MP Materials Corp. / DE Q1 FY2022 Earnings Call

Good day and thank you for standing by. Welcome to the MP Materials First Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Martin Sheehan, Head of Investor Relations. Please go ahead.

Thank you, operator, and good day, everyone. Welcome to MP Materials' first quarter 2022 earnings call. With me today from MP Materials are Jim Litinsky, Chairman and Chief Executive Officer; Michael Rosenthal, Chief Operating Officer; and Ryan Corbett, Chief Financial Officer. Before we get to our opening remarks, as a reminder, today’s discussion will contain forward-looking statements relating to future events and expectations that are subject to various assumptions and caveats. Factors that may cause the company’s actual results to differ materially from these statements are included in today’s presentation, earnings release, and in our SEC filings. In addition, we have included some non-GAAP financial measures in this presentation. Reconciliations to the most directly comparable GAAP financial measures can be found in the appendix to today’s presentation and earnings release. Any reference to our discussion today to EBITDA means adjusted EBITDA. Finally, the earnings release and slide presentation are available on our website. With that, I’ll turn the call over to Jim. Jim?

Thanks Martin and thank you all for joining us this afternoon. We had a great first quarter. I'll get to the highlights in just a moment, followed by Ryan's review of the financial and KPI details. I'll come back to update you all on our progress on Stages 2 and 3, and then we'll open it up to Q&A. So, let's get started on slide four. In the quarter, we produced more than 10,800 metric tons and sold more than 11,700 metric tons of REO. That represents a year-over-year growth in production and sales volumes of 10% and 20%, respectively. Operational execution, cost management, and market pricing are what drive our financial performance. We executed well throughout the quarter, maintained cost discipline, and benefited from higher realized prices. This resulted in record financial performance. Revenue was up 177% year-over-year to $166.3 million. Adjusted EBITDA was up 301% to $132.3 million. Our adjusted EBITDA margin expanded 23 points to 80%, and we earned $0.50 per share in adjusted diluted EPS, an increase of 285%. These are exceptional results, particularly when we consider the global and industry backdrop. We have seen wide reporting in this earnings season of companies in our sector having challenges around production and costs. Our team continues to focus on consistency and continuous improvement in our flotation process, while keeping uptimes at world-class levels. We do not take logistics for granted. We continue to overcome challenges with suppliers, shipping, and labor. All these efforts, combined with strict cost discipline, means we are positioning MP to improve per ton economics over time. We also certainly benefited from strong market prices for NDPR in the quarter. In February, NDPR exceeded $170 a kilogram. With our rare earth distribution of nearly 16% NdPr, our realized pricing for concentrate is highly correlated to the market price of NdPr oxide as it is the vast majority of the contained REO value. Putting it all together, we generated significant cash from operations during the quarter. Our Stage 1 business generated over $133 million in normalized free cash flow. After completing our offtake agreement and making substantial investments towards our downstream expansion, we still generated $71 million in free cash flow during the quarter. MP is in an attractive economic position. We are generating free cash flow and strengthening our balance sheet while investing in high return on capital growth opportunities that will transform our business. I should note, though, for those not following us closely, recent NdPr pricing has pulled back from the February highs. Recent geopolitical developments are an obvious primary driver of the current macro market concerns, specifically the Russian invasion of Ukraine and COVID lockdowns in China. We do not see much of a direct idiosyncratic connection between the Ukraine situation and the rare earth industry. But I can provide some insights into impacts from the COVID lockdowns in China. There are two ways that COVID countermeasures implemented in China could potentially impact our business. The first is potential congestion or bottlenecks in global transportation. While the Shanghai port was recently closed, we generally do not ship significant volumes through Shanghai as there are no major rare earth refiners in the province. Should other ports become more congested as ships transit through Shanghai or divert from Shanghai to offload or pick up products, it could ultimately cause delays in ports that we do use more regularly. We have not experienced any significant issues on this to date. We will continue to monitor this situation as you would expect. Secondly, as you may have heard, certain major EV manufacturing facilities in China have shut down or significantly slowed production at times. This and other resulting supply chain issues in China are clearly disruptions that might be impacting near-term NdPr pricing. But as this dynamic unfolds, shipping bottlenecks or shutdown issues are ultimately short term in nature. I would also add that there were some reports a couple of months back that the Chinese government was encouraging rationality in the market, likely trying to address inflationary pressures on downstream businesses, including magnetics companies, component manufacturers, and OEMs. What we have historically seen with this kind of rhetoric is a short-term blip with limited transactions at lower prices, followed by a return to the forces of supply and demand. In fact, according to Morgan Stanley Research, four of the top 10 OEMs and year-to-date market share for global battery electric vehicle sales are Chinese OEMs. And this means that the Chinese industry needs to incentivize a lot more materials production just as Western industry does in the coming years. As I have said many times, prices will do what they will do in the short term, but we are in the early innings of the transition to electrification across the global economy. This is very bullish for rare earth demand and NPEs prospects, even as real global growth appears to be retreating amidst a very challenging geopolitical and economic landscape. Speaking of transitions, we continue to make parallel progress across stages 2 and 3 during the quarter. Stage 2 construction is ramping and on track and construction of our initial magnet facility in Texas is also underway. I'm going to cover Stages 2 and 3 in more detail after Ryan's remarks. So with that, I will turn it over to Ryan to discuss our financials and KPIs in more detail. Ryan?

