Q1 2022 MP Materials Corp Earnings Call
Yeah.
Dress inflationary pressures on downstream businesses, including <unk>.
<unk> companies component manufacturers and Oems.
What we have historically seen with this kind of rhetoric is a short fuse to incentivize a lot more materials production just as western industry does in the coming years.
As I've said many times prices will do what they will do in the short term, but we are in the early innings of the transition to electrification across the global economy.
This is very bullish for rare earth demand in mp's prospects, even as real global growth appears to be retreating amidst a very challenging geopolitical and economic landscape.
Speaking of transitions, we continue to make parallel progress across stages, two and three during the quarter.
Stage, two construction is ramping and on track and construction of our initial magnet facility in Texas is also underway.
I'm going to cover stages, two and three in more detail. After Ryan's remarks, so with that I will turn it over to Ryan to discuss our financials and kpis in more detail Brian .
Thanks, Jim turning to slide six I'll provide some extra color on some of our key metrics starting with production volumes, which is on the bottom left of the chart as Jim mentioned. This was another really strong result for the company we've seen a general upward trend in the percentage of railroads, we are recovering through technology reagent testing and plenty of <unk>.
While an error importantly, you believe that there are additional process improvements and equipment upgrades, we made to to continue to drive those recovery percentages higher over the long term, but these improvements are never in a straight line and as we've discussed previously the priority remains our preparation for stage two.
Moving to shipments the team did a great job getting some of the inventory from prior quarters to the Port. In addition to the majority of what we produced in the quarter driving a roughly 20% increase in both the year over year and quarter over quarter shipment volumes.
With regards to realized pricing on the top right of the chart Jim covered this well in his opening remarks, I would just point out that our realized pricing is generally closely correlated to the spot price of MVP R per metric ton in RMB adjusted downwards for the 13% Chinese VAT impact.
There is also roughly a one month lag due to the timing of the contracts and actual shipments, but that lag can move around based on both domestic logistics and the situation overseas as Jim mentioned and DPR pricing in recent high in late February . So we expect to see the impact of lower recent pricing flowing through to our Q2 realized price.
And lastly, our production costs remained solid in the quarter. This graph on the bottom right of the slide these costs associated with stage, one continue to be very consistent and a 1300 parking under dollar per metric ton range and were actually down about 5% versus last year's first quarter and roughly equal sequential.
When excluding the investments, we're making in future growth that hit our P&L.
Given the inflation in the marketplace. We are really pleased with the team's ability to offset higher costs with increased efficiencies.
On a reported basis, including with the costs associated with advanced hiring and commissioning for stage two reported production costs were up about 8% year over year and 5% quarter over quarter.
These costs associated with stage two totaled about $290 per metric ton in the quarter. This compares to roughly $120 in the prior year period, the $290 per metric ton includes the incremental cost of operating our combined heat and power plant as well as stage two related hiring ahead of <unk>.
<unk>.
As we've talked about on prior calls the combined heat and power plant is critical for stage two because of the significant increase in power needed for processes like roasting leaching and separations, having our own natural gas fed plant will significantly reduce our per unit power costs. One stage two is operational as well as ensure a more stable source.
Power.
Bringing the power plant and associated water treatment plant online early were strategically important to ensure we have plenty of time to troubleshoot the equipment hone our processes and give our employees and valuable time and experience in operating the plant prior to stage two commissioning.
Right now the CHP plant has to Ron at certain minimum power output for operational permit compliance and as such is currently generating excess power versus stage, one needs, which were primarily dissipate into our load bags.
The excess cost from this temporary inefficiency represents a little less than half of the $290 impact in the quarter, which will of course continue for the next few quarters until the stage two separations facilities are commissioned.
This type of investment in our processes ahead of stage II commissioning minimizes operational risks and the strong execution of our team and integrating two new complex operations further highlights our capabilities and resubmission inside infrastructure, which will be essential as we bring stage two online at the end of the year.
As I mentioned the other portion of the $290 per metric ton impact is related to advanced hiring in preparation for stage two.
I will turn to slide seven and just focus on two points that we haven't already discussed.
First we achieved 80% adjusted EBITDA margins in the quarter, a truly impressive number thanks to the strong production volumes and cost discipline, allowing us to continue to benefit from the leverage in our business model from strong market pricing the.
The strength of our margins speaks to our enviable position on the cost curve.
And second on the chart on the bottom right. We now show adjusted diluted earnings per share instead of adjusted net income like in prior quarters, We will show. It this way going forward either way highlights the same thing mp's impressive progression and profitability over the past year.
I'll take a great and.
And as we briefly mentioned on our last call. We did look at several other potential offers both via direct purchases and via distributors to most effectively bucket are significant volume up concentrate.
