Q3 2022 MP Materials Corp Earnings Call
Sequentially third quarter production levels were up about 6%, mainly due to the impact of our biannual plant turnaround in the second quarter I would point out that we just successfully completed our October shutdown and therefore, you should see Q4 production reduced sequentially and be more comparable to our second quarter output.
Moving to the top left chart sales volumes continue to truck production closely with slight variations based on the timing of shipments given the nature of our offtake agreement and the demand for our concentrate we generally see sales volumes closely tracking production.
And looking forward to the fourth quarter as we started commissioning of stage. Two we are beginning to divert some volumes away from sales and into the charging of ARX. Okay.
This will somewhat reduce our sold volume as a proportion of production of course part of this as a temporary working capital item as we charge circuits to eventually begin production of refined products, which Michael will discuss more in a minute.
Moving to the top right as Jim mentioned pricing remained very strong relative to a year ago up over 50% highlighting the overall strong demand for our concentrate and this includes a modest impact from foreign exchange moving against us versus last year.
<unk> pricing was down about 16% as we had highlighted on our last earnings call driven by the market price of any PR as Jim mentioned.
Recall, the endy and PR comprise around 16% of the rare Earths in our ore body on a P times Q or total value basis make up over 90% of the value of the rare Earths are concentrated.
As such the price of our concentrated highly correlated to the price of any PR and due to the timing of our price negotiations with actual product delivery. There was a roughly one month lag in our reported realized pricing compared to the spot rate of any PR.
NDP, our pricing has recently stabilized in the low $90 range, which would suggest more than a 25% decline in sequential realized pricing assuming that spot rates hold through the rest of the fourth quarter, resulting in realized pricing that would be below baxter's fourth quarter on a dollar basis.
Call. It was about this time last year that pricing for MVP R began to climb rapidly and FX has obviously moved significantly year over year.
Lastly on the bottom right graph of the slide core stage, one production costs remained very low at about $1430 per metric ton. This is up slightly from last year due to the scale effect of large production output and sales of a year ago, while sequentially core costs were up slightly due to continued head count growth.
Stage two related production expenses were similarly impacted relative to prior quarters, we will continue to hire as we move through the fourth quarter and into next year.
Initially some of these labor costs will fall under startup costs until the various sections of the plant are fully commissioned and operating at expected rates.
I would like to add that understandably, we get the occasional question on the impact that inflation is having on our business. We are not immune to the many cost increases impacting the economy. For example diesel fuel for our mining fleet as well as trucking cost to the port have all been impacted generally speaking our operating efficiency as mostly offset.
Many of these increases.
I would also note that we recognize the impact of inflation is having on our employees.
After all the lifeblood of this business and have been instrumental in our success to date to counteract the effects of inflation starting in mid July we began issuing fuel stipends to all of our non executive employees. In addition, beginning this week, we issued nearly all non executive employees, a healthy early cost of living pay increase.
This is separate from our annual reviews that take place towards the end of the year. So while we may see modest cost increases come through our P&L from these efforts.
We believe supporting our workforce in these challenging times is critical to our business at large we believe that fostering an owner operator culture will help keep employee morale high and turnover very low which is another competitive advantage in the long run.
Moving to slide seven revenue increased 25% year over year, a strong realized pricing more than offset the comparative last year's record volumes. This flowed through to our adjusted EBITDA, which was up 34% our margins, which increased five percentage points and our adjusted diluted EPS, which increased 38%.
Conversely, lower sequential realized pricing of a second quarter records resulted in modest declines in our financial metrics quarter over quarter as you can see on the chart.
The strong operational and financial performance resulted in continued strong cash generation out of stage, one which is shown on slide eight.
Normalized stage, one free cash flow was approximately $93 million in the quarter, bringing the year to date total to $328 million.
And company operating cash flow has funded all of our growth Capex. So far this year as we remain positive free cash flow year to date.
Total capex was about $92 million in the quarter and as such we would expect capex to further ramp into Q4.
Importantly, we remain on track with our projects from a schedule and cost perspective, but the timing of payments has been better than originally modeled we continue to expect a total capex investment of approximately $700 million to.
To complete our core major projects stage, two library separation heavy separations, the construction of our stage three magnetics facility in Texas and recycling.