Thanks, Jim. Turning to slide six. I'll provide some extra color on some of our key metrics. Starting with production volumes, which is on the bottom left of the chart, as you mentioned, this was another really strong result for the company. We've seen a general upward trend in the percentage of rare earths we are recovering through technology, reagent testing, and plenty of trial and error. Importantly, we believe that there are additional process improvements and equipment upgrades we can make to continue to drive those recovery percentages higher over the long term, but these improvements are never in a straight line. And as we've discussed previously, the priority remains our preparation for Stage 2. Moving to shipments. The team did a great job getting some of the inventory from prior quarters to the port, in addition to the majority of what we produced in the quarter, driving a roughly 20% increase in both the year-over-year and quarter-over-quarter shipment volumes. With regards to realized pricing on the top right of the chart, Jim covered this well in his opening remarks, I would just point out that our realized pricing is generally closely correlated to the spot price of NdPr per metric ton in RMB, adjusted downwards for the 13% Chinese VAT impact. There is also roughly a one-month lag due to the timing of the contracts and actual shipments, but that lag can move around, based on both domestic logistics and the situation overseas. As Jim mentioned, NdPr pricing hit a recent high in late February, so we expect to see the impact of lower recent pricing flowing through to our Q2 realized price. And lastly, our production costs remained solid in the quarter. This graph is on the bottom right of the slide. These costs, associated with Stage 1, continue to be very consistent in the $1,300 to $1,400 per metric ton range. And we're actually down about 5% versus last year's first quarter and roughly equal sequentially, when excluding the investments we are making in future growth that hit our P&L. Given the inflation in the marketplace, we are really pleased with the team's ability to offset higher costs with increased efficiencies. On a reported basis, including the costs associated with advanced hiring and commissioning for Stage 2, reported production costs were up about 8% year-over-year and 5% quarter-over-quarter. These costs associated with Stage 2 totaled about $290 per metric ton in the quarter. This compares to roughly $120 in the prior year period. The $290 per metric ton includes the incremental cost of operating our combined heat and power plant, as well as Stage 2 related hiring ahead of commissioning. As we've talked about on prior calls, the combined heat and power plant is critical for Stage 2, because of the significant increase in power needed for processes like roasting, leaching, and separations. Having our own natural gas-fed plant will significantly reduce our per unit power costs, once Stage 2 is operational, as well as ensuring a more stable source of power. Bringing the power plant and associated water treatment plant online early were strategically important to ensure we have plenty of time to troubleshoot the equipment, hone our processes, and give our employees invaluable time and experience in operating the plant prior to Stage 2 commissioning. Right now, the CHP plant has to run at certain minimum power output for operational improvement compliance and as such, is currently generating excess power versus Stage 1 needs, which we are primarily dissipating to our load banks. The excess cost from this temporary inefficiency represents a little less than half of the $290 impact in the quarter, which will, of course, continue for the next few quarters until the Stage 2 separation facilities are commissioned. This type of investment in our processes ahead of Stage 2 commissioning minimizes operational risks, and the strong execution of our team and integrating two new complex operations further highlights our capabilities in recommissioning site infrastructure, which will be essential as we bring Stage 2 online at the end of the year. As I mentioned, the other portion of the $290 per metric ton impact is related to advanced hiring in preparation for Stage 2. I'll turn to slide 7, and just focus on two points that we haven't already discussed. First, we achieved 80% adjusted EBITDA margins in the quarter, a truly impressive number, thanks to the strong production volumes and cost discipline, allowing us to continue to benefit from the leverage in our business model from strong market pricing. The strength of our margins speaks to our enviable position on the cost curve. And second, on the chart on the bottom right, we now show adjusted diluted earnings per share instead of adjusted net income like in prior quarters. We'll show a display going forward. Either way, highlights the same thing: MP's impressive progression and profitability over the past year. As a reminder, we issued a convert in Q1 of 2021. Our average diluted share count, therefore, excludes the impact of the shares underlying these bonds as if converted into common stock. For Q1 of this year, our diluted GAAP share count totaled 193.49 million shares, which includes approximately 15.6 million shares from the assumed conversion of the convert. With this, I will remind analysts and investors making enterprise value calculations, utilizing our diluted GAAP share count that they must also remember to reduce our debt by the gross $690 million in convertible notes as those notes are assumed to be fully converted in the common shares as we reported under GAAP. Turning to the cash flow discussion on slide 8. You can see that when we adjust for the growth CapEx as well as make the adjustment for the off-take paydown, we generated roughly $133 million of normalized Stage 1 free cash flow in the quarter. That's an impressive 80% of our revenues. I would point out that our maintenance capital for Stage 1 operations remains very modest, with the preponderance of maintenance costs flowing through our P&L. Regarding the off-take, as of the end of February, we had completed the paydown of the balance under our prior off-take agreement. As we briefly mentioned on our last call, we did look at several other potential offers both via direct purchases and via distributors to most effectively market our significant volume of concentrate. In balancing the significant in-place logistics and our desire to both maximize realized pricing and minimize operational risk, we decided to enter into a follow-on arrangement with Shenghe to distribute our current products to end customers in China as we simultaneously work to complete Stage 2. Under this new contract, Shenghe will remain the exclusive reseller of our concentrate in China, although we will maintain our direct relationships with certain third-party customers who we currently sell to directly, including certain Japanese customers who process our material in China. We will continue to foster our direct sales relationships as we prepare for the transition to Stage 2 oxide sales to maintain the flexibility to distribute separated products via this arrangement should we choose to. And with that, I'll turn it back over to Jim. Jim?