In balancing the significant in place logistics, and our desire to maximize realized pricing and minimize operational risk we decided to enter into a follow on arrangement with Shanghai to distribute our current products to end customers in China as we simultaneously work to complete stage too.
Under this new contract Shanghai will remain the exclusive reseller of our concentrate in China, Although we will maintain our direct relationships with certain third party customers, who we currently sell to you directly including certain Japanese customers, who process or materials in China.
We will continue to foster a direct sales relationships as we prepare for the transition to stage two oxide sales, but maintain the flexibility to distribute separated products via this arrangement should we choose to.
With that I'll turn it back over to Jim Jim.
Thanks Ryan.
Let's turn to slide tend to discuss our parallel progress on downstream expansion in the quarter.
Stage to work as Reaccelerated on site, we have.
<unk> completed engineering and procurement for the light rare separations portions.
R E. P. C is entering the peak of construction with a ramp and craft labor on site, including Ironworkers Pipefitters mill rates and electricians they've.
They've also recently implemented and night shift to further accelerate work.
We are also making progress on heavy reference separations.
These processes will leverage existing facilities and significant shared infrastructure with other parts of our operation the.
The existing light heavy separation line will be expanded to include certain individual separations and the retired cracking building will be used for additional separation and product finishing.
We have begun to demo the existing interior equipment, particularly in the legacy leaching and cracking building in preparation for the installation of new separations and finishing equipment.
Moving on to stage three.
The picture on the right is a nice overhead of the ground's being prepared to build our initial magnetics facility in Fort worth.
Last month, we held a formal ceremony at the site to celebrate the beginning of construction with more than 100 government and civic leaders.
We are grateful for the strong bipartisan showing of support from local state and federal officials.
Real Motors also joined US at the ceremony. So we can share the great news that we had executed are definitive longterm supply agreement, making them, our foundational automotive customer <unk>.
GM also brought a GMC hummer, evie, which looks awesome.
We look forward to supplying magnets for it as well as many other GM models across the ultimate platform.
We have commenced procurement for stage three long lead equipment and are also accelerating hiring for the facility.
We have a number of job openings in Fort worth currently most of which are technical opportunities.
So if anyone listening as interested or knows of someone who might be interested in helping us bring this supply chain home. Please get in touch.
As you've heard me say before <unk>.
Talent, but gets talent.
Scale, but get scale.
We are building an integrated magnetics national champion that should make all Americans proud so join us.
And on that note I am very proud of the culture, we continue to build at M. P.
Our operational result, this quarter in such a challenging landscape or further evidence of our maniacal focus on execution.
This past month, Mark two years without a lost time injury.
To celebrate our team for this fantastic and critical milestone, we just issued a special one time, a safety appreciation bonus to all non-executive employees at M. P.
Keeping people safe and building the right culture requires long term commitment.
We've been at this for a while now and we hope that our passion for our mission is infectious.
We believe that the work we are doing is important to all of us and.
And as we look around the world, we could not feel more conviction.
Just like the semiconductor issue before it.
The tragedy in Ukraine is another bold reminder of the risks of capturing short term savings in exchange for enormous and sometimes even existential long term liabilities.
Several countries in Europe are seeing this severe consequences of relying on Russia for so much of their natural gas needs.
We should all he'd these warnings, especially as the steak seemed to be rising.
A single sourced outside region for an entire supply chain is a significant risk.
The good news is that the evolution of the electrification economy offers enormous opportunity.
The pie is growing across the globe, even in challenging times.
We can build and benefits for years to come and I am hopeful that this is one of the areas where it does not need to be a zero sum between adversaries.
We can succeed well.
While also helping bring about more security and sustainability.
With that operator, let's open it up for questions operator.
Brighter.
Can I get a reminder to ask a question you don't need to press one.
Phone two Italia question press the pound key.
Again to ask a question please press.
One.
And our first question is from that.
Please ask a question your line is open.
Thanks, Good evening.
Maybe a couple on production and <unk> production costs, so with production costs, Ryan how should we be thinking about that 290 dollar a ton number is we're now sitting here in Q2, and then how should we think about how that ramps in Q3 and four if it is indeed going to ramp further from here and then I have a.
Follow up.
Hey, Hey, Matt Ryan go ahead [laughter].
Hey, Matt.
On the 290.
At this point would that represent as as I called out is some of the incremental cost will be experience for running the combined heat and power plant at its current level, which is in excess of the power requirements for stage one so.
Certainly I would expect that portion to to hang around in a relatively similar.
Fashion throughout the rest of the year and then as we continue to build the team for stage two ahead of commissioning.