But given our year to date spend and payment timing factors such as hold backs and retentions for the final completion of stage, two and down payments for long lead stage three items, a greater percentage of that cash deployment will spill into 2023 versus 2022 as compared to our original expectation communicated.
February .
Regarding the balance sheet as you will recall last quarter, we took advantage of the rise in treasury rates to invest a portion of our cash balance into higher yielding short duration U S government backed securities.
This quarter, we increased that investment and as of September 30, we now have approximately $836 $3 million of short term investments in addition to $428 million.
Cash and cash equivalents for a total balance of $1 $26 billion of.
Cash equivalents and short term investments, which is virtually unchanged from the end of the second quarter. Despite the ramp in capital expenditures.
You will also see the impact of this move from cash into short term investments on the cash flow statement, when we file our 10-Q tomorrow.
Before moving on I did want to address a couple of housekeeping items for you.
First regarding adjusted net income and diluted EPS.
Historically, we had excluded depletion expense when calculating our adjusted net income and therefore also our adjusted diluted EPS.
This was to aid comparability between our pre and post IPO financials as pre IPO, we recognized a royalty expense for our mineral assets versus our current treatment of recognizing depletion.
<unk> book value of our consolidated medical electric.
Going forward, we are no longer excluding the depletion expense from our calculations and have presented prior periods on an apples to apples basically.
Second as we've previously discussed in our filings we made a request to resolve certain of our properties at the Battle pass fight.
We are pleased to have received final approval from San Bernardino County, and the division of mind reclamation on this rezoning and the related changes to our reclamation obligation in September .
There will be additional details in our 10-Q, but in short this change results in materially lower estimated reclamation costs, reducing our asset retirement obligation or aro liability on our balance sheet by over $13 million.
The GAAP accounting for this change required us to reduce PP&E I E. The carrying value of the relevant assets by $10 $4 million, but charge the remaining $2 7 million as a credit to our depletion depreciation and amortization expense. So for this quarter you will see a discreet credits.
In DD&A, which should not repeat going forward.
Looking forward to next quarter I've already provided some commentary on pricing and volumes versus this quarter versus the year ago period that will provide some quite challenging comparison.
Importantly, the fourth quarter will be the beginning of several transition quarters as we prioritize commissioning of our stage two assets above all else.
That incorporate the examination of each process boundary to identified punch list construction items.
Verify as built to piping and instrumentation diagrams.
Confirm the safe operability of equipment.
Pressure testing and line flushes.
Verify all utility services and perform other pre startup checks.
Next we will verify electrical terminations complete instrumentation loop checks equipment bump test and begin enabling the automated operation of all equipment and control systems and coordination with our equipment vendors and commissioning team.
Once this is complete the real sign of commissioning begins and we will move onto the next circuit or system boundary.
In September we reached an exciting first milestone with the commencement of commissioning activities in the concentrate filtration, drawing and roaster area.
Initial fills of the filter feed tank have begun and rare Earth concentrates slurry has now been run through the filter press and filter cake has passed through the rotary dryer.
We are addressing control systems, bugs and mechanical equipment issues as they arise.
We're planning for initial runs a drag concentrates through the roaster in the coming weeks at.
At the same time construction is nearing completion and the salt crystallize their area and the pre commissioning steps and loop checks are starting here as well over.
Over the past several months many of the legacy circuits have completed their upgrade and re commissioning efforts and are awaiting fresh feed.
In this camp includes the impurity removal circuit, the heavy light rare Earth post separation process and the NDP our separation facility.
Our wastewater treatment and concentration facilities are now substantially ready for operation as well with various expansions and enhancements underway.
It is an exciting time at mountain past.
We are growing our teams in preparation for operating and maintaining the stage two asset <unk>.
Completing standard operating procedure development, expanding training and getting into the slog of commissioning.
As mentioned, we have started to feed a limited amount of various concentrate into the new circuits to feed them.
We will then begin commissioning in conducting performance testing largely in process sequence to confirm the ability to meet the design flow rate.
To the extent necessary or required we will test out of process order such as we have with our brine treatment circuit.
As all circuits are commissioned and troubleshooting perceived we will then feed the circuits more continuously and that increasing throughput.
The volume of material dedicated to the production as oxide versus concentrate will ramp up as we reached stability.
The time lag between concentrate production and the associated rare earth oxide will be longer than we have historically seen.
