Earnings Call Transcript - MP Q4 2024

Operator, Operator

Hello, and welcome to the MP Materials Fourth Quarter 2024 Earnings Call. We ask that you please hold all questions until the completion of the formal remarks, at which time, you'll be given instructions for the question-and-answer session. Also, as a reminder, this conference is being recorded. If you have any objections, please disconnect at this time. With that, I would like to turn the call over to Martin Sheehan, Head of Investor Relations. Mr. Sheehan, you may begin.

Martin Sheehan, Head of Investor Relations

Thank you, operator, and good afternoon, everyone. Welcome to the MP Materials fourth quarter 2024 earnings conference call. With me today from MP Materials are Jim Litinsky, Founder, Chairman and Chief Executive Officer; Michael Rosenthal, Founder and Chief Operating Officer; and Ryan Corbett, Chief Financial Officer. As a reminder, today's discussion will contain forward-looking statements relating to future events and expectations that are subject to various assumptions and caveats. Factors that may cause the company's actual results to differ materially from these statements are included in today's presentation, earnings release, and in our SEC filings. In addition, we have included some non-GAAP financial measures in this presentation. Reconciliations to the most directly comparable GAAP financial measures can be found in today's earnings release and the appendix to today's slide presentation. Any reference in our discussion to EBITDA means adjusted EBITDA, and tons means metric tons. Finally, the earnings release and slide presentation are available on our website. With that, I'll turn the call over to Jim. Jim?

Jim Litinsky, CEO

Thanks, Martin. Hello, everyone. Let's get started on Slide 4. MP had a terrific year of execution in 2024 across our Materials and Magnetics divisions. We set a new record by producing 45,455 metric tons of REO during the year, 9% higher than in 2023. I want to remind you that production progress is rarely linear. We are continuously implementing new equipment and processes as we advance Upstream 60K. This should lead to further improvements over the next year, but along the way, there may be occasional instability and downtime as we implement these enhancements. That said, we are extremely pleased to maintain strong concentrate product profitability as we expand production and optimize the upstream business. Moving on to midstream operations, we produced 1,294 metric tons of NdPr oxide in 2024, well above last year's total of 200 tons. In Q1, we are targeting over 20% sequential growth in production. Similar to our upstream business, we expect to make a lot of progress in the coming quarters. This means rapid but methodical growth in production while we also make process improvements and capture efficiencies. We remain confident that we will reach gross margin profitability in our midstream operations in the very near term. As we scale, we continue to see growing ex-China demand for our separated products. In 2024, we signed new agreements with the Department of Defense for both NdPr and lanthanum. We also added a top five global automaker for a substantial direct volume commitment of NdPr. This means we now supply three of the five largest non-China automakers in the world. Moving on to our Magnetics division, we achieved two critical milestones in the fourth quarter. First, we started producing NdPr metal at Independence, the first time rare earth metal has been commercially produced in the United States in at least a generation. This achievement resulted in a second $50 million customer prepayment in late December, bringing our total prepayments to $100 million for the year. We expect to attain an additional $50 million prepayment in the next few months along with additional tax credits, which Ryan will cover in a moment. The second significant milestone we achieved was initiating trial production of automotive-grade magnets in the new product introduction facility at Independence. This factory within a factory enables us to rapidly manufacture and validate magnets on the same, albeit smaller, equipment we will use to manufacture at scale beginning in late 2025. This represents a major step towards scaling production for GM by year-end. Moreover, MP now makes magnets at Independence that meet the rigorous performance requirements necessary for EV drive motor applications, which are essentially the most demanding specifications by far. Therefore, successfully producing high-quality magnets for that kind of application demonstrates that MP possesses the intellectual execution and production capabilities to be a solution provider for a wide range of critical applications. As the world races to secure the building blocks of physical AI, such as robots, drones, or even eVTOL, the United States of America now has a champion in MP that can provide a domestic supply chain solution for rare earth magnets. Lastly, during the year, we continued to judiciously manage our balance sheet, pushing out the vast majority of our debt maturities to 2030 while retiring a little over 90% of our 2026 notes at a discount. These transactions allowed us to buy back 8.6% of our outstanding shares at an average price of $14.76. With that, let me now turn it over to Ryan to go through our financials and KPIs. Ryan?