Thanks, Ryan. Let's turn to slide 10 to discuss our parallel progress on downstream expansion in the quarter. Stage 2 work has reaccelerated on site. We have substantially completed engineering and procurement for the light rare separation portions. Our EPC is entering the peak of construction with a ramp in craft labor on site, including iron workers, pipe fitters, millwrights, and electricians. They've also recently implemented a night shift to further accelerate work. We are also making progress on heavy rare earth separations. These processes will leverage existing facilities and significant shared infrastructure with other parts of our operation. The existing light-heavy separation line will be expanded to include certain individual separations, and the retired cracking building will be used for additional separation and product finishing. We have begun to demo the existing interior equipment, particularly in the legacy leasing and cracking building, in preparation for the installation of new separations and finishing equipment. Moving on to Stage 3. The picture on the right is a nice overhead of the grounds being prepared to build our initial magnetics facility in Fort Worth. Last month, we held a formal ceremony at the site to celebrate the beginning of construction with more than 100 government and civic leaders. We are grateful for the strong bipartisan showing of support from local, state, and federal officials. General Motors also joined us at the ceremony, so we could share the great news that we had executed our definitive, long-term supply agreement, making them our foundational automotive customer. GM also brought a GMC Hummer EV, which looks awesome. We look forward to supplying magnets for it as well as many other GM models across the ultimate platform. We have commenced procurement for Stage 3 long lead equipment and are also accelerating hiring for the facility. We have a number of job openings in Fort Worth currently, most of which are technical opportunities. So if anyone listening is interested or knows if someone who might be interested in helping us bring this supply chain home, please get in touch. As you've heard me say before, talent begets talent, scale begets scale. We are building an integrated magnetics national champion that should make all Americans proud. So join us. And on that note, I am very proud of the culture we continue to build at MP. Our operational results this quarter in such a challenging landscape are further evidence of our maniacal focus on execution. This past month marked two years without a lost time injury. To celebrate our team for this fantastic and critical milestone, we just issued a special one-time safety appreciation bonus to all non-executive employees at MP. Keeping people safe and building the right culture requires long-term commitment. We've been at this for a while now, and we hope that our passion for our mission is infectious. We believe that the work we are doing is important to all of us, and as we look around the world, we could not feel more conviction. Just like the semiconductor issue before it, the tragedy in Ukraine is another bold reminder of the risks of capturing short-term savings in exchange for enormous and sometimes even existential long-term liabilities. Several countries in Europe are seeing the severe consequences of relying on Russia for so much of their natural gas needs. We should all heed these warnings, especially as the stakes seem to be rising. A single-sourced outside region for an entire supply chain is a significant risk. The good news is that the evolution of the electrification economy offers enormous opportunity. The pie is growing across the globe, even in challenging times, we can build and benefit for years to come. And I am hopeful that this is one of the areas where it does not need to be a zero-sum between adversaries. We can succeed while also helping bring about more security and sustainability. With that, Operator, let's open it up for questions. Operator?