And there will be a relatively small permanent investment in work in progress.
But once a greater level of stability has been achieved we should see this gap begin to normalize.
As Jim mentioned, we expect commissioning to be a discontinuous nonlinear challenge for the balance of the year and into 2023.
And we will not sacrifice long term sustainability and product quality to hit near term production goals.
So we cannot and will not try to predict our exact trajectory and.
And we will need to overcome a series of expected problems known unknown and without a doubt certain amounts of rework and remediation.
However, what is also known is that we have an outstanding dedicated team many with hands on experience in successfully operating the legacy process that is up to the challenge.
We also have a stable and highly profitable core business that can largely continue while we worked through the commissioning process.
With that I'll turn it back to Jim Thanks, Michael.
Hopefully Michael's commentary offers a more detailed view into the complexity of the challenges involved in completing one piece of our mission.
It may sound daunting, but it actually speaks to the culture, we have built and the value of the long term franchise. We are building at M. P.
As I've said earlier.
This is probably the most challenging global operating environment. Most people working today have faced in their careers.
Spike tests, we have steadily increased stage one production.
Mountain pass has never operated better.
This means we are generating an enormous amount of cash flow and our upstream business.
Against all that.
We have fought our way through construction and other challenges to begin stage two commissioning.
Simultaneously.
And maybe because we really like moving multibillion dollar supply chain.
Take a look at slide 11.
This picture is awesome.
And what was an empty field in Fort worth seven months ago, now stands that future center of the American Magnetics industry.
This building looks big on the page, but in real life it feels a lot bigger.
As I mentioned earlier, we already have a completed building shell and are starting to build out of the utilities and infrastructure.
This is the most obvious sign of stage III progress, but under the surface. We are doing much more to make sure MP becomes a vertically integrated magnetics champions.
In addition to developing our people and capabilities, we remain committed to our buy build <unk> JV approach to stage three growth.
We continue to spend time with prospective customers potential partners and of course GM.
We are fortunate to have a high volume committed customer and general motors.
On the electric cars, new growth opportunities will emerge wind turbines are set to accelerate thanks to geopolitical considerations as well as the recently signed IRA Bell.
It seems obvious to me that there will be a robot in every home one day, just like a computer and a phone it seems obvious to me that drones and other forms of electric transportation will eventually become much more pervasive.
These technologies and many others will drive incremental demand for permanent magnets for decades to come.
Mp's control of one of the world's preeminent rare Earth resources as a source of great strategic competitive advantage that.
The synergies between our stages two and three are also very important to consider.
And the manufacturing process as much as 30% to 40% of magnetic material may be lost as byproduct.
Absent the ability to recycle that scrap the economics and sustainability of magnetics manufacturing is very challenging.
Our stage two and three teams are working now to define and pilot the optimal point across the entire flow sheet to reintroduce that material.
They are doing the same with end of life magnets.
Our vertical integration freeze the team to evaluate these fundamental concepts from a first principles perspective.
Long term the importance of recycling and closing the loop is obvious developing the knowhow and scale to lead this space now is enormously valuable.
So to conclude we are proud of what we achieved this past quarter and we are very bullish about mp's prospects. We know we have a lot of challenges to overcome in the months ahead as we commission stage two and then begin refining at scale at mountain paths.
And in what feels like a treacherous economic landscape.
We have a cash flowing upstream business and a fortress balance sheet.
This really matters as the cost of capital is becoming an even bigger risk for many most.
Most importantly, we have a strong owner operator culture that is battle tested and focus.
With that let's open it up for questions.
Operator.
Okay.
Thank you if you would like to ask a question. Please press star followed by one on your comments. Thank you Pat now if you do change your mind. Please press star followed by player when the time to ask a question. Please ensure your line is on mute that.
Our first question comes from <unk> <unk> from Deutsche Bank. Please go ahead. Your line is now open.
Hey, good afternoon, Thank you for that.
Thanks for taking the time.
My first question would be for.
<unk> really focusing on the near Sam I think you made 20, San Antonio would be assuming that took huge outcome scheduled maintenance.
Wanted to get more detail on the pricing that you're seeing I believe you mentioned, 25% sequentially down when looking at spot price. If you can just remind us on.
On the timeline that you have at this point and maybe any color that you can guide on the pricing.
And then my second question would be just trying to understand already the timing of the commissioning stage. Two is there anything that you can give it. Thank you.
