Title

Presentation

MP Materials Corp. beats earnings expectations. Reported EPS is $-0.02, expectations were $-0.03. MP Materials Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, everyone. Thank you for attending today’s MP Materials Fourth Quarter 2023 Earnings Call. My name is, Sierra, and I’ll be your moderator today. All lines will be muted during the prepared remarks from our management team, with an opportunity for questions and answers at the end. [Operator Instructions] I would now like to pass the conference over to your host, Martin Sheehan.

Martin Sheehan: Thank you, operator, and good afternoon, everyone. Welcome to the MP Materials four quarter 2023 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 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?

Jim Litinsky: Thanks, Martin. Good afternoon, everyone. Let me begin with a brief overview of today’s call. First, I will discuss the highlights from the fourth quarter and full year 2023, while adding some important context from the first two months of 2024. Ryan will then run through our financials and KPIs, followed by Michael, who will review our operational progress. I will then close with my macro commentary before turning the call over to Q&A. Moving on to Slide 4. Despite facing formidable market headwinds, MP executed diligently throughout 2023 across all three stages of our business. In our upstream concentrate business, we exceeded 40,000 metric tons of REO production for the third consecutive year. The MP team now has over six full years of production under our belt.

We continue to learn, increase productivity, and identify new opportunities for value creation. To that end, in November, we announced Upstream 60K, our plan to increase REO production approximately 50% over the next four years with modest incremental spend. This announcement was the culmination of extensive research, development and piloting activity focused on sustainably unlocking even more value from the Mountain Pass resource. We have already begun some of the physical aspects of this expansion. As many of you have heard me say repeatedly, we believe expansion at Mountain Pass is the quickest, lowest risk and highest return on capital source of rare earth growth in the western world. Assuming we can achieve our goals, it means that we can generate multiples on our invested capital with this expansion.

That is remarkable, especially in this pricing environment. So, for example, where you may see news stories of large rare earth deposits, those are often uneconomic at almost any price. New projects underway now and/or those that are seeking funding will likely end up destroying capital at these or even materially higher prices. And it’s hard to imagine any greenfield project right now, even in China, can generate a positive return at today’s prices. At MP, though, we are in a unique position as a low-cost producer with a world-class resource and significant assets already in place to economically grow our upstream substantially through the down cycle. Moving on to our midstream business. In 2023, we established and ramped production of separated rare earth products, including NdPr oxide.

This represents a huge milestone for MP and our mission. Ryan and Michael will walk you through how we are tactically approaching the coming months financially and operationally in a moment. To expand our customer opportunity set for separated products, we recently began producing NdPr metal in Vietnam. We have also begun trial production of NdPr metal in a North American pilot facility, and we look forward to making metal in Fort Worth this year. During the fourth quarter, we delivered our first batch of NdPr oxide to a customer in South Korea, and we expect more sales across Southeast Asia. Importantly, we now have firm commitments for a significant portion of our NdPr from Japanese customers via our Sumitomo distribution relationship, so look for those sales to be material this year and even higher next year.

Lastly, in our downstream magnetics business, we continue to add substantial depth to our team and capability set. Engineering and operations are now situated under one roof in our magnetics headquarters in Fort Worth, and as I said a moment ago, are working diligently towards start of commercial metal production on site. This means we expect Stage III to start producing revenue and modest positive EBITDA later this year, which is very exciting. Ryan will cover more on this later. In summary, while the pricing environment has been very frustrating, our team has executed extraordinarily well. We’ve made a lot of progress on all fronts. I will have more to say on the macro environment and MP in my closing remarks, but for now, let me turn the call over to Ryan to discuss our KPIs and financial results.

Ryan?

Ryan Corbett: Thanks, Jim. Let’s turn to Slide 6 and review our full-year operational KPIs. Starting on the far left. We produced more than 41,500 tons of REO in concentrate in 2023, exceeding 40,000 tons for the third consecutive year, despite a significant focus on Stage II commissioning and ramp throughout the year. Sales volumes were down around 6,000 tons year-over-year, primarily due to the initial charging of our Stage II circuits with REO, as well as the consumption of REO in concentrate in the downstream circuits to produce NdPr and other separated products in the third and fourth quarters. Lower production volumes in Q4 as well as the timing of sales in 2022, also modestly impacted the comparison. Moving to the middle of the slide, our realized price declined significantly alongside a pullback in the price of NdPr in the market.

Moving to the right, production costs increased $330 per ton, driven primarily by Stage II ramp activities, including longer plant turnarounds and the impact of descaling standalone concentrate production. Given a fair amount of our Stage I concentrate production costs are fixed, spreading those costs, as well as plant turnaround and general sitewide costs over smaller sales volumes results in this lower fixed cost absorption. Lastly, on the far right, we produced 200 metric tons of NdPr oxide in 2023, closing our inaugural year of Stage II production with a nice sequential lift in the fourth quarter as we guided to on our last call. Moving to Slide 7 and our full-year financials. Revenue in 2023 was impacted primarily by the decline in realized prices as well as the change in volumes previously discussed, as we ramped Stage II.

The flow-through of pricing was the primary driver of the decline in adjusted EBITDA, in addition to the fixed cost absorption just discussed. Lastly, we continued to make certain modest investments in our corporate infrastructure, some of which will continue through the early part of 2024 before declining in the back half of the year, most notably an investment in a new SAP implementation that goes live in Q2. Despite the lower average price during the year, EBITDA margins were still quite robust at 40%. The change in adjusted diluted EPS was primarily impacted by the same drivers just discussed, in addition to higher depreciation brought on by additional assets, namely the rest of the Stage II circuits being placed into service during the year, partially offset by higher interest income on our cash balance and lower income tax expense.