I would say that the levels that were at will probably slightly increased throughout the year. These these folks that we're talking about that are embedded in our P&L at this point are.
Represent for example, a much increased maintenance crew and all the things that you would expect us to be bringing on a head of commissioning of these assets. There are specific members of the team that will be bringing on for example operators for certain circuits that won't fall.
Into our Cogs measure immediately if they are not actively participating.
You know in in the shared infrastructure of the site and so I'd expect you to see.
An increase in those folks as well as a slight increase over the period of this year going into the startup production at the end of the year and early early next year, both in the production number and uhm outside of the production number.
Got it and then as a follow up I think Ryan in your remarks, you were mentioned you had mentioned that longterm production at a stage one still has room for upside via upgrade. So my investments you could be making maybe give a little bit more detail on how we should be thinking about that timing.
And otherwise bearing in mind that you are laser focused on stage to know and I certainly understand that and then I'd be curious as to as we sit here today, where are the biggest stage one bottlenecks that would keep you from from really pushing that envelope further thank you [noise].
[noise] excellent.
But yeah, you want to have Michael.
Page one and then.
You can finish up right exactly yeah, Mike, you'll probably best positioned to give some color there.
Shortly thanks for the question.
The love diminishing marginal returns certainly applies to our cause.
Concentrate operation as with anything else.
I think as we've said in the past when I've said, maybe now I'm increasingly optimistic about the opportunity to apply the known technology and additional automation to improve.
Ah recovery are great and I think the potential.
Some of these more game changer opportunities are not likely to be implemented this year. This.
You'll be more focused on incremental improvement.
In terms of where the bottlenecks are no mining.
Mining is certainly not a bottleneck.
So it is in the processing operations and we continue to increase the throughput slightly.
In order to see if we can identify where those is I would say right.
No more than the grinding circuit.
Is where we anticipate initial bottlenecks only we haven't reached there yet.
But we see opportunities to do things.
That will open that up.
Long term I see you know pretty tremendous opportunity to improve the quality and quantity of iphones reproduction.
And then I would just add.
You kind of said this in your question, but as you can imagine as we gear up in preparation for.
For the rest of the year for.
Getting stage two online obviously, that's our primary focus and there'll be a lot of activity on the site for that and of course yep getting that done prop.
Properly and safely is is our primary focus as as the year unfolds.
Got it and then I'm just gonna sneak one more in real quick any change in timing for this year's stage, one maintenance outages normal scheduled maintenance. So we're still looking at Q2 and Q4 or has that changed at all.
No change, but Ryan if you want to cover anything on that.
From an operating standpoint financial standpoint, but no change.
Yeah.
Right and we actually just completed a very successful turnaround here last week.
And no change to the schedule versus last year. So the the year over year compares will be.
Lined up as opposed to how they love them in 2021.
Great understood. Thank you guys.
Thank you. Thank you have a question is from Carla's Dealba. Your line is open.
Exactly learning.
Good afternoon.
All good thank you very much and good quarter I, just got a question or several questions. The first one maybe it is related to them.
The inventory.
Mentors situation.
You currently have you shipped a little bit more than you for the us.
You're going to have to make it you had the maintenance outage already in the second quarter.
How shall we well why should we look for in just production maybe where.
You can give us.
Production and shipment for.
For the fourth quarter even.
Those those those too.
Situations and then coming back to your comments about the potential disruption on port and logistics and then.
What is happening in China, what other ports or the key port but were you ship during Makiya. If you can show that there'll be awesome.
Sure what Ryan why don't we take the first part and then Michael you take the second part about the ports and then and then I'll come back.
Sure a carlos good to hear from you.
[noise] on thinking about production, obviously, we don't give specific production guidance I think what Matt just asked applies here in terms of the timing of the maintenance or maintenance outages, and then comparing year over year Q.
Q2 last year had a had a similar maintenance outage and so I would look just ordered the cadence of of production from last year.
As indicative in terms of you know.
The impact from a maintenance turnaround and then from an inventory perspective, obviously, we were able to get some of the slight inventory that had built up in transit to the port.
Over the course of the quarter.
In addition to the preponderance of our of our production.
You know the.
The shipping situation as you can imagine continues to evolve I think we were pleased with our ability to get material to port this quarter, but it is always in fits and starts and so I don't think there's anything really specific at this point that I would call out you know just sorted that the typical.
Trends that we'd seen you know so so nothing really there to to call out in particular might.
Mike you Wanna take the rest of it.
Oh sure Yeah in terms of.
Sports that we shipped to the primary ones or intention.
Qing though.
Uhm.
Occasionally luchow.
Those are the biggest ones.
Oh. Thank you. Thank you guys, maybe Michael <unk>.
Cause we have your there.