Thank you. And our first question is from Matt Summerville. Please ask your question. Your line is open.

Thanks. Good evening. Maybe a couple on production and production costs, so with production costs, Ryan, how should we be thinking about that $290 a ton number, is we're now sitting here in Q2? And then, how should we think about, how that ramps, in Q3 and Q4 if it is indeed going to ramp further from here? And then, I have a follow-up.

Hey Matt, Ryan, go ahead.

Hey Matt, on the $290 million, I think that at this point, what that represents, as I called out, is some of the incremental costs that we experienced for running the combined heat and power plant at its current level, which is in excess of the power requirements for Stage 1. So certainly, I would expect that portion to hang around at a relatively similar fashion throughout the rest of the year. And then, as we continue to build the team for Stage 2 ahead of commissioning, I would say that the levels that we're at will probably slightly increase throughout the year. These folks that we're talking about that are embedded in our P&L at this point represent, for example, a much increased maintenance crew and all of the things that you would expect us to be bringing on ahead of commissioning of these assets. There are specific members of the team that we'll be bringing on, for example, operators for certain circuits that won't fall into our COGS measure immediately if they're not actively participating in the shared infrastructure of the site. And so I'd expect you to see an increase in those folks as well as a slight increase over the period of this year going into the start of production at the end of the year and early next year, both in the production number and outside of the production number?

Got it. As a follow-up, Ryan, you mentioned that there is potential for increased long-term production out of Stage 1 through upgrades and some investments you could be making. Could you provide more detail on how we should consider the timing of that? I understand you're focused on Stage 2 now. Also, where do you currently see the major bottlenecks in Stage 1 that might prevent you from making further progress? Thank you.

Well, on that one…

Yeah, you want to have Michael hit Stage 1 and then, you can finish up.

Sure, Matt. Thanks for the question. The law of diminishing marginal returns certainly applies to our concentrate operation as with anything else. But I think as we've said in the past, I said maybe I'm increasingly optimistic about the opportunity to apply the known technology and additional automation to improve our recovery, or grade and our throughput potential. Some of these more are game changer opportunities are not likely to be implemented this year. So this year, we'll be more focused on incremental improvements. In terms of where the bottlenecks are, mining is certainly not a bottleneck. So it is in the processing operation. So we continue to increase the throughput slightly in order to see if we can identify where those is, I would say, right now more in the grinding circuit is where we anticipate initial bottlenecks, although we haven't reached there yet. But we see opportunities to do things that will open that up. So long-term, I see a pretty tremendous opportunity to improve the quality and quantity of our concentrate production. And then I would just add, Matt, you kind of said this in your question, but as you can imagine, as we gear up in preparation for the rest of the year for getting Stage 2 online, obviously, that's our primary focus. And there'll be a lot of activity on the site for that. And of course, getting that done properly and safely is our primary focus as the year unfolds.

Got it. And then I'm just going to sneak one more in real quick. Any change in timing for this year's Stage 1 maintenance outages, normal scheduled maintenance? Are we still looking at Q2 in Q4, or has that changed at all?

No change. But Ryan, if you want to cover anything on that from an operating standpoint or financial standpoint, but no change.

Yes. No. That's right. And we actually just completed a very successful turnaround here last week and no change to the schedule versus last year. So the year-over-year compares will be lined up as opposed to how they looked in 2021.

Great. Understood. Thank you, guys.

Thank you.

Thank you. And our next question is from Carlos De Alba. Your line is open.

Good morning. Good afternoon.

Good afternoon.

Good afternoon. Thank you very much. It was a good quarter. I have a couple of questions, the first one being about your current inventory situation. You shipped slightly more than expected this year. You have already addressed the maintenance average in the second quarter. What should we anticipate regarding production? Could you provide some insights on production and shipments for the fourth quarter, considering both of these factors? Additionally, regarding the potential disruptions in ports and logistics occurring in China, what are the key ports from which you ship your materials?

Yes. Sure. Ryan, why don't you take the first part? And then, Michael, you take the second part about the ports and then I'll come back then.