Turning to Slide 8 and our fourth quarter results. Concentrate production of 9,257 tons was down year-over-year, primarily due to higher downtime, both planned and unplanned in the quarter. Michael will expand on this in a moment. Concentrate sales volumes fell around 2,000 tons sequentially as we consumed more concentrate in Stage II circuits to produce NdPr and other refined products. Production costs increased $373 per metric ton sequentially from the combination of our longer more detailed plant turnaround, as well as the more pronounced descaling on our Stage I production costs in the quarter. For context on the plant turnaround expenses, we think about Stage I related facilities at Mountain Pass as essentially three interconnected operations with mining and crushing, beneficiation and tailings management, the primary targets along with sitewide infrastructure of our power plant, water treatment plant and others.

With Stage II now in service, these turnarounds now encompass nine additional plants, including our drying and roasting circuits, leech, impurity removal, brine purification, separation circuits, and multiple product finishing circuits, as well as a corresponding increase in sitewide infrastructure and support functions. I cannot emphasize enough how well the maintenance and operations teams performed this quarter with all of these new demands. One further note on the production costs is that the Stage II portion is down sequentially and year-over-year as more of these costs are now building into inventory, following the NdPr product through the midstream refining and metallization processes versus being expensed through the P&L. Note also that some of our costs of goods sold in the quarter was related to our modest NdPr sales as well as other rare earth product sales and were not included in the production cost calculation.

When you strip out all of the one timers and more difficult compares, we see baseline concentrate production costs up low-to-mid single digits year-over-year. Lastly, in the quarter, we determined that the carrying cost of a portion of our early separated product inventory exceeded its net realizable value based on the recent rapid decline in spot pricing. As we’ve spoken about in the past, our early cost of production of separated product is higher than our expected costs once we reach our full production levels given we are staffed for higher production rates, and early production often requires additional labor and certain rework that will not recur once operations normalize. This resulted in us taking a write-down of $2.3 million in the quarter, which was included in costs of sales in the P&L and impacted our adjusted EBITDA.

More than half of this charge was related to lanthanum products, where our per unit cost of production is particularly sensitive to throughput, but where we aren’t yet pushing to maximize volumes as we put the finishing touches on the logistics and supply chain to serve our North American lanthanum customers. These charges are not unexpected as we ramp the plant and may continue into Q1. That said, peeling back the onion and looking at the circuit-by-circuit cost profile gives us further confidence in achieving our expected per unit cost profile as we ramp towards run rate levels. Moving to Slide 9, you can see our revenue and adjusted EBITDA results again impacted mainly by pricing in our concentrate sales volumes as previously discussed. With regards to concentrate pricing specifically, assuming current spot prices hold for the remainder of the current quarter, we would expect a mid-teen sequential decline in first quarter realized concentrate pricing.

As for NdPr oxide pricing and oxide equivalent prices for metal sales, we expect prices to reflect a more notable lag with Q1 prices based off of the Q4 average market price. We expect our realizations to be roughly in the middle of the calculated spot market price and the spot price net of Chinese VAT. Moving on to the balance sheet and our CapEx spend in 2023. We ended the year with just under $1 billion of gross cash and over $300 million of net cash each. As for CapEx, we spent $262 million on gross CapEx, or $259 million net of $2.8 million received from the Department of Defense. Net growth CapEx totaled $244 million with roughly $15 million of maintenance CapEx during the year. Regarding cash flow. 2023 was a year of significant investment in working capital, with some amount of permanent increases in work and process inventory from our commissioning and ramp-up of Stage II, as well as spare parts and raw materials as we endeavor to maintain the same world-class uptime levels in Stage II as we’ve seen in Stage I.

Further working capital investment was also required in semi-finished goods to fill certain sales and toll processing channels with separated product inventory to maintain sufficient on-the-ground inventory for continuous metal production. These investments will set us up to meet our growing customer needs, particularly in Japan, and maintain operational flexibility. While some of that investment is therefore semi-permanent, some will indeed convert to revenue and cash flow starting in Q1 as we ramp our sales of NdPr metal to Japan, which I’ll talk about in a moment. Further, we invested approximately $10 million in Q4 in VREX holdco, the ultimate owner of our primary toll processing partner in Vietnam. This investment funded the expansion of the VREX metallization facility and gives us a 49% stake in the business.

Through this investment, we have secured the ability to ultimately reduce as much as two-thirds of Mountain Pass’s target NdPr oxide output into metal, significantly expanding the number of markets and customers we can serve, particularly outside of China. We will recognize our proportional share of VREX financial results as an equity method investment in our financial statements, which will modestly impact our net income and EPS compares beginning in Q1. While we generally did not provide forward-looking guidance, I do want to walk through how we think about 2024 operationally and financially. Firstly, as it relates to separated product sales, depending on the timing of shipping, we expect to book a little more than 100 tons of NdPr sales in the first quarter.

Michael will cover our production ramp in more detail in a moment, but given the current pricing environment, I wanted to highlight that we are now tactically responding to this market environment by managing our separations ramp for the remainder of the year. Our goal this year is to maximize our near-term cash flow potential while we position MP for maximum long-term upside. To be clear, we remain extremely confident in our ability to achieve our targeted throughput levels and production costs, but how we get there really matters in a low-price environment. Let me provide an illustrative example. We capture the significant majority of our theoretical gross profit via our concentrate business, but as we move downstream to refining, we capture material incremental profitability.