Ryan Corbett, CFO

Thanks, Jim, and good afternoon, everyone. Before diving into the details, I wanted to note that with the company making modest deliveries of magnet precursor products in Q1, we are providing additional segment-level financial disclosures with this earnings release and our 10-K filing expected next week. Our two reportable segments are Materials and Magnetics. The Material segment consists of our upstream and midstream businesses at Mountain Pass and includes our concentrate and separated rare earth product sales. The Magnetic segment encompasses our operations at Independence and initially consists of magnetic precursor product sales. With a commercial start of magnet production on track for year-end, we will add revenue derived from those sales in 2026. Additionally, we report corporate expenses and other costs as a reconciling item to our consolidated adjusted EBITDA. These costs primarily consist of unallocated overhead, legal and HR expenses, and the other usual corporate support functions, including executive compensation. While not a reportable segment under GAAP, this category is the bridge between our segment adjusted EBITDA totals and our consolidated adjusted EBITDA. Lastly, I would point out that in 2024, 100% of our revenues and cost of sales were generated in the Material segment. Magnetics costs are primarily located in the SG&A and advanced projects portions of our consolidated P&L ahead of deliveries of saleable product in 2025. So, let's start on Page 6 with our full year consolidated financial results. The revenue trend over the last three years has been driven mainly by NdPr pricing. The average price of NdPr was about $120 per kilogram in 2022, $75 per kilogram in 2023, and roughly $55 per kilogram last year. Currently, the market price is approximately $60 per kilogram. The decline in realized pricing falls straight to the bottom-line in a commodity business like our Material segment, which you can see in the consolidated EBITDA trend. Also impacting our 2024 results was the ramp in production of separated products, primarily NdPr oxide. As we have talked about throughout the last year, our production costs for separated products are temporarily elevated as we continue to optimize our processes and ramp production levels towards our targeted throughput. And as NdPr oxide production volumes ramp, we are consuming more REO from the upstream circuits to produce separated products, supplanting otherwise highly profitable concentrate sales. Lastly, you can see the flow-through of the decline in adjusted EBITDA to adjusted diluted EPS on the far right chart. EPS was also impacted by higher depreciation from capital assets placed into service in the Materials and Magnetics segments over the last two years, as well as higher interest expense from our new 2030 convertible notes, partially offset by a larger tax benefit in 2024. Turning to Slide 7, this is our usual slide showing the KPIs for what is now our Materials segment, with the metrics on the left reflecting our upstream performance and on the right relating to the midstream. As Jim mentioned, on the far left, you can see our record-setting concentrate production of 45,455 metric tons in 2024, which was our fourth consecutive year over 40,000 tons. Our performance in the back half of 2024 gives us confidence in continued modest production growth in 2025. The decline in REO sales volume shown on the left-hand side of the page is driven by our ramp in the production of NdPr oxide shown on the right. Realized prices per metric ton of REO moved in tandem with NdPr pricing, as you would expect. Our sales of NdPr, 1,142 metric tons in 2024, moved generally in line with NdPr production with a short lag, which will ebb and flow based upon shipping schedules and the mix of metal versus oxide sales. On the far right, you can see our average price for NdPr sales for the year. On Slide 8, the financial results for the Materials segment for the past three years are displayed on the left, and the Magnetics segment results are shown on the right. With our updated segment disclosures, investors can now get a better sense of Mountain Pass' favorable cost position in the industry, as well as our significant investments in the Magnetics segment over the past few years. For Materials, the revenue trends are in line with my prior comments on our consolidated results. Regarding Materials segment adjusted EBITDA, you can now see the earnings power of the Mountain Pass operation on a standalone basis. 2024 results reflect both our shift from selling concentrate to consuming it, which would have a temporary negative impact in any pricing environment and the pronounced pullback in market pricing for our products. Additionally, the numbers account for the early production phases of NdPr, cerium, and lanthanum products, operating below one-third of our target throughput while incurring costs associated with labor, maintenance and infrastructure that is needed to run at full capacity. With our continued progress on ramping our midstream volumes as well as firmer pricing, we look forward to an improved 2025. The Materials segment adjusted EBITDA loss of $14.1 million was driven primarily by the items outlined in the consolidated discussion. These results also reflect a $21.5 million write-down of inventory during the year, partially offset by a $12.2 million credit related to the Section 45X Tax Credit for NdPr oxide production. You can also see on the right that the Magnetics segment adjusted EBITDA loss has grown as we continue to invest in staff ahead of initial production. We now have north of 100 employees in this segment, and we will likely double that number over the next two years as we ramp magnet production. As part of our segment results, we also now break out capital expenditures between Materials and Magnetics. On the left, you can see that the capital expenditures in Materials have dropped meaningfully over the last two years as we wrapped up our midstream optimization and recommissioning efforts. And on the right, you can see the fairly steady spend on Independence beginning in April 2022 when we broke ground. In 2024, capital expenditures for the consolidated company totaled $186.4 million, decreasing over $75 million year-over-year. I'll provide our 2025 CapEx expectations in just a moment. Moving to Slide 10, and our quarterly consolidated financial metrics. Revenue