More or less roughly could you comment as to when do you expect to start trials in the concentrated over then to dry on the casino stage too.
And can you give us a rough idea of the fish got progression of completion of the states.
Stage two project.
Uhm.
Dates or Ryan or Jim mandates.
I can touch on the the physical progress, though in generalities.
But the progress is moving along nicely.
<unk> said the number of craft insight is increased and we're starting to add.
A night shift to the schedule.
A lot of the civil work is complete.
And.
Steel erection.
Erection structural steel is wrapping up.
In the next couple of months, we hope that leaves typing in electrical which are always sort of <unk>.
Let her into the the project along with the ancillary equipment.
The primary equipment as in installed already.
And then in broad strokes, we do hope that the Cal Center.
And dryer will begin trial operations.
Go ahead of the commissioning of the of the rest of the facility.
Also <unk>.
Eventually.
In the process it comes first though.
And to have that.
Prior to.
Commissioning the rest of the circus, but that business I mean, we will run it continuously at that point.
Hey, Carlos.
Yeah, Hey, Carlos Jim <unk>.
I believe we sat on the last call.
We expect to be mechanically complete by year end and hit run rate normalized production sometime in 2023 and that remains on track. So we've made a lot of progress in the corner.
Sounds great and maybe one last for for Ryan.
Now now that you have.
Pay down the.
The prepayment.
We change that you're how do we change it they will take a.
Agreement that you had a wishing it.
But you renew the agreement is there anything how'd you casual impression in particular I was going to change and now that that that you would you pay to down the they will take.
Sure Yeah.
One of the key benefits of transitioning into this new agreement is we do not have that balance that would result in sort of the the non-cash revenue portion that you would seen sort of the roughly 15 cents of every dollar that was a effectively a debt paydown back from our gap treatment.
Came through operating cash flow at an optic paydown. So that portion will go away. The abroad economics of the agreement are are not dissimilar and sort of whatever commission fees that are built into it are are shown primarily on on a net basis. So that's already accounted.
Four and a realized price and so from that perspective.
The entirety of that portion of the cash flow.
That that we had that negative impact from will go away so all else equal.
Real benefit operating cash flow.
Excellent. Thank you very much I Smith.
Thanks Carlos.
Next question.
Thank you you have a <unk>.
She was from table Rebecca bombs.
<unk>.
Hey, guys, everyone thinks hey, how are you guys. Thanks for taking my question is.
I just wanted to confirm German Ryan with the addition of the night shift on the construction crew.
I guess as this was this part of the original plan. This this result in any incremental costs or or is this.
This is just one part of the steel structural installations or is their assumption that you'd be having two crews running through the remainder of the year.
Oh well.
Oh chummy with some thoughts on Orion feel free to finish.
As you can imagine this has been this is a huge project and if we think back over the last few quarters.
You know as as we sort of sad.
Been.
Handling all.
All sorts of issues in the supply chain in the world.
As it is pretty much everyone has and so we've been kind of managing day to day and certainly as you can imagine with so many moving parts with construction schedules.
One thing gets out of whack you can have that.
That can have rubber rubber questions on the rest of the job and we sort of made clear that.
We're going to manage this in real time.
And make sure that we.
Get this job done effectively on time that economically and so we've been doing that so it's hard to say how much of a night shift within their original plan because.
Sort of like all Battle plans got until the first shot fired I I would say that the the original plan there was.
It moves over time, but obviously the the the lion's share of what you're doing is the same and so.
We have been working out so I couldn't tell you exactly if we kind of think back how much of a of a night shift we might have anticipated, but but certainly the night shift is is helpful.
And and so will we.
We're trying to get this work done as quickly as possible I think we also mentioned on.
Prior calls we utilize the past because we are the paths rated project and so we were trying to utilize all the letters and then as far as budget, we remain on track with.
The last call, we kind of gave.
Do you have an outline of what our expectations, where you can kind of see our our capex in the quarter and and so we feel good.
About where we are with respect to the project financially.
I appreciate that Jim Yeah, maybe just the the the renewed agreement with Shanghai for <unk>.
Concentrate sales I guess does it cover just concentrate sales going forward or would you be using Shanghai for any residual laughing themselves are.
Certainly I understand you're gonna be stockpiling, the heaviness once the N D. P R separation circuits up and running.
But for I guess, the remaining lights would windows be marketed by Shanghai.
Yeah, So you're right on the Heavies Ryan why don't you wanted to address the agreement and then I'll I'll finish.
Sure Yeah. So the agreement is time base. So it has an initial term.
With overdue option at at the company's option.
And with that the focus obviously, primarily in the take or pay obligation on the part of of Shanghai is.
For the concentrate sales.