The higher the NdPr price, the greater the incremental profit potential. Because our concentrate product is saleable though, we always want to think about that as an opportunity cost versus a state of the world where our refined product cost structure is not fully optimized. Put simply, every single dollar of incremental variable cost that we can avoid as we optimize our process conditions is weighed against the opportunity cost of selling our upstream product. Ordinarily, we would not think so much about this at say $90 or $150 NdPr shaving say $2 per kilogram off of production costs is less important relative to maximizing the refining ramp as quickly as possible. But again illustratively, and not as any kind of guidance, at a $35 per kilogram normalized production cost of refined oxide in a $50 NdPr world, $2 of unnecessary inefficiencies might eat up most or exceed a lot of the incremental benefit net of the opportunity cost when you factor in all of the flow-through impacts.

So think of this as mainly just a 2024 model consideration, but MP is uniquely positioned with added downside protection by ramping more methodically in a low-price environment. We will be thoughtful about utilizing that advantage, and Michael will expand on this in more detail in a moment. Turning to our magnetics business. We are thrilled with our early progress and expect early revenue and modest positive EBITDA contributions from Fort Worth metal sales starting later this year. Importantly, as we focus on capital efficient growth, we expect the cash flow impact of early production of magnetic precursor products in Fort Worth to be much more meaningful than their P&L impact given our current expectation of hitting certain production milestones that will result in material product prepayments, which we expect to be reflected in our financial statements as deferred revenue.

While customer discussions are still ongoing and we must continue to execute strongly, we expect that operational success in delivering early American-made NdPr metal to our customers this year should result in our sources and uses of cash in the magnetics business being roughly neutral in 2024. Regarding CapEx, we have consistently guided to a roughly $700 million net growth capital plan for the last couple of years as our total cost to achieve our goals of full rare separations in Mountain Pass and magnet and precursor product production in Fort Worth. Importantly, we remain within the margin of error on that assessment despite enduring inflation since our initial forecast. While we had initially expected slightly higher CapEx than reported in 2023, some of that spend will slip to 2024.

So for the full year of ’24, we expect to spend between approximately $200 million to $250 million on total CapEx, including maintenance CapEx. Within this capital plan, we expect to continue to make strong progress on our previously disclosed initiatives, as well as further some of the early stages of Upstream 60K and other potential high-return investments in Mountain Pass that will further strengthen and improve our production cost profile. Even with this investment, we expect to maintain a very strong capital position through this pricing down cycle. Taking current spot prices and with all of the caveats that go into forecasting, both regarding pricing expectations as well as regarding our timeline to execution, we expect to end 2024 with at least $200 million to $250 million of net cash on the balance sheet, or greater than $900 million of gross cash.

With our strongly cash-generative concentrate business, a thoughtful ramp of Stage II and normalization of the relevant working capital investment, as well as achievement of milestones in Stage III leading to certain product prepayments and the receipt of initial 45X production tax credits, we see strongly positive operating cash flow funding a significant portion of our capital plan. With that expectation set and a lot of execution ahead of us, I will turn it over to Michael to discuss our Q4 operational results. Michael?

Michael Rosenthal: Thanks, Ryan. The fourth quarter was an exciting but challenging quarter for the Mountain Pass operation. In our upstream business, concentrate production per operating hour was up year-over-year. However, several factors combined for lower operating hours and therefore concentrate production. As Ryan just discussed, in October, we had our first sitewide scheduled outage that included all of the Stage II operations. The outage was well executed and completed on schedule. Upon restart in early November, we returned to solid performance with less rework required than is often the case. However, several events in December collectively cost us approximately six days of production in the mill. Approximately four of these were the result of unexpected power plant outages.

On two consecutive weekends, two ancillary instruments in our power plant failed approximately four months prior to their planned replacement. Instrument life was somewhat skewed from the several years of powered-up but nonoperating status of the plants. And while the cause was promptly identified and we had parts available, service was not immediately available locally. It was an important lesson learned and we are confident that our current preventative maintenance scheduling procedures will prevent an issue like this from ever reoccurring. Also in December, we pulled forward certain grinding circuit maintenance that we had expected to not need until our next outage. This cost us another day and a half of production, but it has released additional grinding circuit capacity and improved grind stability into 2024.

In all, our upstream operations had another solid year with over 92% uptime. In addition, 2023 resulted in our highest level of REO production per hour of uptime, demonstrating our continued efforts to improve efficiency and productivity. We expect renewed growth in 2024. As previously mentioned, the Stage II midstream circuits had their inaugural scheduled outage, providing us with the opportunity to conduct a thorough inspection of the new equipment after three to nine months of service. On a positive note, there were few serious mechanical discoveries or surprises. However, we identified more rubber wear than expected in certain rubber-lined vessels and agitators. After a thorough review, we attribute the issue to subpar installation workmanship rather than to inappropriate materials of construction for the service.

Unfortunately, addressing these issues required a comprehensive process of de-inventorying, repairing, curing, and re-inventorying circuits, which led to a slower recovery from the outage than planned. Part of the Stage II optimization project included the installation of a new cerium extraction section in our existing separation circuit that separates NdPr from lanthanum and cerium. In the fourth quarter, we identified an excursion in the new section that impacted the NdPr production quality. We took appropriate action to restore stability, though this resulted in several weeks of lost output. Recognizing this new risk, we have adjusted our monitoring and models and are confident we have put this issue behind us for good. During this incident, we took the opportunity to implement certain changes that significantly increased concentration in the circuit and is expected to result in higher throughput capability and stability going forward.

Despite all these challenges, we produced 150 tons of NdPr oxide in the quarter, 3 times that of the previous period. In summary, after several quarters with all Stage II circuits in operation, we have reached a significant turning point. We can feel that most circuits, particularly those that were commissioned earlier in 2023, as well as our operations teams are starting to come together. The core chemistry and technology continue to perform. This progress bolsters my confidence that production volumes and quality will continue to improve. Importantly, in the last two quarters, we have qualified our NdPr oxide and NdPr metal with many of our major customers and target customers. So going forward, we will more quickly convert production into revenue.