climbed 48% year-over-year to $61 million, driven by the ramp in sales of separated rare earth products, primarily NdPr. And in the middle of the slide, you can also see that the ramp in initial subscale production of separated products continued to impact EBITDA, added the continued growth in Magnetics. On the far right, similar to the full year, we have the flow-through of the change in EBITDA impacting adjusted diluted EPS, as well as higher depreciation and interest expense on a year-over-year basis. Moving to Slide 11. On the left, REO production increased 24% year-over-year, setting a record for a quarter with a planned maintenance outage. This also drove the 9% increase in REO sales volumes. Realized pricing strengthened slightly sequentially in line with our outlook, but was down 16% compared to last year. And as we look at Q1, we expect sequential REO realized pricing to be roughly flat with Q4, assuming current market prices hold. On the right side of the slide, you can see that NdPr production was solid at 413 metric tons. Sales volumes in the quarter were quite strong and roughly in line with the prior quarter's production. And lastly, NdPr pricing improved sequentially in line with our expectations. As we look at Q1, similar to REO realized pricing, we expect sequential pricing for NdPr to be relatively flat with Q4, assuming current market prices hold, subject to the puts and takes of delivery timing and contract terms. Moving to Slide 12. I discussed the revenue trends on the consolidated slide, and as I mentioned earlier, despite our production costs for separated products being temporarily elevated, we were able to offset that headwind as well as most of the segment's SG&A costs with continued profitable sales of REO as EBITDA for the quarter came in at negative $1.3 million. These results also reflect a $6.4 million write-down of inventory in the quarter, mostly related to lanthanum, as well as an offsetting $8.4 million Section 45X credit in part due to the favorable final rulemaking by the IRS in October. Importantly, looking ahead to 2025, as we further ramp production, we continue to have clear line of sight to gross profit and sales of NdPr, which as you can see from Q4's results, should return our Materials segment to profitability. And on the right, you can see the modest investment in operating costs in our Magnetics segment. Again, importantly, we will begin booking modest revenue in Q1 and expect to turn EBITDA positive in this segment in the first half of the year. As for CapEx, we expect to spend roughly $150 million to $175 million in 2025 net of government grants. Recall that much of this spend is the spillover from our 2024 capital plan, mainly due to timing. Had we not underspent in 2024, this outlook would have been closer to $100 million. This year's spend will be split roughly evenly between the Materials segment and the Magnetics segment. Magnetics CapEx will be focused on completing the acquisition and installation of the latter portions of the manufacturing equipment to reach our goal of producing magnets by year-end. And in the Materials segment, our spend will primarily be focused on high-return growth investments, like Upstream 60K, certain initial work on the recommissioning of our chlor-alkali facility, heavy rare earth separations, along with debottlenecking projects and the usual infrastructure and maintenance CapEx. Turning to the balance sheet, as we continue to make solid progress at Independence, we reached an operational milestone that unlocked an additional $50 million customer prepayment in the fourth quarter, bringing the total prepayments received to $100 million for the year. We expect to receive the final $50 million prepayment in the next few months. We also expect to receive an additional roughly $50 million in proceeds from our 45X and 48C tax credits within the year, further supporting our strong cash position. The fourth quarter results are always a bit more to take in as we recap both our recent performance and reflect back on the full year. Given the pivotal moment we are at in our country, our economy, and our company, I want to recap what these financial results and KPIs really tell you about where MP sits today. With regards to the Materials segment, in 2024, we undertook a tremendously disruptive transition in our business from producing and selling a highly profitable concentrate product to consuming it to produce separated products. And as I mentioned earlier, we are currently operating at roughly one-third of our targeted throughput for NdPr oxide production, resulting in temporarily higher cost per unit of production. Despite this transition, we have a line of sight to turning NdPr production and, therefore, the segment back to profitability even in pricing, which certainly on an inflation-adjusted basis, is a decade or longer lows. These facts and our recent performance give us tremendous confidence that we will be a low-cost producer of NdPr as we reach targeted throughput. While we continue to invest in debottlenecking and other high-return projects, we have completed the major optimization capital spend at Mountain Pass, boosting our go-forward cash-generation profile for the segment. And in Magnetics, as we began sharing last month, what we have built at Independence is world-class, particularly with regards to the team we have assembled. In addition, the lion's share of our investment in the facility is complete, and we will begin generating revenue and EBITDA here in the first half of 2025. We still have roughly $100 million of capital spend to go, with most planned for 2025, but the nature of our contract will allow us to earn a strong fair return on this investment while also recapturing the full investment over the coming years. This will not be like the commodity materials business with initial losses as production ramps. Importantly, we believe Independence can more than double our initial target capacity with significantly lower incremental capital given the infrastructure, laboratories, and NPI facility do not have to be duplicated. And, operationally, as Jim mentioned, our early success in making automotive-grade magnets, some of the more challenging magnets to make, provides us a strong base from which to grow as our opportunity set explodes with the advent of physical AI and other critical use cases. With that, let me turn the call over to Michael. Michael?