Sure. Hey, Carlos, good to hear from you. Regarding production, we don’t provide specific guidance. What Matt mentioned about the timing of maintenance outages is relevant, especially when looking at the year-over-year comparison. Last year in Q2, we had a similar maintenance outage. I suggest using last year's production trends to gauge the impact of the current maintenance. From an inventory standpoint, we managed to clear some of the slight inventory buildup that had occurred during transport to the port throughout the quarter, along with the majority of our production. The shipping situation continues to change. We are pleased with our ability to deliver materials to the port this quarter, though it does have its ups and downs. At this time, I don’t have anything specific to highlight, just the usual trends we've observed. Mike, would you like to address the rest?

Sure. Yes, in terms of ports that we ship to, the primary ones are in Tianjin, Qingdao, Liaodong. Occasionally, Luzhu. Those are the biggest ones.

Got it. Thank you, everyone. Michael, could you share your expectations on when you might begin trials for the concentrate of the dry and the consignor of Stage 2? Also, can you provide a general update on the progress of the Stage 2 project?

Ryan on dates or Ryan or Jim on dates. I can touch on the physical progress, though, in generalities. But the progress is moving along nicely. Jim said, the number of craft on site has increased, and we're starting to add a nice shift to the schedule. A lot of the civil work is complete, and steel erection structural steel is wrapping up in the next couple of months, we hope. That leaves piping and electrical, which are always sort of at the latter end of the project, along with the ancillary equipment, a lot of the primary equipment is installed already. And then in broad strokes, we do hope that the call center and dryer will begin trial operations ahead of the commissioning of the rest of the facility. It's also sequentially in the process that comes first. So we're hoping to have that prior to commissioning the rest of the circuit, but that doesn't assume we'll run it continuously at that point.

Yes. Carlos, it's Jim. I believe we said on the last call that we expect to be mechanically complete by year-end and hit run rate normalized production sometime in 2023, and that remains on track. So we've made a lot of progress in the quarter.

Sounds great. And maybe one last question for Ryan. Now that you have paid down the prepayment with Shanghai and renewed the offtake agreement, how will your cash flow operations change now that the off-take is paid down?

Sure. Yes, that's one of the key benefits of transitioning into this new agreement is we do not have that balance that would result in sort of the non-cash revenue portion that you had seen sort of the roughly $0.15 of every dollar that was effectively a debt paydown, but from our GAAP treatment came through operating cash flow as an offtake paydown. So that portion will go away, the broad economics of the agreement are not dissimilar and sort of whatever commission fees that are built into it are shown primarily on a net basis. So that's already accounted for in our realized price. And so from that perspective, the entirety of that portion of the cash flow that we had that negative impact from will go away. So all else equal, a real benefit to operating cash flow.

Sounds good. Excellent, thank you very much guys.

Thanks, Carlos. Next question?

Thank you. Our next question is from David Deckelbaum. Your line is open.

Hey guys. How are you? Thank you for taking my question. I just wanted to confirm, Jim and Ryan. With the addition of the night shift on the construction crew, was this part of the original plan? Does this result in any additional cost, or is this part of the steel structural installations? Is there an assumption that you would have two crews running for the rest of the year?

I'll share some thoughts, and then Ryan can add on. As you can imagine, this is a significant project. Looking back over the last few quarters, we've been addressing various supply chain challenges, similar to what many others are experiencing. We've been managing the day-to-day aspects of the project, and with numerous construction schedules involved, any disruption can impact the overall timeline. We've been clear that we'll manage everything in real time to ensure we complete the project efficiently and on time. It's tough to pinpoint how much the night shift was included in the initial plan, as all project plans tend to evolve over time. However, the core elements remain consistent. We are actively working to expedite progress, and while I can't specify how much of a night shift we initially anticipated, it's proving beneficial. We're making every effort to complete the work swiftly. We've also mentioned in previous calls that we've utilized DCAS since this is a DCAS-related project, and we are leveraging all available resources. Regarding the budget, we are on track. During our last call, we outlined our expectations, and you can observe our CapEx for the quarter; we feel confident in our financial standing concerning the project.

Appreciate that, Jim. And yes, maybe just the renewed agreement with Shanghai for concentrate sales. I guess does it cover just concentrate sales going forward, or would you be using Shanghai for any residual last month sales? Certainly, I understand you're going to be stockpiling the heavies once the NDPR separation circuits up and running. But for, I guess, the remaining lights, would those be marketed by Shanghai?

Yes. So you're right on the heavies. Ryan, why don't you address the agreement, and then I'll finish.