However, in the current pricing environment, we are even more focused on extracting operational efficiencies and reducing the variable cost of production as we increase NdPr production volumes. Where yields have room for improvement, we are focusing on optimization before pushing volume for volume’s sake. Our existing low-cost concentrate operation affords us the flexibility to take this prudent approach that maximizes profits and cash generation while ensuring we drive towards our integrated model and market-leading cost structure for separated products. For the latter, we continue to make important progress. To this end, I’d like to reiterate that all circuits are running at commercial volumes, sufficient to evaluate capability and chemistry.

But we continue to run at relatively lower uptime in certain circuits. To some extent, this creates higher costs in the near term when viewed solely from the lens of Stage II operations. In the short term, we are incurring incremental variable costs from certain inefficiencies, bottlenecks, and admittedly, areas where we must improve our execution. We’re working furiously to address these and week after week we see progress, though sometimes progress in one area reveals additional opportunities for improvement elsewhere. I’d like to provide a few examples of the types of improvements we are making at this stage so you can understand our philosophy. In our leach circuit, we have been working towards achieving and consistently maintaining our target 85% cerium rejection with very high NdPr recovery.

This will reduce reagent consumption per ton of NdPr produced and other variable costs. Recently, we’ve made several key breakthroughs with NdPr yield increasing more than 5% while at the same time driving a 5% plus absolute improvement in cerium rejection. There is still opportunity to improve further, but we believe the gains to date to be sustainable and will be more evident in our Q2 production and financial results. Next, the first step of our separations process involves the bulk separation of light rare earths from heavy rare earths, or SEG+. Our primary focus here is on the efficiency and effectiveness of this separation, limiting the amount of light rare earths in our SEG+ and vice versa. We had initially assumed greater than 5% of the SEG+ plus fraction would be Nd and Pr. This is now down to less than 0.5% over 90% of the time.

At the same time, we remain focused on 100% on spec for cerium in the light rare earth fraction. These improvements benefit NdPr production volume per ton of concentrate produced. And with greater stability, we have achieved a 25% reduction in reagent usage per ton of feed in this particular circuit, down to our target levels, with additional opportunity to improve from here. Lastly, lanthanum production, which represents the largest volume of our production but only a single-digit percentage of target revenue. We’ve recently seen a one-third increase in per-shift production capability. However, this is an area where we have significant room for operational and mechanical debottlenecking to reduce our cost of production. We will look to implement several low-cost upgrades in 2Q that will help reduce the burden on our operators and maintenance teams.

We expect to achieve a return on investment for these upgrades in under a year. As for 1Q, we expect that concentrate production will return to normal run rates, and the power plant will operate at the greater than 99.9% reliability that we’ve experienced for the first two years of operation. Given our commitment to ramping as efficiently as possible in the current environment, we have spent much of January and February extracting operational efficiencies and reducing variable costs through focused attention on the above projects. Therefore in 1Q we do not expect significant growth in NdPr production relative to 4Q. The difference will be made up for by higher concentrate production, but from 2Q on, we expect the volume of un-spec oxide we produce will grow materially, which will also result in more obvious improvements in our cost of production.

And with that, I’ll turn it back over to Jim.

Jim Litinsky: Thanks, Michael. As you just heard from Michael, the team at Mountain Pass is doing an excellent job. We are executing on a lot of levels, whether it be on production efficiencies, the refining ramp, or the upstream expansion. The same can be said for the magnetics team. A lot of progress has been made and they are working maniacally towards first revenue while being mindful capital spent. Unfortunately, the market has not been kind to say the least. The price of NdPr has collapsed nearly 70% from its peak in 2022. The decline has been particularly steep over the past year, beginning essentially just as we were about to commission Stage II. I know we have discussed on recent calls the demand impacts from the macro factors in basic industries in China, but I think it is obvious to state that something bigger and more dramatic has happened in recent months.

The pendulum has officially swung. Wall Street has decided it is Armageddon for the electric vehicle right now. We have all seen the press reports around the disappointing EV sales versus expectations and the rising inventories. This was followed by announcements from a number of major OEMs around increased capital discipline and slowing down electrification timelines. One bright spot has been the dramatic acceleration in hybrid sales, which is bullish for NdPr demand relative to existing ICE penetration levels. In any case, for a variety of reasons, the timeline to electrification has been extended, and therefore the near-term prospects for critical materials are now worse versus recent prior expectations. The cost of capital is now higher.

We are seeing some stress, and my guess is we will see some distress out there. Some materials projects have been canceled and I assume more will be. That said, it is not economically rational to paint that broad brush equally across the material space. In rare earths, China controls in excess of 80% of the market via two super majors, and then the remaining almost 20% is MP and Lynas. Whatever Western EV reset is happening now, the Chinese OEMs are not stopping their downstream expansion. The strategic value of what we have remains. That said, the pricing environment is not something we can control, neither is the pace of EV penetration, nor the geopolitical landscape. Those will be what they will be. What we can control is our operational execution and our financial and corporate management.

Not so long ago, when our share price and NdPr prices were much higher, a number of aggressive investors pushed us to extend our balance sheet and buy back a significant amount of stock. We made clear then that although we firmly believe in our execution capabilities and the long-term value of our assets, we are in a cyclical sector where we have to think about a variety of long-term scenarios. There is a lot of inherent leverage in commodities prices, so we have to proceed accordingly. Our decision to maintain a prudent balance sheet was the right decision. Now, though, it seems like the market pendulum has swung too far given the uniquely strategic nature, low-cost position, and replacement cost value of our assets. I think it is fair to say, given some recent press reports that there are others who really understand our assets and appreciate this.