As I mentioned in my remarks, we continue to distribute directly to a certain customers of ours.
And will continue to focus on building up our direct sales relationships.
Particularly in Japan, and South East Asian markets as well as of course in the U S and obviously continue to focus on.
Ultimate sell through via our downstream strategy.
This particular agreement does give us the flexibility again at our option of distributing separated products.
Through Shanghai into the Chinese market should we so desire.
I appreciate that.
Maybe if I could love it or another one and I'll also around just contracts, but this time with with G M around magnetics products and magnetic flake in stage three.
Is there a there is a timing target around the first production or for a sales there but.
There are timing elements to your contractual relationship with G M as an anchor customer.
Great question, David I I.
Can't get into the specifics of the contract relative to what we've will be disclosed, but I'll I'll rehash that and maybe give you some extended color and then go from there but.
You stated that they're sort of two main product components, we expect late twenty-three to be selling alloy.
G M and so that will come on line late next year, and then 2025 is when will start delivering magnets to that to them.
You can imagine that as we all all sort of step back in general terms. So I don't get very specific on single customer details. If you will but we made very clear that.
We viewed the stages, two and three businesses as as separate businesses, we would not Rob Peter to pay Paul Sorta speak and that we need to to make the downstream investments we need to have.
A setup that is an attractive return on capital for for what we're undertaking and the strategic nature of our supply. So you can imagine that.
Any agreement that.
We would do.
That fits what I sort of very clearly stated we would do would be longterm in nature.
And and so.
Sort of leave you with that but we haven't disclosed sort of specific time lines, but of course.
G. M has publicly stated and it said in the press release.
This is covering across the LTM platform and so the you can look at all the cool models that they have.
Coming out in the scale of what's to come in and so there's.
Quite a bit of of demand to come as they grow their business.
So.
Ryan you want to add anything on that.
No I I I.
Yeah completely agree with with all your comments, Jim I think you hit it.
Certainly we continue to see.
Lot of strong demand across the board.
From a variety of industries, and so I think that to gyms point of having.
Having the separate businesses and being sure that we are setting up.
Contracts that certainly.
Our meeting our customers needs, but protecting us given the significant capital that we're putting into the ground. That's obviously something that we focus very closely on balancing.
Thanks, Jim and Ryan for the time Jen Thanks.
Thanks, again, and thanks for the entertaining hold music is Louis take care no problem. We're glad you enjoyed that [laughter]. Thanks.
Thanks.
Thank you.
Question, Yeah <unk> your line is open.
Yeah, Hi, Thanks for taking my questions. My first question was actually on stage three again, so clearly states three has significant expansion potential up to 10 times the current plan.
So it was so I was wondering if you could provide more colonial grossed out of G. As it is the priority here first commission, the Texas plans with thousand tonnes capacity.
<unk> 2026, and beyond study or what do you <unk> <unk>.
Consider expanding under capacity has moved up a moving target.
Yes, <unk>, so well just wanted to correct one thing, which is I I do not believe that just 10 times.
What we stated as sort of the initial <unk> Fort worth facility is the kind of capacity of where we can go I think it's actually quite a bit larger than that certainly are output from mountain pass.
Goes 10 times, but I think that this industry is so dynamic we are working in parallel we made clear from the very beginning that will buy build and or JV to to continue to grow. This business. I mean, we think we're in such an attractive area and I would say I mean.
Kind of to restate, the obvious, but but just given what's going on in the world I think that the importance the strategic nature.
The.
What we're doing.
Is.
Just continues to strengthen by the day. So you can imagine that we're having lots of conversations and and I I think the the main thing here is that.
Want to make sure that we do this in a thoughtful way we don't want to just sign deals we want to execute and get this done right for our customers. So I would just say that I believe that the if you look out longer term that the magnetics business as we kind of see the the scale the growth opportunity exceeds the.
Sort of a <unk>, which would be the next step.
For our existing.
Or body.
So we are years and billions ahead of anybody in the west and as I said in the prepared remarks, we believe if we if we look around at our team. We believe we are creating a western national champion fully integrated national champion of Magnetics, and it's a it's a huge growth harbor here, there's a lot to execute but.
We are focused on that so.
Okay, Yeah. Thanks for.
Thanks for the call and actually it piled onto my next question. So you said the expensive jealous even more than the next so it all depends on probably the third but the feedstock and resetting your identity. So any any color you can provide in terms of what quantify be opportunities from third party.
Oh and recycling or does it poorly.
Yeah well.
You're right and so.
When we think about the recycling in third party capability the whole go with that and that's why we we have a variety of of work that we've taken on in parallel and the reason is because we believe that that positions us both obviously two internally consume.