Sure. So the agreement is time-based, so it's an initial term with a renewal option at the company's option. And with that, the focus, obviously, primarily and the take-or-pay obligation on the part of Shanghai is for the concentrate sales. As I mentioned in my remarks, we continue to distribute directly to certain customers of ours, and we'll continue to focus on building up our direct sales relationships particularly in Japan and Southeast Asian markets as well as, of course, in the U.S. and obviously continue to focus on ultimate sell-through via our downstream strategy. This particular agreement does give us the flexibility, again, at our option of distributing separated products through Shanghai into the Chinese market should we so desire.

I appreciate it. I have another question regarding contracts, specifically with GM concerning magnetic products and magnetic flake and Stage 3. Is there a timing target for first production or sales? Also, is there a timing aspect to your contractual relationship with GM as your anchor customer?

Great question, David. While I can't provide specific details about the contract, I can give you an overview. We have mentioned two primary product components. We expect to start selling alloy to GM in late 2023, with magnet deliveries commencing in 2025. Generally speaking, we view the Stages 2 and 3 businesses as separate entities and recognize the importance of making downstream investments for a solid return on capital and the strategic nature of the supply. Any agreements we pursue will likely be long-term. Although we haven't shared specific timelines, GM has publicly indicated that this pertains to their LTM platform, and with the exciting models they have in the pipeline, demand is expected to grow as they expand their business. Ryan, would you like to add anything to that?

No, I completely agree with all your comments, Jim. I think you hit it. Certainly, we continue to see a lot of strong demand across the Board from a variety of industries. And so I think that, to Jim's point of having the separate businesses and being sure that we are setting up contracts that certainly are meeting our customers' needs, but protecting us given the significant capital that we're putting into the ground, that's obviously something that we focus very closely on balancing.

Thanks, Jim and Ryan for the time. I'll get in the queue.

Thanks David.

And thanks for the entertaining hold music as always. Take care.

And David, I’m glad you enjoyed that.

Thank you. And our next question is from Sathish Kasinathan. Your line is open.

Yes. Hi. Thanks for taking my questions. My first question is actually on Stage 3 again. So clearly, Stage 3 has significant expansion potential up to 10 times the current plan. So I was wondering if you could provide more color on your growth strategy. Is the priority here to first commission the Texas plant with 1,000 tons capacity, meaning any growth is more 2026 and beyond story, or would you simultaneously consider expanding and the capacity is more of a moving target?

I want to clarify that I don't think the capacity we initially stated for the Fort Worth facility is the limit. I believe it's actually much larger. While our output from Mountain Pass might reach 10 times that, the industry's nature is highly dynamic. We are pursuing various strategies, including buying, building, and joint ventures to expand our business. We are in a very attractive sector, and given current global developments, the strategic importance of our work is increasing daily. We are engaged in numerous discussions, and it's crucial to approach this thoughtfully rather than just signing deals. We aim to execute effectively for our customers. Looking at the long term, the potential in the magnetics business likely surpasses the anticipated 10 times growth associated with our current ore body. We believe we are several years and billions ahead of our competitors in the West. As mentioned previously, we see our team building a strong national champion in magnetics that is fully integrated, presenting a significant growth opportunity. There is much to accomplish, but we are fully committed to this.

Yes. Thanks for the color. And actually, it ties down to my next question. So, you said that the expansion potential is even more than 10x. So it all depends on probably the third-party feedstock and recycling opportunities.

Yes.

Can you provide any insights or quantify the opportunity regarding third-party feedstock and recycling, or is it too early to tell?

Yes, you're right. When we consider recycling and third-party capabilities, our main goal is to establish a variety of tasks that we can undertake simultaneously. This approach allows us to internally use waste from the magnetics production process, creating a closed loop for our operations, as well as managing third-party feed. I believe there is a significant amount of capital that needs to enter this space, and I recognize that bringing these projects online is challenging. There will be valuable opportunities for us to offer solutions to other parties and to help grow the supply chain. Currently, the main alternative is sending materials to China, but as the demand for a Western supply chain increases, our ability to accept third-party feed will give us a competitive edge. Furthermore, if anyone has underestimated project costs or timelines, we are ready to assist. Of course, we aim to ensure our shareholders benefit from this. Overall, we believe this positions us very well. When I say the opportunity is greater than 10 times, I mean the magnetics sector is expanding. While competition will be present, the growth potential is substantial, and I wouldn't limit it based on our current output.

Okay. Thanks for the color and congrats on a great quarter.

Yeah. Thank you.

Thank you. And our next question is from George Gianarikas. Your line is open.

Hey, good afternoon guys. Thanks for taking my question.

Hey, George. Yeah. Of course, hello.