So I wanted to mention this to lay the groundwork that I’m not going to comment on M&A speculation at this time. If asked, I will just keep referring you back to this section in the transcript. So I hope you are enjoying it live right now. However, I want to be crystal clear. I’m the largest shareholder. Our management team and our employees are large shareholders. We take our fiduciary duties extremely seriously. To the extent something makes sense to do in the future, we will do it. You can count on us to be opportunistic and thoughtful. In the meantime, all aspects of our organization will continue to execute with a somewhat new playbook. In the down cycle, the cost of capital is higher. That adds risk, and it means timing and payback matter more than achieving manufactured deadlines.

Having the intellectual fortitude to throw out prior plans or assumptions to be critical and to remain unemotional is paramount. It also means there are more home-run opportunities. MP exists now as a result of one of those periods so I do think patience with us will be rewarded. With that, operator?

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Operator: [Operator Instructions] Our first question today comes from David Deckelbaum with TD Cowen. Please proceed.

David Deckelbaum: Thanks, Jim, Ryan and Michael, and I appreciate you taking my questions today. I guess I just wanted to understand — hey guys, just between Ryan and Michael, and Ryan, you kind of like laid out that obviously with NdPr pricing now at like $55 a kilo, the efficiency that you give up just versus selling concentrate. And I guess I kind of just wanted to square that with Michael’s comments around just making some operational enhancements around the separation facility this year. If I take all of that together, has the organization changed how they think about what the max rate or the target is for NdPr production? Is it still in that sort of 500 ton a month range? Or looking at things more fulsome now, is there a more balanced approach that we should expect over the long term, irrespective of where price is assuming that we get back to a $70 to $90 incentive level?

Ryan Corbett: Sure. Hey, David, it’s Ryan. I’ll start. I might push back on the $70 to $90 incentive level, but that’s another question that we can address separately. I think to answer your core question, there is no change in our view of our long-term target production and our view, frankly, of where we think we will get from a cost structure perspective. We are very confident from the early results that we’ve seen in being a low-cost producer to the world, and we continue to build significant confidence in reaching our target production. I think what we’re really trying to say is in these early stages of production, there are inherent early inefficiencies that again at a $70 to $90 price point, that incremental variable cost for those inefficiencies might not matter so much when you look at the incremental profit pool available, going from concentrate to oxide.

When you’re at a $50 price point, that profit pool — the incremental profit pool is a lot smaller. And so all we’re really saying is we’re thinking very, very closely about that incremental profit pool versus inefficiencies and the opportunity cost of selling some of that upstream product as con in the interim. And so I think the big message here is we want to be scaled and ready for the upcycle, but we are not going to push volume for volume’s sake. How we get to our target is really what matters in this pricing environment. That’s the message. I don’t know, Michael, if you have anything else you’d add from an operational perspective.

Michael Rosenthal: Not too much to add there. I think we’re very comfortable with the ability to meet those production volumes that we had targeted. And as Ryan said, we’re going to work through that in the most efficient way as possible.

David Deckelbaum: Appreciate it. And I was hoping that you could give a little bit of color on just the 45X. I think you mentioned it as a source of funds this year. Could you just refresh us on the timing? And is that something that you’ve already applied for? And I guess just what’s the expectation when we might have some more visibility around that?

Ryan Corbett: Sure. So, David, the 45X is the production tax credit on the critical mineral side for NdPr oxide. You’ll actually see on the balance sheet in the press release that we have nearly a $20 million government grant receivable. There is a lot of nuance to this calculation, and you’re probably aware that there is quite a bit of ongoing dialogue with treasury as we speak about exactly the various definition of costs that make it into this calculation. What we’ve put into our existing receivable and to my point earlier about this being a source of funds on the order of magnitude of $19 million in 2024, is based off a conservative approach to the proposed regulations. One of the nuances of our unique facts and circumstances here is the fact that we put hundreds of millions of dollars of Stage II related assets into service this year in order to meet our NdPr production and made certain sales in the year.

And so those nuances allow us to take an initial credit in 2024. And then, of course, there would be ongoing production tax credits going forward. That’s targeted at 10% of production cost. I think the overall debate right now with treasury is what exactly is the definition of production cost. And so we’ll get back to you on that one. But again, we feel confident in the numbers that we put forward here are the — they’re very conservative interpretation of that.

David Deckelbaum: Thanks, Ryan. Thanks, guys.

Ryan Corbett: Thanks, David.

Operator: Our next question today comes from George Gianarikas with Canaccord. Please proceed.

George Gianarikas: Hey, everyone, good afternoon. Thanks for taking my questions. I’d like to ask Jim about your assessments on the pricing environment. We’ve had this discussion on conference calls past, and we’ve broken through that $60 level at which you thought that China Inc. was relatively unprofitable. I’m curious as to whether that’s still your current thinking, and if that’s so, how long do you expect us to be at this level given that it’s hard to make money at $50? Thank you.

Jim Litinsky: Sure, George. So with the caveat that always when it comes to pricing, things are pretty predictable, and I’m certainly not one who is going to be able to perfectly pick the direction of commodities prices. But I’ll give some puts and takes here. I mean, I think as we look around the EV landscape, there’s a lot of talk — there’s a lot of moving parts with respect to interest rates and models,, and being a disappointment, range anxiety, different moving parts. But remember that 75% of demand is still basic industries in China, and those macro impacts are still kind of flowing through. So it’s really hard to distill sort of what are the moving parts in this quarter. But again, long term, I just go back to at these levels — pretty much, as I said in the earlier comments, at these levels, new projects don’t make any sense.

We actually saw — we saw some headlines this past week of a big project in Australia with government funding that is having huge cost overruns and is potentially uneconomic. Even up to — there were some of the analyst reports were talking about $90 NdPr is NPV negative. And so I think in this environment, what we’ve seen is that there’s been a lot of supply destruction as well as there has been demand destruction. And so there’s just so many moving parts. But again, I keep going back to at these levels, at some point, the macro headwinds around 75% associated with sort of basic industries like HVAC or consumer electronics and some of the pullbacks that we’ve had in China, coupled with the 25% maybe disappointing in EVs relative to what prior expectations were, is sort of some of the demand destruction.

