back end of the project or lumpy throughout? What's the best?

Yes, we have not given any guidance around sort of specific timing on Stage II CapEx. But maybe Ryan, you can sort of not answer the question in a more artful detailed way. Give any helpful color.

Yes. There is certainly the chance for it to be lumpy. I think we did sort of discuss at a very high level as with any of these projects, it's a little bit lighter in the beginning and it gets a little bit heavier towards the end as parts of the project complete. I wouldn't – I certainly wouldn't draw a straight line. There will be lumpiness just based on certain milestones that are achieved. But certainly, I’d say, you saw our spend this quarter, next quarter will be lighter than, I'd say, the following few quarters.

Okay. Okay. Got it. That's helpful. Thank you.

We have time to take one more question, Subash Chandra from Northland. Your line is open. Please go ahead.

Thank you. Thanks for squeezing me in.

Yes, of course. How are you?

Good, thank you. You might've obliquely referred to it and I hopped on the call late, so you might've explicitly referred to it. But that IEA report, it talks to two things reduce supply through control of illegal mining in China. And then also, perhaps tightened the process and because of this revised waste pollution act, solid waste pollution act, which seems like it's about six months old. Do you – can you elaborate on that and sort of, do you have an opinion if those are meaningful events to kind of respond to that scenario that China will just flood the globe with supplies?

Yes. And so I covered this by just, I will – I think it's a great question because it's really critical to understand, I think that there's – that idea of flooding in our opinion, from what we read there, obviously anything can change. But that idea of flooding is really a backward-looking thing without recognition of sort of Chinese strategic imperatives and pronouncements. The most senior Chinese rare earth official, the Head of the MIIT refers to them as industrial gold and wants the prices to reflect the environmental externalities. If you just think about it logically, I don't see how China would benefit from subsidizing an industry so that the Western world can now compete better with their dominant downstream companies, which is where the jobs and dollars and you want it I think, right? I just think that the world has evolved enough, where the access to resources are really of such strategic value. They want to compete downstream. They do not want to destroy their environment to help Western competitors. Again, this is just based on kind of what we read in here. I take that at face value to the extent that they had rare regulators saying that prices need to reflect the idea that they're rare, not that they're earth, and cause on industrial gold. I think that it's fair to think that rare earth prices particularly were – relative to where they are today and frankly on a dollars basis, are probably heading higher, but that's our perspective on it.

Yes. And Subash, on your question on illegal mining and the reduction there, I think one important nuance that some don't appreciate also is, when you've seen an announcement about increased quotas, which I think people like to focus on those headlines. In our opinion, a significant amount of that is bringing illegal mining into the regulated fold, because of exactly what Jim just laid out, China trying to clean up the environmental impact, which their country and their citizens are demanding. When people look at supply models and take the increased quotas and just add that, and don't make the right adjustments to illegal mining, which admittedly is hard. So by its nature, it's hard to measure, but that is with what we've seen in the industry there, that is a lot of what's going on. That is a pretty important factor in driving the supply balance in China.

Okay. That's very helpful. So we might be double counting if we don't include the illegal mines when it comes to…

Well, exactly and when it comes to – when you're adding to supply from increased quotas, I think, the thought would be looking very closely at how much of that is already contained in the market, but is illegal mining.

Helpful guys. Thank you.

Yes, sure.

There are no further questions. So I will now hand the call back over to James Litinsky.

Okay. Sure. Thank you. Well, thank you everyone for listening today. We are very proud of our execution here. I think the team did a really great job and we look forward to next quarters updates with you and have a great night.

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