So maybe to start, just when you think about the landscape, and you've discussed lots of opportunities that you're working through with various third parties. Is it possible for you to have a direct deal, given your Stage 3 ambitions for just MDPR? Is that something you'd sign a deal for, or are you more leaning like the firm towards becoming a full magnet maker and therefore, only looking for deals with third parties that want to buy your magnet metal over the long term?

Sure, George. I would say that we were opportunistic. We approached this initially as investors, focusing on the most strategic returns. However, as we reflect on the current landscape, the strategic aspect of our business is essential, and we aim to grow our downstream operations, which will increase our overall profits and transform the business. Over the long term, we want to maximize our opportunities. We are open to anything that makes sense for us.

I want to discuss the recent comments from the industries in China. The drop in the price of NdPr from around 170 to approximately 130 seems to align closely with those comments. I'm interested in your thoughts on the mechanism behind that decline. Additionally, we often receive questions about supply, especially regarding China, which can be somewhat unclear in terms of its capacity. How quickly can supply be activated or deactivated? I would appreciate your insights on the dynamics that led to the price decline as well as your assessment of the situation in China, particularly regarding how swiftly supply could re-enter the market.

Sure, that's a great question, George. What I would say is that we saw something similar about six months ago in the iron ore market. There was a lot of speculation, and the government intervened. In China, when the government sets a specific goal, adoption tends to be much quicker than in the West. As a result, there’s often a reaction where companies want to align with government policy, leading to some transactions at lower prices, even though these are typically small amounts. This can cause a temporary stalling in the system. Over time, though, the balance of supply and demand will come back into play. Right now, prices have risen significantly amidst inflation concerns, similar to what we’re experiencing globally. Some players in the market are trying to establish tighter pricing. Four of the top ten global manufacturers of battery electric vehicles are Chinese, and they require a steady supply of materials, which is essential. In the U.S. auto market alone, we need more supply—forget about wind turbines and drones; we need additional resources. The long-term trend that many may not yet fully appreciate is that the global economy is facing serious geopolitical challenges. Capital investment is needed to expand production capacity, and the time required for this expansion is insufficient. This is reflected in the current discussions among major manufacturers. I find it illogical to expect the Chinese government to subsidize foreign competitors at the expense of their own national champions. If Chinese OEMs and Western markets need product, and the supply is limited, it wouldn’t make sense to lower material prices excessively, which would essentially mean subsidizing Western producers. In terms of future dynamics, I believe that the Chinese will prioritize their own environmental interests and ensure that their OEMs have the necessary products rather than undermining themselves. So, I see the current situation as a temporary pause. While the world faces production delays, I think this will only be short-term, and I expect prices to rise significantly from here.

One more, if I may, that's okay?

Of course, yeah.

Just on talent, you said a plenty of time that you're trying to build a magnetic chain in the US, that hasn't really been done. And so, how do you feel about the talent pool? I mean you have a lot of reps you mentioned that at the end of your talk. So are there people that you think could fill the roles that you need to operate both Stage 2 and particularly Stage 3?

Yes, there's no doubt that there is a struggle for talent everywhere. Almost every company is discussing this issue. However, I believe our mission is a strong motivator for individuals, which sets us apart. It transcends political views. Recently, the President announced our Department of Defense contract for heavy equipment, and we stated our intention to hire at both Mountain Pass and Fort Worth. We have significant hiring ahead. What we observe is that as our efforts gain momentum, many talented individuals want to join us. Regardless of their political beliefs, everyone is interested in creating more American jobs, enhancing diversity in the supply chain, and supporting sustainable production. We don't need to go over the environmental benefits of our methods compared to other production practices. Thus, we continue to attract many people to our mission. In this talent struggle, I see it as a competitive advantage. We aim to spread the word and attract as much talent as possible. We are confident we will find the people we need, and we are regularly welcoming exceptional new team members.

Thanks guys.

Yeah, of course. Next question.

Thank you. And our next question is from Subash Chandra. Your line is open.

Thank you. I may have missed the answer to this question. I'm curious if the structure is now well established to progress to Stage 3 with the current GM contract, or if there is still room for exploring additional joint ventures or partnerships to reach that stage.

I'm not sure, could you please repeat that?

Yeah, sure. I think you've talked about you can build by a joint venture your way to growth. I was just curious if the GM deal right now, the $700 million Stage 3, the way you have it structured right now where you're bringing that pretty much on a sole basis to first production, if that is settled at this point, or are you still open for additional joint ventures?