Michael Rosenthal, COO

Thanks, Ryan. I will now walk through the three parts of our operation: upstream, midstream, and downstream. Before I go through the details, I would like to acknowledge the hard work of our team for executing a record year at our three locations. We did so again without experiencing any lost time injuries and with a very strong regulatory and environmental performance. Thank you all for your commitment and unwavering determination in the face of countless challenges. Turning to Slide 13, here are recent photos of two of our US-made products. On the left, NdPr oxide produced in Mountain Pass, and on the right, NdPr metal produced at Independence. We are very proud of our progress in reestablishing this US supply chain, but we still have a lot left to accomplish. Onto the operations. In our upstream business, we continued to deliver strong results in REO production per operating hour, capping a very productive year. The October scheduled outage was executed smoothly and with minimal rework. As I mentioned last quarter, we commissioned the first significant project in our Upstream 60K initiative, an enhancement to our grinding circuit, including new cyclones and screening equipment. Over time, we expect this investment to help us tighten our grind's distribution to incrementally improve rare earth recovery. Initial operations were primarily focused on achieving mechanical stability and operability, and I'm pleased that this has been largely achieved. In Q4, the new assets had a slight negative impact on uptime and results. Though when operational, they showed strong promise. We are working with the vendor to identify materials of construction for the screens that will better withstand the abrasiveness of our ore and our other operating conditions. In addition, we see the need to upgrade certain flotation and tailings plant pumps and line sizes to deal with higher recycled water usage necessitated by lower pulp densities preferred by the screens. We expect that Q1 will benefit from these new assets, although there will be some ups and downs while we optimize the operation. In Q4, the combination of some altered flows from the new circuit, strong production growth from previous initiatives, and normal or variability at times put pressure on our concentrate dewatering and tailings processes, resulting in slightly lower-than-normal uptime for an outage quarter. The midstream operations continues to ramp NdPr oxide production in a non-linear fashion, but with continuous improvement. Similar to the upstream assets, the semi-annual outage was executed on time and with less unplanned equipment maintenance than during prior outages. The midstream assets are a series of interconnected, continuous operations with inline storage to smooth short-term production interruptions in the various circuits. However, a significant part of our ramp involves aligning the uptime and throughput of each process to optimize resources. As previously discussed, we have been focused on uptime and stability before maximizing throughput. In much of the operation, we are starting to see more satisfactory uptime and good process stability. While we still have a few assets that are not meeting our expectations, we are steadily addressing these. Some of the key circuits can now further increase uptime only if other areas increase their throughput. This is a pleasing development. In Q4 and early January, we had a couple of mechanical and process upsets that held back production and/or required unexpected rework of the product finishing steps, consuming extra resources and limiting throughput. Based upon what we have seen since, we are expecting stronger run rate production for the balance of Q1. We also expect that this momentum will improve further after our Q2 maintenance outage. We also believe that some of our maintenance cost, labor hours, and reagent consumption per ton of production will be leveraged to a greater extent going forward. In short, I feel good about recent trends in production volumes and cost structure, though we still have significant room for improvement in all areas. The downstream metal, alloy, and magnetics business achieved MP Materials' biggest milestones in Q4. The highlight was commercializing continuous NdPr metal production at Independence. While still early and at relatively limited scale, we are pleased with our team's progress on the learning curve and our ability to consistently produce on-spec metal. Over time, we expect to improve yield and first pass on-spec metal percentage and reduce energy and raw materials consumption per unit produced. In addition to preparing metal for commercial scale alloy and magnet production later this year, we are now able to use our own metal for prototype strip cast melts. Our new product introduction facility continues to increase its scope of activities from alloy production, powder production, sintering, machining, GBD, and magnet characterization. From expanding prototype operations, we are now able to produce magnets for customer qualification and also evaluate the impact of varying process conditions on magnet attributes, experience that will help us accelerate the operation of full-scale equipment as more is commissioned later this year and into next year. 2025 promises to be another year of tremendous progress at Independence. With that, I will turn it back to Jim.

Jim Litinsky, CEO

Thanks, Michael. Turning to Slide 14, here's a picture of one of our automotive-grade magnets produced on our NPI line at Independence. As our commentary and this picture highlight, 2024 was a terrific year of execution, and 2025 is already off to a strong start. As most of you know, the rare earths industry has long been subject to extreme market distortions driven by China's command over global supply and its ability to dictate pricing through subsidies, export controls and other non-market mechanisms. However, that playing field is beginning to shift. According to ATMOS Research, global demand for NdFeB magnets is expected to triple by 2040, fueled by electrification and physical AI, where intelligent automation meets real-world applications in robotics, defense, and industrial systems. This trajectory underscores the escalating financial commitment and risk tied to China's dominance over rare earths. Meanwhile, the Trump administration is poised to take decisive action to level the playing field for American workers. As President Trump recently stated, the US is now committed to true reciprocity in trade, whether through tariffs, subsidy adjustments, or other mechanisms that level the playing field for American businesses. This shift, combined with the long-term supply and demand realities of rare earths, reinforces our conviction that MP Materials will play a pivotal role in securing a competitive and resilient supply chain for industries of the future. Moreover, as the era of physical AI accelerates, national security considerations will only grow in importance, perhaps even more so in rare earth magnetics than in other electrification applications. Today's battlefields from Ukraine to the Middle East already prove that warfare is no longer about dogfights between jets, but about networks of drones, sensors, and AI-driven robotics. On Wall Street and in capital markets today, we see immense enthusiasm for defense tech, robotics, and physical AI, but I want to remind everyone, great power competition is not just about the next breakthrough in hardware or software, it is also about securing the critical supply chains that make those breakthroughs possible. Can the next hot drone robotics or eVTOL company really tell investors with a straight face that the rare earth magnets or other essential components come solely from China? At MP, we remain relentlessly focused on scaling our fully-integrated rare earth supply chain, advancing our Magnetics business, and delivering long-term value to our shareholders. The momentum is building. The fundamentals are on our side, and MP is positioned to lead for years to come. With that, let's open it up for questions. Operator?