Yeah.
Hey, Brent it's Ryan I'll take the first part and see if Michael has anything to add at the end on commissioning.
As it relates to the fourth quarter you are right.
We covered a bit in the prepared remarks, the fact that we expect production to mimic our last non shut down quarter.
From a sales perspective, I think there's a couple of things to think about namely we made the point that we will have been and will continue to divert certain product away from sales and into the charging of circuits.
It's somewhat impossible to predict exactly what that will look like over the course of the quarter, but to give you a rough sense of how to think about it over time.
We could end up taking up to two weeks of production for use of charging all of the circuits as we make our way through commissioning.
I would just think about that taking place over time as sort of the permanent investment in working capital that Michael referenced in his remarks as it relates to pricing.
Youre right, we did mention what we see at this point if pricing were to hold was a greater than 25% decline in sequential realized pricing.
It's a little bit difficult to perfectly match up our concentrate price to the spot price of MVP are you guys see on your screens and it moves very very similarly, but not perfectly obviously, there is a unique and discrete market for concentrate versus oxide, but from what we see at this point.
As you guys can see on your screens, both with the Chinese domestic price and the movement in FX. The peak to trough pricing decline was was almost 60% and so when you've got 16 sequentially in this quarter that we just reported here.
Certainly we're going to feel the remainder of the impact primarily in Q4.
So hopefully that gives you some color Michael I'll flip it over to you if you have any thoughts on.
Stage two timing.
Thanks, Brian <unk> screen.
As we said.
We're excited to be starting the commissioning process and soon will.
We will be converting from <unk>.
Some are construction mode.
To all of the commissioning.
As I said, it's difficult to predict the exact trajectory so probably can't do it right now.
But every day, we are closer to us.
Starting to produce on site.
Thank you.
Difficult to give a timing.
Timing, but I was talking about and maybe you have commented I came to the previous quarter.
We're looking at three to six months that way okay.
No.
Next year, it should be fully commissioning and ramp up or just trying to get an idea there.
Yes.
Hey, Jim how are you doing.
Okay.
Okay.
Go ahead, I was just going to say that.
Yes, I was going to add Michael you and IRA.
Are we going to say the same thing, but I think that the way to think about it is we still remain confident that we're going to reach our run rate goal next year.
But we just want to be thoughtful about what the next.
Three to six months look like we made clear that this is a transition we want to be mindful of that but with everything that we see.
We remain confident that we're going to hit that run rate.
If you want to add and Mike go ahead.
That was what I would say youre going to say the same thing.
Our next question. Thank you I would take the rest offline. Thank you guys.
Yes.
Our next question comes from Matt <unk> from D. A Davidson. Please go ahead. Your line is now open.
Thanks, Jim in your prepared remarks, you'd mentioned just the IRA and I just wanted to get maybe your most updated views big picture on how <unk> is positioned to benefit from a handful of things that have happened legislatively and just the overall policy backdrop, the latest of which you'll at least.
Mentioned, but maybe do a little bit of a deeper dive holistically on all that.
Sure.
Thanks, Matt.
So there is two major provisions of IRI. The first is 45 X, which is a 10% operating operating expense credit.
For critical materials and so.
We're confident that mountain pass will be will be covered by that so thats. A very you can look at the expenses, there and take 10% and thats that credit and that's.
Quite a bit of money. So we're excited about that.
The other by the way that is a perpetual credit.
And so that doesn't sound like some of the others mentioned with the belt.
The other is a 48 fee, which is an investment tax credit, which is a 30% credit.
Four.
For supply chain.
And so we are looking at that very closely I would I would caution in saying that the final regulations arent out yet so we don't exactly know how it's going to be implemented.
But.
We feel good that we should be able to find an opportunity with with all of the stuff we expect to build the battle.
<unk> be a pretty large benefit for us and again, that's just 30% of spend so.
If in theory, you go out and spend $1 billion on a magnet facility of 30% credit would be at $300 million of credit.
The other thing I would just say which is <unk>.
We have seen historically.
Bipartisan introductions.
Tax credits for permanent magnet production.
And so.
Hopefully after the new year when the new Congress is and maybe we will see something on that front as well, which would be an added benefit.
So that's sort of the backdrop.
Okay.
Okay.