Magnetic swore for waste.
Waste from the production process. If you will so that we can kind of have have a loop.
For our private closely for our process as well as they are pretty feet and what I would tell you is I think as we look around there's just so much more capital that needs to come into the space and I think having been out this for awhile.
That that the these these are hard things to bring online.
And I think that there's going to be attractive opportunities for us to to frankly provide other parties and we want to see the supply chain grow and so I think that we can provide other parties a solution to sell an intermediate product to US right. Now obviously the only real alternative is is into China, and so to the extent that people Wanna build out of whack.
Turn supply chain, our ability to take their party feed as a source of competitive advantage and then frankly to the extent that there are people who have put together a project and have underestimated the cost and the timing.
Will be there to to lend a helping him of course, but you know obviously, our our shareholders will.
Demand to benefit as we should and so we just think of physicians is really well and and when I say the opportunities bigger than 10 out cause I just mean that just the magnetics business is growing.
Of course will be competition out there there needs to be a lot more.
And we just think that there's.
A lot of opportunity and so I just wouldn't cap the growth at at what is our existing output today is is the concept.
Okay. Thanks for the call and congrats on a vehicle.
Yeah. Thank you.
Thank you next question is from July January weakness.
Okay.
Hey, good afternoon, guys. Thanks for taking my question Hey, George.
Of course <unk>. So maybe the start just when you think about the landscape and you discuss lots of opportunities that you're working through with various third parties.
Is it possible for you to have a direct deal, giving your stage three ambitions.
For just MVP or is that something you'd sign a deal for are you more leaning firm towards becoming a full magnet maker and therefore only looking for deals for the third part is that one of <unk>.
To make sure they're over the long term.
Sure George I would say that we were opportunistic right. We come at this originally as investors and we think about you know we think about what is sort of the most thoughtful uhm returned what I would say though is that.
Kind of just again rehashing, what I said earlier, but as we think about the world today, the strategic nature of what we have.
Is so critical that we want to grow our downstream business right. That's just more total dollars of profit it transforms the the business and so you know over a very long period of time, we Wanna just maximize.
The opportunities that for ourselves.
But we certainly will do and DVR, we would do.
Will do anything that makes sense and so.
You could certainly see something like that from us.
And then moving onto the recent comments from the.
Ministries in China.
The fall of the price of N DPR from about 170 to Wednesday, the wrong 130 seemed to have been time be correlated perfectly with those comments. So curious as to what the mechanism was through which that happened in second <unk>.
Question, we get a lot of the boat supply and particularly from China somewhat opaque in terms of its capacity.
How quickly can supply turn on how quickly can in turn off I'm just curious as to whether you can share. The first thing I said about the dynamics I lifted that price decline in second.
What your assessment of the landscape in China, and how how quickly supply can could come on the market.
Sure no great Great question.
So what I would say this and I, yeah, I I touched on the kind of typically what happens and I think this is probably an imperfect analogy, but I think we saw it about six months earlier and iron ore. There was a lot of speculation in the government talk to down and then what happens is obviously in China.
When the government says <unk>.
Well put it this way there's a much higher adoption of X then there might be [laughter] in the west and and so you you typically will have a reaction where people will want to show that they are following that policy and so you'll see some transactions happen at lower prices, but they'll typically be small amounts.
And it'll sort of freeze up the system. If you were a little bit and then a little time will go by and supply and demand.
What kind of come back into play and so because ultimately that's.
That's what has to happen and so I I think that this is similar.
In the sense that the.
Plus it had moved quite a bit.
Concerns over there about inflation that there is here and and so I think that there was an attempt by some people to submit just demonstrate tighter.
Tighter pricing, what I would say and again this is.
This is the empty house perspective on this but.
Set in the remarks.
Four of the top 10 global market share battery electric vehicle producers Oems are Chinese Oems and ultimately.
The Chinese need to have the material and so there needs to be a lot more stuff like we need a lot more supply right. Just if you look at the U S auto market alone for example, we need forget wind turbines drones, all that stuff forget the rest of the world we need three more mountain passes right. So there's just and I I I think that that's.
The bigger longterm trend that I still think the.
World doesn't yet fully appreciate especially as we know kind of head into this period of obviously the global economy is severely.
Severely challenged geopolitically, given everything that's happening I don't need to rehash that but when we look around at these commodities in the electrification.
Supply chain and again, whether it's copper or aluminum or any of these things they're just the the.
The capital that needs to come in to expand the output in the time that it takes there just isn't enough that I think you're you're seeing a lot of that in.
The rhetoric out of the downstream now right you've heard it from some of the major Oems and I think in our space. You know obviously that is is is the same and I I don't expect.