Operator, Operator

Thank you. Our first question comes from Matt Summerville with DA Davidson. Please unmute your line and ask your question.

Matt Summerville, Analyst

Thanks. I'm curious about the NdPr volume ramp-up for this year, considering the technical difficulties in Q1 and that this is a non-linear process. How should we anticipate the ramping cadence and the exit rate into 2026, particularly in relation to the current pricing environment? I would also like to follow up on that.

Michael Rosenthal, COO

Thanks. This is Michael. As I mentioned earlier, yeah, in terms of our production ramp, we've been focused on balancing cost, efficiency, and the long-term success of the business. In 2024, we were primarily focused on stability and uptime. And in 2025, that will focus more on uptime and throughput. This underlines our plans for significant volume growth in 2025 along with the return to profitability. As you mentioned, in the first quarter, we'll show improvement, but we're feeling even more confident about that growth path after the early Q2 outage.

Matt Summerville, Analyst

And then, as a follow-up, I'm sure you guys saw this the other day, maybe it was even yesterday, that China plans to prohibit non-state companies from mining rare earths, which would effectively or theoretically further tighten their control. I guess, what's your view on how that ultimately plays out in the commodity itself should that come to fruition?

Michael Rosenthal, COO

Good question. Obviously, it's difficult for us to speculate on what will happen with the Chinese regulatory environment, but this does seem consistent with the policy announcements from last year, along with a general trend over the last decade plus of consolidation of the market into the two super majors and the de-emphasis on purely privately owned market participants. This obviously means more of the quota allocation and enforcement is in the hands of those two players as well. Certainly, the initial response from the market seems to take this as maybe more supply discipline and higher pricing. Over the last couple of years at the prevailing prices, most of the Chinese market has also been unprofitable. So, perhaps this is a move towards addressing that. Either way, we think it validates our business model and our mission, and the importance of having a diverse supply chain that's not dominated by a single party.

Matt Summerville, Analyst

Thanks, Michael.

Operator, Operator

Our next question comes from Corinne Blanchard with Deutsche Bank. Please unmute your line and ask your question.

Corinne Blanchard, Analyst

Hey, guys. Can you hear me?

Jim Litinsky, CEO

Yes.

Michael Rosenthal, COO

Yes.

Corinne Blanchard, Analyst

Hey. Thank you. The first one, Michael, you mentioned that there are a few areas that you would like to see improving at Mountain Pass. Most of us went there, like, a few weeks ago. So, could you just talk about the few areas that you would like that to get better, and then, what can be done and so? And then, the second is also related to Mountain Pass. I think at the site visit, you mentioned trying to focus more and more on exploration for this year and next year. So, if you could just share some more detail on there, that would be helpful.

Michael Rosenthal, COO

Okay. Thanks, Corinne. I also mentioned in the remarks, the midstream assets are a series of interconnected circuits. And while as part of our stage two optimization project, we added additional intra-circuit storage. There are limits on how much we can smooth uptime between the different stages. So, the different areas need to run each with sufficiently high uptime and throughput to achieve production goals. In general, we're very happy with the process itself, but there's still room to improve the mechanical reliability of certain parts of the assets. One category that we see significant room for improvement is in solids handling and conveyance, where we see intermediate products are not, in some cases, moving as reliably as we need them to. Some of these issues resolve themselves as the processes on either side of that material handling improve, but some require specific troubleshooting. As we address one issue, it may expose another area where that didn't appear to be a bottleneck. So, we're sort of addressing these as we go, hopefully as many at once as we can. So, while progress may not be as apparent in the production figures as we may like, we're really optimistic that behind the scenes here, we are making day-to-day progress, and that will become a lot more apparent in the coming quarters.

Corinne Blanchard, Analyst

Thank you. And if you can just talk a little bit about the exploration plan that you may have for this year and next year?

Michael Rosenthal, COO

Sure. Since 2010, there's really been minimal exploratory drilling of the Mountain Pass deposit. We've done a small amount a couple of years ago, but I think, as we've improved process recovery in the concentrator, we're looking to fill in gaps in the mine where we do not necessarily have sufficient definition to include certain areas in the resource or not enough definition to really categorize what the grade is and what the mineralogy is. So that will be the focus for this year, more within pit or near pit. I think in the coming years, we may look at expanding that area within our primarily the 2,000 acres that we have of the Mountain Pass patented claims.