Thank you and then just as a follow up Ryan could you help me understand how.
Page two production cost actually.
Retreated a little bit on a quarter on quarter basis, and then is there any sort of bandwidth range or that you can maybe help us out with what you think that might look like in Q4 or into next year the run rate of those costs.
Okay.
Sure.
The biggest change when you look at things sequentially is moving out of a quarter with a shutdown.
So you get sort of the double whammy in quarters, where we where we do our planned turnaround of both lower production and sales generally from a denominator perspective. In addition to the fact that you tend to have increased costs from onsite contractors and other maintenance maintenance expenses hitting at the same time, so if you sort of <unk>.
<unk> production costs over time, you tend to see that effect between the quarter. So hopefully that also answers. The second part of your question which is.
I would look more towards how things looked in.
The second quarter for the fourth quarter with the understanding that costs have continued to.
Move up over time as we've seen throughout the year and in addition.
As we start to commission stage, two we are continuing to bring head count on pretty rapidly both specifically in mountain path and elsewhere.
So hopefully that gives you a little bit of effect of kind of think about things sequentially.
Okay.
Perfect. Thank you guys.
Thanks.
Thank you. Our next question comes from Logan <unk> BMO capital markets. Please go ahead Robin Your line is now open.
Hey, guys.
Question on Capex, maybe you can elaborate on what exactly caused the push out or.
Spending for some of the stage three long lead items there and.
Does that mean that maybe the commissioning might be pushed out a bit as well at least for the metals and alloys are part of it.
Hey, Robyn, it's Brian I can take that.
I would not read at all into the timing of capital as relating to any change in schedule.
We obviously have to make a lot of assumptions.
Far out when we set our overall <unk>.
Capital guidance for the year and given the scale of projects that we've got going on.
It's often difficult to be able to predict whether a cash payment is going to hit on 12 31 or January one and that obviously makes a big difference for capturing the calendar year and so what I'd say in terms of the way to think about capex for the remainder of this year and sort of why the bit of a push out is as we complete the stage two commissioning.
As you would expect from us.
We are pretty maniacally focused on maintaining retentions and hold backs in areas as we get to the finish line and so all that means is that in areas, where we're putting the finishing touches on you will actually see the cash come probably right after that.
So that drives some of the effect and then as well for for the stage III long lead equipment. We just have not had the same level of requirements for upfront down payments on some of these long lead items as we've seen in the past and as we had seen in stage two and so we continue to make very good progress we have no change in expectations.
Patients from a timing perspective at this point.
But it is purely a timing of cash flow as opposed to <unk>.
A real change in schedule.
Okay, Thanks, and just as a.
Colorado and this is a bit more of a.
Forward looking question, but with everything going on on the.
No.
Legislative support in what could be coming from that.
How do you think about.
Early to say, but scaling out the magnum business across the deck I know, Jim you talked about.
Goals for potentially 10000 ton at some point.
Of magnets.
Again.
What's going on on the.
The.
What political support.
There is an added incentive to maybe speed that up assuming that things go smoothly initially.
Yeah. Thanks, Robin so here's what I would say, we and this goes back obviously the last few months.
The rancor, if you will about getting the supply chain home and expanded just continues to grow with everything we see legislatively geopolitically et cetera, but it's also been that way for a while we have not been demand constrained sort of speak to the level of demand just continues to grow but demand has not been a constraint.
Really the key.
Key constraint is execution.
A lot of people out there that like to talk we like to build stuff and get it done right.
And so we just we are moving as quickly as we possibly can.
We're making sure that we get things done right.
And if you just think back and I know you've probably heard me say this a couple of times, but when we went public a couple of years ago. We made clear that we thought the magnetics business, which was certainly a key strategic vision, but a 2025 plus event.
And now look at slide 11.
<unk>.
It's November of 2022.
And we've got we've got the shell built I mean, so on I think on every front we've been.
Been really accelerating this mission and we will continue to do so.
As the demand grows obviously that makes that increases the value of <unk>.
The strategic value of what we have but also just the value of all of our in placed assets.
So.
We will keep at it.
Yeah.
Great. Thanks.
Yes.
Thank you Robbie next question comes from Carlos de Alba from Morgan Stanley . Please go ahead. Your line is now open.
Yes, thank you very much.
Good afternoon guys.
A couple of questions on.
So could.