It would seem illogical to me to expect the Chinese government to push to subsidize.
Oh Yum competitors of their national champion Oems and so if there are any product and the western world needs product and there isn't going to be enough for everyone than you would imagine that it.
It wouldn't make sense to push the prices of material down to a level.
Where the Chinese economy was essentially subsidizing western producers and I think that that is that is sort of the the the change. If you will a lot of a lot of people have trouble thinking about the four decade versus the last decade.
And I think that when when you think about the forward decade. This new cycle that is sort of going to be the new dynamic does that the Chinese are not going to destroy their own environment and subsidize their competition they've moved downstream.
And they're gonna.
Make sure that their Oems have what they need and so anyway I add all that up in our belief.
That this is this is a brief pause certainly the world as a backup if you will and production shut down but I believe it's a temporary policy and it yeah I don't know how long it is but I I do believe that prices will go materially higher from here. So.
One more thing that that's okay.
Course, yeah, just oncologist, you're you're set up plenty of times that you are trying to build.
Magnetics chain in the U S. It hasn't really been done and so how do you feel about the talent pool and you have a lot of Rex you mentioned that at the end.
Of your talk so are there people that you think could fill the roles that you need to operate boats with both stages, two and particularly stage three.
Yes.
Nope first there's no question that there are there's a struggle for talent all over the place where we were seeing that pretty much every company is talking about that but what I would say is the advantage. We have is our mission really motivates people right and that is that frankly is.
A differentiating factor and it's frankly, it's non-political right.
I was at a thing.
You may have seen where the president announced R. D O D.
Contract for for heavy and you know we said we're going to hire if you have to be we're gonna hire in both malthouse and in Fort worth and so we've got a lot of hiring to do but what we see as as as what we're doing game.
Gained speed, we have a lot of talent that wants to join us because again, whether you are on once the left side of the political spectrum or the right side of the political spectrum everybody wants.
More American jobs, everybody wants to get some diversity in the supply chain everybody is in support of a producer that is doing things sustainably.
Clearly.
We don't need to rehash, all all of the the.
Mental attributes of of what we're doing.
Relative to other production and so we continue to find that there are a lot of people attracted.
To our mission and so in that sort of struggle for talent out there I think it's it's a source of advantage and we just obviously want to spread the word and get as much talent as we can.
But we think we'll be able to get the people that we need we have an.
Incredible people and joining us all the time.
Thanks, guys.
Yeah of course.
Next question.
Yes. Our next question is from Dash Swanndri your line or something.
Yeah. Thank you.
This question Might've been asked that might've been answered if it wasn't it it went over my head.
Just curious is a structure pretty well settled now to get to stay.
Stage three with the existing G M contract or used or are you still open for additional joint ventures partnerships to get to that point.
I'm not sure I.
You want to say that one more time.
Yeah sure so.
I think you've talked about you know you can build buys.
And joint venture you wait a growth I was just curious.
If the G M deal right now the 700 million dollar stage three the way you have it structured right now where you're bringing that pretty.
Pretty much on the sole basis to first production.
If that is settled at this point or are you still open for additional joint venture Oh, Yeah.
So yeah sure so well.
Two things on that.
The they are the foundational automotive customer of the corporate facility, but they're not the only customer and it's not an exclusive and so you should expect us to want to grow we're here to build a magnetic business and frankly.
For for them for us, it's they want us to be successful. So we expect to have additional customers in that facility and then as you can imagine we're thinking about overtime.
Overtime, Tenex and beyond right and so the answer is all of the above there's nothing exclusive about that and I think you could see additional customers you will see additional customers in automotive as well as other verticals.
And and in that facility and in future facilities.
So the magnetics business will be 100% organic business for Ya not interested in joint venturing in the make that as well.
Ah well I wouldn't say that I mean, I would say that I mean, certainly as as it stands today.
We have an outstanding team were were growing that team. We're building that facility is as we sat on the call. We we're we're already building that facility.
But to the extent that there are interesting partnerships and other things.
Again, as we go back to kind of our original.
Now <unk> J D to create value I mean, ultimately if we think we can execute well for our customers and great value for shareholders will will consider it for sure.
Okay got it and then you should have an update so that 700 mill to.
Talk to quite a bit about inflation and and it certainly seems like a game of inches every quarter, but how does the 700 mill feel right now to you.
Yeah well.
What I would say is if you. If you go back I think I I think I said this sometime last year I'm forgetting I believe it was in August kind of after our queue to call, but it was sometime about a year ago.
Our expectation was that the <unk>.
Use the 1973 oil crisis analogy and when you have a supply chain disruption at the time, you know people were kind of talking about transitory and I can tell you that internal eight M. P. We were very focused.