Corinne Blanchard, Analyst

Great. Thank you.

Michael Rosenthal, COO

Thank you.

Operator, Operator

Our next question comes from Greg Jones with BMO. Please unmute your line and ask your question.

Greg Jones, Analyst

Good afternoon. With all the discussions of tariffs over the past few weeks or months, are there any aspects of MP's business that are sourced external to the US which could potentially be exposed to price increases, maybe things like consumables, chemicals, or reagents?

Ryan Corbett, CFO

Hey, Greg. It's Ryan. I'll take that. Certainly, every global business is concerned about tariffs. I think we've been very forward-thinking here. And given the required logistics of the major input costs for Mountain Pass and its very favorable position, we have very little exposure to imported materials, whether Chinese or otherwise. So, we don't expect the increased tariffs for global imports into the United States to have a meaningful impact on our cost structure.

Greg Jones, Analyst

Great. Thanks. And one related question. There's been some reports that the Trump administration may pause grant payments under the IRA. Is there any potential risk that grants that MP expects to receive could be at risk?

Jim Litinsky, CEO

No. Hey, Greg. This is Jim. I don't think so. I think there's one area that there's sort of wide appreciation is in critical minerals. And so, there's pretty broad support for that. In fact, on Valentine's Day, they just put out an executive order establishing the National Energy Dominance Council, and one of the big things is focused on more critical minerals production. So, our expectation is that anything that is done is going to be extremely beneficial towards supporting our efforts. So, we don't really see much risk on that front in totality.

Greg Jones, Analyst

Great. Thank you.

Operator, Operator

Our next question comes from Carlos De Alba with Morgan Stanley. Please unmute your line and ask your question.

Carlos De Alba, Analyst

Yeah. Thank you very much. Good afternoon, everyone. So, just, you clearly have surprised people over the years on how you have executed, particularly, obviously, on the Materials segment. So, what can you tell us...

Jim Litinsky, CEO

Is that your way of saying you didn't believe in us?

Carlos De Alba, Analyst

No. I'm saying the market, man.

Jim Litinsky, CEO

Okay. Fair enough.

Carlos De Alba, Analyst

If you have seen how we have talked and rated the stock. But anyway, the midstream, as was said, it's only a third of the production right now. So, how do you see the progression of production and cost? Should we expect sort of a linear relationship between the two, a constant relation between the two, or do you think that you can deliver or you will deliver production at capacity or normalized run rate before then costs start to really come down, just to make sure that we don't miss that as we try to model that for the improvement?

Michael Rosenthal, COO

Thanks, Carlos. This is Michael. I'll begin, and I'm sure Ryan will elaborate. Similar to what we experienced in the upstream business, we encountered a period of challenging reliability with relatively low throughput, followed by significant improvements marked by step-change functions in production. I'm seeing similar patterns here where the advancement is not immediately visible, but we are confident it's occurring and anticipate it will materialize. We have been clear and focused on avoiding the pursuit of volume for volume's sake at unmanageable costs. Therefore, I'm optimistic that once we achieve certain volume levels, our cost structure will improve significantly. I'll allow Ryan to expand on that.

Ryan Corbett, CFO

Yeah. I mean, I think you hit it well, Michael. All I'd say is, obviously, with the data we see in each circuit, when each individual process is running as intended, which we get very good line of sight into that over the course of a production quarter, the model is working as we expected effectively. And so, we're at this point where, to Michael's point, stringing it all together to maintain the reliability with the increase in throughput is really going to be what we need to unlock the cost structure that we've always targeted. We feel very good that we will get there. And so, that's a lot of words to say, we're at the point where a lot of this is a fixed cost absorption issue where as we get throughput, the way we should be getting throughput, so being thoughtful about it, we do expect our costs to come down. On top of that, I talked a little bit about some of the projects that we are investing in that I think give us even further excitement about our ability to continue to bring costs down and be a low-cost producer globally of NdPr oxide and other separated products namely, what I mentioned on chlor-alkali over time, and some other investments that we're working on. And so, this will be a long-term plan to continue to pull costs out even as we just get to our targeted cost structure from throughput over time.

Carlos De Alba, Analyst

That makes sense. I have a related question regarding the upstream. As you start executing and delivering on the 60K project, what do you think would be the cost reduction benefit from the incremental throughput and production output of concentrate?

Ryan Corbett, CFO

Well, this is Ryan. I'll start, and Mike, jump in if you've got other thoughts. I think as you've seen with our cadence of production cost improvements on the upstream side in periods of higher upstream production, certainly, depending on how you get to those higher throughputs, will inform how much of a cost benefit will flow through the model. What we have seen recently is a lot of the production growth coming via improved recovery and improved recovery has nearly a full drop through to the bottom line. And so, those are the types of opportunities that we are focused on in the short- and medium-term. As we want and look to grow even further, there is a limit to the amount of improvement to recovery that we can achieve, and so that will have a slightly different cost profile. But putting that all together, certainly, there's a significant amount of fixed infrastructure and shared costs that we'll start to get leverage on as well as we drive production growth. And so, different shades of a positive, but generally all quite positive.