Sure. To clarify, they are the primary automotive customer for the Fort Worth facility, but they aren't the only one, and it's not exclusive. We aim to grow as we're focused on building a magnetics business. They want us to succeed, so we anticipate acquiring additional customers at that facility. Over time, we are considering significant expansion. Thus, there are no exclusive arrangements, and you can expect to see more customers in both automotive and other sectors at that facility and future ones as well.

So the magnetics business will be a 100% organic business for you, not interested in joint venturing in the magnetics business?

I wouldn't put it that way. What I can say is that we have an exceptional team at the moment, and we are expanding that team while also constructing the facility. As previously mentioned, we are actively building that facility. However, if there are promising partnerships or other opportunities, we will revisit our initial mission, which is to buy, build, or joint venture to create value. Ultimately, if we believe we can effectively serve our customers and enhance shareholder value, we will definitely consider it.

Okay. Got it. And then just an update, so the $700 million, you talked quite a bit about inflation, and it certainly seems like a game of inches every quarter. But how does the $700 million feel right now to you?

What I want to emphasize is that around a year ago, I drew an analogy to the 1973 oil crisis, highlighting the supply chain disruptions that were being viewed as transitory at the time. Internally, we at MP were focused on positioning ourselves effectively for these disruptions, as I believe we are facing several years of ongoing supply chain shocks. This situation continues to unfold. While we recognize that we will not be immune to inflation—especially since I expect our employees' real incomes to rise—we want to ensure our team thrives. We have built an owner-operator culture, and it's important that everyone benefits from rising incomes rather than just seeing nominal growth eroded by inflation. In this inflationary environment, our existing assets and the scale of investment we have make it increasingly difficult and expensive for newcomers to enter the market. I believe that even if we experience some level of peak inflation—which could unlikely be the case—the value of our in-place assets will likely continue to increase. We are positioned well within the electrification sector, which promises substantial growth over the next decade. Regarding the $700 million target, we feel confident in that number and have planned accordingly. There is nothing in recent months that suggests we won’t meet or exceed that figure. However, building on this target could come with unexpected costs. Overall, the mining material sector, where we operate, is one that is likely to thrive in an inflationary and disruptive environment.

Right. Okay. Got it. Thanks. Good to hear.

Sure. Yeah.

Thank you. And our next question is from Matt Summerville. Your line is open.

I just have a really quick follow-up. I know the call is running over a little bit. With respect to…

No problem. Stage 2 as a what point do you think you'll start looking at transacting with third-parties for your outbound Stage 2 material? Is that something you start to do immediately after startup? Is that something you start to do a year after being up and running? How should we be thinking about the cadence of that cutover to non-Chinese customers is basically what I'm asking, Jim?

We've been focused on this since the beginning. Looking back to 2017, we started with a small team and were considering how to build a successful business. We're always thinking about Stage 2 sales and have received interest from various parties along the supply chain. The main challenge will be to maximize the downstream benefits of that interest. I don't know if Ryan or Michael would like to add anything, but we certainly have a lot of interest in our Stage 2 product.

Got it, understood. Thank you for that.

Yeah. Sure.

And our final question is from Carlos De Alba. Your line is open.

Hi. This is going to be quite brief. It's just on the effective tax rate, went up to around 25% in Q1. I think quite a large number we saw in the last few quarters, even greater than what we saw in Q1 last year of 2022. So I wonder, if you Jim or Ryan can give us a little bit of color going forward?

Yeah. Of course, Ryan, why don't you take that?

Sure, Hey Carlos. On that, what I would say is, obviously, as we've discussed our plans from a Stage 2 perspective of completing construction and bringing those assets online to see if that does have an impact on our effective tax rate given the potential bonus depreciation we can take on what is the pretty significant scale of assets. And so, we are in the account limited and so what you bring in a significant amount of bonus depreciation some of those deductions effectively get stopped down when you got lower net taxable income and so we're in the beneficial position of likely being able to have a very attractive cash tax rate this year, but that does actually find its way into the effective tax rate from a GAAP perspective over the course of the year. So I would say likely what you see here around this area is reasonable for the next couple of quarters, and we'll continue to reevaluate that as we get closer to in service of Stage 2.

Great. Thank you very much.

Thank you.

Thank you. And there are no further questions at this time. I would like to turn the call over to back to Mr. Litinsky for closing comments.

Sure. Well, I just want to thank everyone. It was a great quarter for us. And so just we'll get back to work now. Stay everyone safe. And we'll talk to you soon. Good night.

And this concludes today's conference call. Thank you for participating. You may now disconnect.