As we've been about making sure that we're positioning as best we can for all the disruption because our house for you you know my view has been that.
That we are in for a number of years of reverberating supply chain shops and other.
You know, obviously sort of the world continues to play out that way what I would say is we will not be immune to inflation right with our our employees <unk>.
Need to have and I would demand. It we have incredible team. We've tried to build an owner operator culture I Wanna make sure that People's real incomes grow right because it doesn't help if you're nominal incomes growing a little but you're getting destroyed by inflation. So when people join M. P. We want them to grow and do well all of them every single employee and so we won't be immune to inflation.
But what I would tell you is that it.
Just actually grows our competitive advantage because are in place assets the scale of capital and time. It again, if you even had all the stuff that we had it just get that much harder and not much more expensive. So I believe that that if we continue in this inflationary environment right now I think the talk is kind of.
Peak inflation, who knows but but I think that misses the bigger question, which is.
Whether 8% was the you know and I I.
Argue is probably not peek over the coming years, but.
Even if we stabilize at five per cent for awhile, that's still a lot more inflation than we've had over the last.
Several years and so what that means is that the value of the in place assets that we have we will continue to grow particular, because we sell into.
The the largest growth story for the next decade, which is electrification again, if those timelines get thrown off a little bit. It still is a great grocery so what I would tell you is we will not be immune.
But we will we will be able to be a beneficiary and an inflationary environment info on the 700, yeah. We feel good about that we've we've we planned and and so we feel.
Good about that number as we see it today.
And so it's not like there's anything that.
That we've seen in the last few months that would change that number I mean, we feel really good that.
We'll get that done at that are within that but you know to the extent that were growing beyond that and doing other things of course, if we thought if six months ago, we thought something would cost X. It could cost two X, but I think the bigger broader picture as we are in a space. The mining material space. This is a space that in this kind of environment.
Will do well right if you're.
As a space that will grow on a real basis and a inflationary disrupted world.
Right, Okay got it thanks fifth year sure yeah.
Thank you.
Next question is from that some of their your line or something.
I just have a really quick follow up but I never calls running over a little bit with respect No-trump age too.
At what point.
Do you think you'll start looking add transacting with third parties for your outbound stage to material is that something you start to do immediately after startup is that something you start to do a year after being up and running how should we be thinking about the cadence of that cut over.
Two non Chinese customers is basically what I'm asking.
Oh, well, yeah sure I mean, we've been looking in that sense.
If we go back to 2017, when all of a sudden we have this site and we had a people and it was a turnaround when we were thinking about you know we're thinking about one day, having a magnetic symptoms right. So we're thinking about stage two sales always and.
So we've been think about that for awhile.
And you can imagine that we've had plenty of inbounds from a variety of parties at various points downstream in the supply chain and so.
Frankly the.
The <unk>.
<unk> will just be too I believe the challenge will be to just maximize.
The the kind of the broader downstream benefits of of that but I don't know if riner, Michael you want to chime in on this and chairman thoughts but.
That's something that we're we have no shortage of people, who would like to get our stage two product.
[noise] got it understood Okay gotcha.
Yeah sure.
And then my last question I guess would be the last one sounds highlights yeah last question from Carla's Beatify Your line.
Okay, Hey, Yeah. This is gonna be.
Quite brief is just.
If I could if the effective tax rate went up to around 25% to one.
I think that.
Scraped quite.
Large on what we saw in the last few quarters, even greater than what we saw each one last year of 22. So what are you.
Deemed your Orion can give us.
Going forward.
Yeah of course, Ryan wanting to take that.
Sure he call us on.
On that what I would say is obviously as we've discussed.
Our plans from a stage two perspective of of completing construction and bringing those assets on.
Online this year that does have an impact on our effective tax rate given the potential bonus depreciation we can take on you know what is a pretty significant scale of assets and so we are in the beneficial position from a tax perspective of enjoying a couple of different deductions that.
That being net income limited and so when you bring in a significant amount of bonus depreciation.
Some of those deductions effectively get stopped out when you've got lower next taxable income and so we're in the beneficial position of likely being able to have a very attractive cash tax rate. This year, but that does actually find its way into the effective tax rate from a gap perspective.
The course of the year, so I would say.
Likely what you see here around this area is is reasonable for the next couple of quarters and.
And will continue to reevaluate that as we get closer to and service of stage too.
Great. Thank you very much.
Thank you. Thank you and there are no further questions at this time I would like to change the color.
Timothy Timothy <unk> closing comments.
Sure well I just want to thank everyone. It was a great quarter for us and so just we'll get back to work now stay everyone's stay safe and we'll talk to you soon.
Since this concludes today's conference call. Thank you for participating here may now disconnect.
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