Carlos De Alba, Analyst

All right. Thank you very much.

Operator, Operator

Our next question comes from Bill Peterson with JPMorgan. Please unmute your line and ask your question.

Bill Peterson, Analyst

Yeah. Sorry about that. Can you hear me okay now?

Jim Litinsky, CEO

Yes. Hey, Bill.

Bill Peterson, Analyst

Good afternoon, everyone. It was great to visit both Mountain Pass and Independence. I appreciate the insights you provided. Regarding the midstream cost reductions, I want to clarify my understanding. In the previous quarter, you mentioned that you expected to achieve a positive gross margin by the end of the quarter, but now it seems there were throughput and reliability issues. With the improvements you've implemented and those expected going forward, assuming there is no change in pricing—which has remained stable over the past quarter—what are your updated expectations for achieving a positive gross margin?

Ryan Corbett, CFO

Yeah. Sure, Bill. It's Ryan. I don't think we've really changed our view at all on timing of exiting Q1 for hitting gross profit in the NdPr production. We continue to think we're tracking towards that. Obviously, there are puts and takes. Michael talked about the rework in January. But we still think that we have good line of sight to achieving that. So, no change in our commentary on that.

Bill Peterson, Analyst

Thank you for the confirmation. Also, congratulations on securing the third OEM. Do you have the capacity to support additional OEM agreements at this time? Is there interest from your side or from other OEMs? Additionally, can you provide insight into any discussions with companies in the robotics sector or eVTOL, or any of the emerging markets you mentioned earlier that may require a western source of supply?

Ryan Corbett, CFO

Yeah, sure, Bill. It's Ryan again. In terms of the automotive OEM, this was something we announced, I think, a couple of quarters ago. And the way we think about it is obviously serving those OEMs across a variety of products, both on the oxide metal and magnetic side. So, from the magnetics perspective, we have no new news to break at the moment. And, certainly, we remain focused on the magnetics side at the moment on executing for General Motors, given the significant commitment we have to them in that facility. That said, both on the Materials segment and the Magnetics segment, conversations have picked up, I would say, meaningfully over the last three months or so, in terms of interest in securing supply from a trustworthy western supplier of these critical products. And so, whether it's the tariff discussion and potential reciprocity there or just the concerns where we've seen in several other critical minerals, an inability for certain large OEMs to source, that is really the crux of our mission from the beginning. And so, everything that we're seeing geopolitically, I think, plays exactly into the reason we're doing everything that we're doing. And so, conversations continue across both sides of the business. Specifically to your question on robotics, eVTOL, et cetera, we are having a lot of conversations. I think the great thing about the way we set that business up is focusing on a customer like General Motors and the automotive supply chain to begin with, lower SKU count, an extreme amount of focus on quality, and some of the hardest magnets to make. And so, hitting that first sets us up for great opportunities to come that we can fit into Independence where we've already got the team in place. We've got most of the assets in place. And so, I would say, we're having a lot of conversations and, obviously, you know our MO, we will announce something when we have something to announce, but we have no shortage of opportunities.

Bill Peterson, Analyst

Yeah. Thanks for that, Ryan. Good luck, team.

Operator, Operator

Our next question comes from Ben Kallo from Baird. Please unmute your line and ask your question.

Ben Kallo, Analyst

Thank you for taking my question and for the detailed information. Could you update us on your approach to heavies, particularly regarding the upstream side of the business and sourcing for the magnetics side? Additionally, I have a second question for Jim about the policy aspect. You mentioned the formation of the council, but is there anything specific that indicates real support for pricing or efforts to encourage domestic production? Thank you.

Michael Rosenthal, COO

Thank you, Ben. We have mainly concentrated on our heavy rare earth separation project as our key strategy for supplying terbium and dysprosium to our Magnetics business. Our primary goal with heavy rare earth separation is to support this business. Concurrently, we have been assessing the most effective way to invest shareholder capital in this project. We are confident about our progress in securing sufficient materials to initiate operations at a 1,000 ton capacity facility. Additionally, we are equipped to procure materials from the market as a backup. Our heavy rare earth project is designed to handle third-party materials, and we have a dedicated team focused on sourcing them. However, with market changes, some projects we were optimistic about have experienced delays or complications. Nonetheless, we are enthusiastic about our advancements in the heavies project. We have been successfully coordinating efforts between our midstream team at Mountain Pass and our downstream team at Independence to create a well-integrated heavy rare earth business that incorporates recycling while minimizing unnecessary processes and costs. Our aim is to reduce heavy rare earth usage and increase the production of these resources.