But then sort of commensurate with that is this supply destruction. And then I guess the last thing I would say on that is that I do think that on the demand side, this is really a hiccup or sort of an air pocket. And by that, I mean if you look at what’s happening out there, where there’s sort of a lot of talk about is the EV, sort of concern about the EV and you’re seeing a lot of concern around the landscape, hybrid sales are going crazy, right? You’re seeing hybrid sales go up 80%, 90% in some cases. And so when we think about EV penetration, let’s not forget that hybrids typically utilize 50% to two-thirds of the incremental NdPr that an ICE vehicle would use. And so if we’re in this new state of the world where hybrids are going to be a big portion of the combined electric/battery electric, plugin hybrid demand.

I think that you’re going to sort of see that growth of that 25% get back on track faster than people might think and then sort of some of the other macro things that will play out through China. So that’s a long-winded way of saying, again, with respect to commodity prices, we don’t know. But this environment is certainly — demand will come back and then the supply disruption has been pretty remarkable as well. So we remain medium and long-term bullish, but the short term is anyone’s guess.

George Gianarikas: I really appreciate the color. Thank you for that. Maybe just as a follow-up. I know you said your piece on the rumored Lynas merger or takeover. I’m just curious if you can entertain us. What would be the industrial logic of something like that in Europe business? Thank you.

Jim Litinsky: So I was wondering how many different ways I would get asked this question and what fun jokes I could have. And I guess that’s a good way to ask it. I mean, I guess I’ll just refer you back to the script. I don’t want to comment on any M&A speculation. I appreciate the way you’re asking. I mean, I guess, what I would say is that objectively, when you look at any company in a generic sense, there are always things that companies can learn from each other and cut costs around and all of that. So your guess around all those kinds of things, if you’re looking at a specific situation, there certainly are those things. But again, I’m not going to comment other than just refer you back to what I said in the script.

George Gianarikas: I appreciate that. Thank you.

Jim Litinsky: Sure.

Operator: Our next question today comes from Carlos De Alba with Morgan Stanley. Please proceed.

Carlos De Alba: Yeah. Thank you. Hello guys. So a question is — I think Ryan mentioned about a prepayment that you will get on some of your downstream, I didn’t understand if it was downstream or oxide sales. Can you comment a little bit more as to the level of this prepayment? And when do you expect to get it so we can properly model that?

Ryan Corbett: Hey, Carlos, it’s Ryan. You were right. What we were talking about was related to the Fort Worth magnetics business and an expectation of prepayments over the course of the year that likely would help cover a very significant portion of the CapEx that’s remaining for that facility. We’re not going to go specific details on timing or quantum. Obviously, as I mentioned in my prepared remarks, customer conversations are ongoing. I think the major message though is that with operational success that we expect and that we’re pushing towards as rapidly as possible, I tried to give you guys the building blocks to understand where we expect to end the year from a balance sheet and capital perspective. And so I think you can take those remarks and kind of do with them what you will to backsolve into the quantum here.

But lot of puts and takes, but I think it’s something that obviously is a very positive measure of success of ours as we go through the course of the year.

Carlos De Alba: All right. Okay. Thanks. And you also mentioned that the investment that you did, I think in the [indiscernible] company of the Vietnam, tolling company that you’re working with. I think you own 49% now. Is there an expectation that you set at that level. Or would you potentially like to integrate a little bit more and maybe fully control that operation. So you have maybe — I mean, you control a little bit more of your destiny on that tooling process.

Ryan Corbett: Yeah, it’s a great question. The 49% stake that we have in the business was really a factor of the amount of growth capital that we put in, in order to support the growth in potential output at that facility. I don’t think we have any particular prescriptive view on how things may look over time other than to say, I think the structure that we have in place right now is working very well for us. In addition to the investment, we obviously have the tolling arrangement, which provides us with a lot of certainty as to the amount of volumes that we’ll be able to drive through that facility over time. And so as it stands right now, I think that we’ve accomplished quite a bit with the combination of the tolling framework and investment in VRX.

Carlos De Alba: All right. Thank you very much.

Ryan Corbett: Thanks, Carlos.

Operator: Next question comes from Corinne Blanchard with Deutsche Bank. Please proceed.

Corinne Blanchard: Hey, good afternoon. Maybe could you talk about the Phase III. So you said you completed the construction of the Texas facility. Can you walk us through again the timing expected there? Is there any remaining CapEx and how much.

Ryan Corbett: Hey, Corrine, it’s Ryan. I’ll take that. Sort of following on my answer to Carlos. As it relates to Stage III in the Fort Worth facility, the building itself and a lot of the support infrastructure that has been completed and is in service, but we continue to bring significant capital equipment into that building. and continue to fit out the factory to meet both our magnet production target date at the end of 2025. And as well as the in-service of precursor products, metal and alloy ahead of that. And so some of my commentary earlier was in regard to our expectation for producing metal at the DFW facility later this year, and that would drive certain customer prepayments based on our success in those initiatives.

So certainly, there is still more capital to go on that — on the plant. But as it relates to 2024, from a cash flow perspective, assuming I think a really important thing here is sort of the balanced cash flow impact of the investment in Stage III versus the prepayment for products in Stage III.

Corinne Blanchard: Okay. So maybe it’s a difficult question, and obviously, I was trying to kind of get that answer. You already started to talk a little bit about it. But do you have like a critical pricing level where you have to reconsider Phase III, where you have to reconsider some of the cadence in the volume for Phase II. I think six months ago, nine months ago, we would have thought it would be like around that 50 to 60, where we are now. It seems like, obviously, it’s a challenge, but maybe it’s a fact — a critical price level. So I’m just trying to better — which — at which price levels do you already get into changing the strategy there?