Jim Litinsky, CEO

And, Ben, regarding your second part, to finish what Michael mentioned, it's important to highlight that many of the exciting growth use cases we're observing in the marketplace for physical AI have limited or no heavy components. This is crucial to consider when thinking about our business's growth prospects. Now, on the topic of policy, I've mentioned this before, but it's worth reiterating: we seek a level playing field so that we can then do our part. This is the consistent message we've communicated to the government over time, highlighting that without a level playing field, our potential is limited. The current administration seems to be paying attention to companies like ours that are focused on bringing jobs back, including operators, electricians, maintenance workers, and engineers, which are essential to revitalizing American manufacturing. Recently, I found a post from President Trump discussing reciprocity in detail. He emphasized various aspects, not just tariffs from other countries but also regarding VATS and other subsidies. If we take him at his word, which I certainly do, the progress made in this first month has been remarkable, and it seems they intend to uphold their commitment to leveling the playing field. While it's still uncertain how this will manifest, achieving that level playing field could be extraordinary for our business.

Ben Kallo, Analyst

Okay. Thank you.

Operator, Operator

Our next question comes from Laurence Alexander from Jefferies. Please unmute your line and ask your question.

Laurence Alexander, Analyst

Good afternoon. Have you produced and qualified all the target SKUs needed for the GM contract, or are there still some technical challenges to address? Also, regarding trade-offs, given your current position compared to when you signed the first contract, what constitutes a comparable or better-quality contract now? You no longer require upfront payments, so could you share your philosophy on this? Lastly, while we understand the focus on bringing Magnetics to profitability, once that is achieved, how important is it to enhance the engineering team's capabilities to manage more SKUs and target adjacent markets? What is your philosophy on the timeline for that?

Ryan Corbett, CFO

Sure, Lawrence. It's Ryan. I'll start. In terms of your question on qualification, I think we are extremely pleased with the progress that we've made in producing the quality of magnets that we have in the NPI facility. I would say the qualification and PPAP process with an automotive customer is very long and involved and it involves quite a bit of production runs on full-scale equipment. And so, that will come later in the year. We have a great working relationship with the engineering and qualification team at our foundational customer and continue to have great dialogue there. So, we remain excited about that. I don't know, Jim, if you want to cover your thoughts on contracting.

Jim Litinsky, CEO

I appreciate your question about what constitutes a good contract. We've been very deliberate in building this business, and I hope that's clear to you now. The answer is that there are many factors at play, making it challenging to summarize everything succinctly. However, we are committed to being responsible stewards of shareholder capital and will not take unnecessary risks. As we welcome new customers, our top priority is to execute effectively, particularly in our Magnetics business at Independence, where our foundational client is GM. Our goal is to excel in our service delivery and to grow the business. Based on our insights and observations, it's reasonable to expect developments in the physical AI space over time. While it’s still early, the pace of capital investment and scientific advancements in that area is impressive. A year ago, I expressed my belief that physical AI would be one of the first tangible business applications arising from the current AI boom, which is seeing significant capital inflows, though the sources of GDP growth and actual revenue are less clear. I maintain that physical AI will start generating that growth, and this is set to be one of the transformative elements we observe. We are well-positioned, having demonstrated our ability to produce automotive-grade magnets, making it feasible to create magnets for these applications. The key question is how we want to expand our business, and we will approach this thoughtfully without rushing. Our focus remains on executing well, as poor execution limits growth opportunities. To reiterate a point I made earlier, it's crucial for companies in high-growth sectors like defense tech, robotics, and drones to have a clear understanding of their supply chains. Relying solely on one source, such as China, is not a sustainable approach for long-term funding. I believe this gives us a competitive advantage, and we'll be careful about how we develop our business.

Laurence Alexander, Analyst

Thank you.

Operator, Operator

Our last question comes from Leanne Hayden with Canaccord. Please unmute your line and ask your question.

Leanne Hayden, Analyst

Good afternoon, everyone. Thanks so much for taking my questions. You mentioned stronger midstream run rate production going forward. When do you expect to reach run rate production of 6,000 tons of NdPr? And, additionally, where do you expect the steady state cost of NdPr production per kilogram to land?

Michael Rosenthal, COO

We will try to get there to the run rate as fast as we can within the confines of what I said earlier in terms of balancing cost efficiency and long-term stability. But certainly, we expect significant improvement in progress this year towards that.

Ryan Corbett, CFO

Leanne, regarding costs, we've provided several key insights over time to help you understand our anticipated run rate cost structure. There are certainly some fluctuations since we gave our initial guidance in 2020 or 2021 about cost estimates, but we remain highly confident in our ability to be a low-cost producer globally, especially considering the progress we've made. Michael has discussed at length the challenges we need to overcome, and we plan to address those. As we tackle these challenges, we believe the numbers will demonstrate that Mountain Pass holds an exceptionally strong position on the cost curve.

Operator, Operator

That concludes the question-and-answer portion of today's call. I will now hand the call back to Mr. Litinsky for closing remarks.

Jim Litinsky, CEO

Thanks. As I said earlier, I think it was a really remarkable 2024. 2025 is off to a terrific start. And so, we will get back to work like usual, and we look forward to speaking to you all next quarter. Thanks.