Jim Litinsky: Sure. Well, Corinne, let me — there’s multiple parts to that. Let me take them all. With respect to Stage III, I think we were very careful in how we set up that business going way back to the beginning and making sure I think if you — on some of our earlier calls, we said repeatedly that we weren’t going to rob Peter to pay Paul. In other words, we were viewing that business as a standalone business where we have to earn an attractive return on capital to make that investment. And so as we proceeded with that, we structured initial contracts to make sure that we felt like that was an attractive business. There’s no doubt that the playbook around the world has changed with respect to the cost of capital, the overall perception of electrification and the pace of penetration.

But what I would tell you on that is that we’re talking about a Western world supply chain that basically doesn’t exist. And so going from zero to something is still a very attractive opportunity. To the extent that something changes, we’re always flexible and opportunistic and are willing to throw out any playbook at any time if that makes sense. But from everything we see on the ground today, even though the environment is tough, from what we’re hearing from customers, there’s still a desire for this supply chain to exist. Admittedly, there’s just a lot of pain and challenge with — from a capital and execution standpoint to make all of that happen kind of writ large. With respect to overall other prices, I just want to take you back to — because I think it’s really important, and forgive me, if I say this repeatedly, I know I kind of addressed this earlier, we can’t predict commodities prices.

Nobody knows. Even the people on the inside, nobody knows. And all you can do is position yourselves you sort of act within the things that you can control. And from the beginning, we set up our balance sheet to make sure that we could survive a variety of environments. And if you look at our business today, just look at our initial content, we’re a low-cost producer to the world. And so as things get uneconomic, of course, they can be uneconomic for a period of time. but they cannot persist that way indefinitely forever. And so what we focus on is being absolutely low cost. And that’s why again, we wanted to highlight on the call today, there’s a couple of things about our business, we’re not standing still in this environment. Upstream 60K is a modest amount of capital to expand our REO output by approximately 50%.

That’s incredible. I mean, if you think about — and again, I get that the pendulum is sort of to the negative today. But if you think about when EVs were as cool as AI is today, right, a few years ago, people perceived the assets of MP before we had done a lot of this work to be worth $10 billion. So now add that by 50%, and that means the new upside is $15 billion without adjusting for inflation over a long period of time. And so, the point is that these pendulums swing back and forth, all we can do is control the things that we can control and work on executing this. And so — that’s also why, lastly, I just — the last point is I thought Ryan’s comments were really important. With respect to Stage II, we — the new playbook is we are thinking very thoughtfully about making sure that our Stage II, our refining is ultra low cost.

We’ve made incredible progress in that business, but we have a long way to go. And if prices were at 150 NdPr, we might not care about a few bucks here or a few bucks there of cost. But in this environment, we do. And I do think also that having to fight through and survive environments like this is what makes for great operations, right? When you have no alternative but to get your cost down because you need to survive, that’s you really do a lot of great work. And we’ve lived through that, right? If you — we took control of these assets in ’17, and it was hand to mouth for quite some time. We went through a cycle of a down cycle and survived very strongly. And so no doubt that this time, we will, and that’s how we’re thinking about things.

We do not spend a lot of time trying to predict prices.

Corinne Blanchard: Great. Thank you very much. Good luck.

Operator: Our next question comes from Bill Peterson with JPMorgan. Please proceed.

Bill Peterson: Yeah. Hi, good afternoon and thanks for taking the question. I’d like to ask kind of prior question or similar lines of questions in a different way. Is there kind of a right level of pricing where you would cycle more through Stage II? And maybe I guess is there a minimum level you would need to run to — I guess, maybe continue to try to improve sort of debottlenecking yield, overall cost improvements across separation, finishing? Is there like a minimum level? In other words, can you make cost improvements by running a lower rated Stage II, such that if it was a higher price environment, you could really take advantage of that from that leverage.

Jim Litinsky: Michael, do you want to go ahead?

Michael Rosenthal: Yeah. Hi, this is Michael. Sorry about that. I think just to start off with the last part of that question, we are currently running all circuits at commercial and significant throughput volumes. So we are able at those levels to demonstrate chemistry to demonstrate throughput capability and demonstrate the effectiveness of our processes. So that’s not a question. We do run at lower uptime in parts of the Stage II business or all of the Stage II business than we do in the upstream business. As we continue to make improvements in each area of the operation, we will see that cost structure come down and the trade-off that Ryan talked about running through Stage II versus running at more modest volumes and producing more concentrate for sale.

We’ll see that pendulum also swing. And so we expect — and I mentioned, starting 2Q, we expect that to become more noticeable. But as we get leach yields in an area or in a position where we’re maximizing recovery of NdPr and at the most reagent effective method, we will run more material free leach once it gets that far. We will have to produce it as a finished product. But we want to make sure that also when we’re at that point, we’re not losing material through inefficient operations in, for example, purification processes or losing material in product finishing. So all of those things, we want to make sure that we have the process, the integrated process running efficiently before we push through volume and end up losing hard-won gain in one part of the process.

So we’re very confident that we’ll do that because we see every day, we see the progress every single day. And we see that the process works. We just also see opportunity to do it better. And in the current pricing environment, the necessity of pushing volume just for volume’s sake to repeat what we’ve already said, that economic trade-off is not at a start.

Bill Peterson: And then on the pricing, like what kind of — I mean, there was some number of 70 to 90 that may not be attractive, maybe 150. What is the right work — how do you guys see what the framework where that would make more sense?

Ryan Corbett: Yeah, Bill, this is Ryan. I think my — maybe I’ll start. Mike, feel free to jump in. But my offhand comment on 70 to 90 was not that it was unattractive. It was that I do not think for many greenfield projects that, that is actually the incentive price. I think there are a lot of hopeful projects out there that think they will be economic at 70 to 90 and likely will not be, which is referring back to Jim’s comment. That’s exactly what we’ve seen and probably one of the largest potential additions to supply in the Western world. So that was my comment. I think 70 to 90, again, you can do the math on the incremental profit potential of going from selling concentrate to separating the product and selling it as oxide.

There is significant incremental profit at 70 and at 90. There’s incremental profit at 55. But if we know that the parts of the process that are suboptimized, I think what Michael was walking you through is we make the decision every single day, whether to run or not based on the trade-off of the potential profit we get in our upstream product versus pushing suboptimized product and maybe losing yield or adding an incremental dollar to a variable cost that makes that trade-off not worth at these prices just to push volume for volume sake.

Jim Litinsky: And I just want to add because I referenced it but expand upon it because I know I’ve probably — again, like a broken record, have talked about this on a lot of calls, where when we think about global supply and how hard it is to get this stuff online. From a financial analysis perspective, it’s sort of very easy to pick an incentive price and then sort of assign that number and expect that people will come online and they can earn an attractive return at that number. The practical reality is, and again, as Ryan just referenced, look at the sort of the biggest source of potential incremental supply that was expected to come online out of Australia has just come out and said massive cost overruns does not necessarily have the capital to complete sort of meeting support because there’s — the reality is that these are really hard things to get online.

And again, that’s why I go back to the value of what we have. Again, if you take any amount of medium or long-term view, the ability to get this supply online, it’s really challenging. That’s also why, Upstream 60K was a relevant thing that people should appreciate about what we believe is our ability to bring on incremental supply. But also to be clear, the comment when Ryan was giving those numbers, that was not to suggest that there’s not a lot of incremental profit at 70 or 90. That was not the point there is. At these prices here, we are being extra thoughtful because we just want to maximize our cash flow. But we are still working very maniacally to get our cost structure down because we know that the pendulum will ultimately swing. And typically, the cycle seems to be moving faster these days.

And so that pendulum may swing back much more quickly than people think.

Bill Peterson: Yes, that’s all well understood. I’d like to ask M&A in a different way, but actually kind of maybe similar to what you’re kind of getting at. You mentioned earlier about the stressed assets. Are there actually — I’m not talking about the rumored M&A, I’m talking about are there other assets out there that may make sense for you to take on as you think about a long-term potential market or even areas like heavy rare earths as opposed to light as part of your magnetization efforts, things like that. I just wondered if that’s of interest as maybe assets are lower valuation these days.

Jim Litinsky: Yeah, absolutely, Bill. I mean that’s why we — it is very important for us to have positioned the company to be able to be offensive at times like now. And we’ve talked about how our expectation is over a long period of time, we’ll be able to pick up a lot of invested dollars at $0.10, if you will. I do think there is typically, when you think about a project, there’s typically a disconnect where you have someone who’s started it or promoted or whatever, and they think it’s going to cost x and they want to get wide discount rate. And then what inevitably happens is it turns out it cost 3x and the discount rate is why plus something. And so there needs to be typically catalysts that cause those two perspectives to converge to something that is sort of doable for all sides.

And times like now are the kinds of times that cause that weather that caused that to happen. And so that’s a long-winded way of saying that we’re always looking opportunistically and expect that there will be some opportunities out of this. But again, whatever the investment is, I think the — I go back to Upstream 60K, which is from an opportunity standpoint is an enormous home run relative to anything we see out there right now.

Bill Peterson: Yeah. Makes sense.

Jim Litinsky: Next question. Thanks, Bill.

Operator: Our Final question comes from [Davis Sunderland with Baird] (ph). Please proceed.

Unidentified Analyst: Hey, guys, thanks for the update. Appreciate the time. I was just wondering if you could talk a little bit more about the physical expansion that’s already been completed for Upstream 60K? Maybe any incremental capital that will be spent on that this year and just how we think about volumes ramping up from that over the next four years.

Jim Litinsky: Mike, you want to kick us off?

Michael Rosenthal: That’s right. The total amount of capital spend this year will be relatively modest. We have small equipment expansion to our grinding circuit, which we think will help release some additional capacity there and also result in more efficient grinding, which we think will be a key contributor to better flotation recovery. That’s the one kind of capital activity that we have ongoing. We have significant other piloting activity, and we’re working to execute all of these plans as capital efficiently as possible. As I’ve said in the past, there’s sort of three ways of looking at it. One is sort of optimizations, which are effectively low capital. Others are sort of modest capital investments that we hope have sort of step change improvement and then there’s the possibility of some larger investments, which lead to a much bigger potential the throughput increases over — for production.

So the one project ongoing now that I think we talked about is in the second category with modest capital that we hope would be to some degree of step change in that recovery, but we don’t have that built into our plans for this year. So we hope to bring it online sometime in the second half of the year.

Unidentified Analyst: Awesome. Thanks guys.

Operator: Thank you all for your questions. That will conclude the Q&A session. I will now turn the conference over to Jim Litinsky for further remarks.

Jim Litinsky: Well, thank you, everyone. And I just wanted to reiterate that despite what is clearly a tough pricing environment, I think the execution across the board across all stages of our business has been really remarkable. And I have no doubt that we are positioned very well for the coming months and years ahead. So we wish prices were higher, but we won’t focus on it. We’ll just keep working on the things that we can control and continuing to execute for you all. So we look forward to seeing you next quarter. Thanks, everyone.

Operator: That concludes today’s conference call. Thank you all for your participation. You may now disconnect your lines.