Could you comment on the trends that you expect to see on the fifth.
Feed grade and recovery.
Stage one.
Obviously as things are.
As you mentioned and they're going to be bumpy, but just.
You alluded to that.
In your comments around production.
What should we expect in the coming quarters.
Okay.
Thanks Carlos.
<unk>.
I guess I would just.
The thing that we're pretty pleased with the production in the second in the third quarter. It was the second best quarter ever compared to last quarter's record.
And that our current production is consistent with those 6000 ton and DPR plans.
As you mentioned this quarter this year third quarter had slightly lower feed grade compared to last.
And I think we mentioned.
In relation to the SK 1300.
That's.
We're looking to long term optimize the value of our reserve base and that does include including some additional lower grade material.
In our in our feed.
But.
We have a good idea of what will come out of the ground over the next 35 years, but what comes out in any one period and when we blend too well in a relatively tight band.
There is.
Slightly quarter to quarter.
But we're always working to optimize our reagents and our processes.
And experimenting some periods everything comes together perfectly some periods.
Normal.
But in general you'll continue to improve on an apples to apples basis. So I would say the same is true this quarter.
Compared to what we would have been with the same type of feed in the past this quarter was better.
I've mentioned a couple of times in the past, we're really optimistic.
Optimistic about the ability to continue to improve.
Concentrate volume production volume as well as quality.
So.
So we would expect that to continue.
Also in a nonlinear fashion.
A little bit of ups and downs, but generally getting better.
Yeah.
Alright, Thanks, Michael and does this affect your realized pricing in any way or are you able to concentrate the lower feed.
Two of the traditional average standard.
Because we do.
Yeah, Carlos we price on a campaign to Oreo.
Sure.
Sorry, Mike just.
To talk about pricing specifically the metrics that you see are on contained area, which obviously is what.
What people are after and what we get paid on and so.
I wouldn't expect any of the changes to impact our price on a per ton of Oreo basis.
Okay.
But Mike if you want to add anything else. Please go ahead.
Yes part of the improvement we make has the ability to upgrade.
To the same.
Or higher.
Really concentrate grade.
Back to the feed grade.
Okay.
Alright, Thanks, and just a last question for me is.
Can you comment on how the restart of the combined heat and power plant is growing and as you see.
The impact on energy costs.
You mentioned in the press release continue or is this just more something that you saw in the third quarter that we should not count.
On that repeating in the coming quarters.
I can talk operationally, Brian if you wanted and other cost.
We.
Again operating the site of the combined heat and power plant in the first quarter of this year.
It was.
Pretty large and in depth process of reconditioning, but we're really pleased with how it's operating.
It's operated very reliably.
It's provided also steam to a process. So we're really pleased with how it's going and we look forward to its going to stage two assets as well.
When and as we are commissioning them.
And from a cost perspective, Carlos part of what you actually saw on a quarter over quarter basis.
The.
The element of the costs that we flag as sort of pre stage two commissioning costs.
Is the fact that we were able actually to bring down our <unk>.
Cost per btu pretty significantly quarter over quarter by.
Looking at at managing our natural gas exposure and hedges and so from that perspective that was part of the reason that that was brought in a bit.
But in general what would you see is we are operating the CHP.
Somewhat purposefully inefficiently at this point by over producing due to the fact that we wanted to get this asset to Michael's point ready and operating very reliably ahead of bringing the stage two assets online and so we have to purposefully really.
Run it on a day rate basis, which drive some level of inefficiency and so that inefficiency will decline as we bring the.
The load from stage two online.
Alright, Thank you very antimicrobial angle reservations on the commission and start the commissioning stage two.
Yeah.
Thank you Carla.
Next question.
Our next question comes from George Santana that came from Canaccord Genuity. Please.
Please go ahead. Your line is now open.
Hi, everyone. Good afternoon, Thanks for taking my question.
I was wondering if you could possibly update us on your.
As we're approaching stage two on your off take agreements for oxide going forward I mean can you help us understand.
Where your archive land geographically is it mostly China outside of China any color would be appreciated. Thank you.
Sure Hey, George it's Ryan.
I can start us off.
Yes.
We continue to see really strong demand for for our oxide. Obviously, we've been on this mission to bring separated products.
To the United States for many years now we're very excited that we're well on our way to that.
See no impediments to selling our stage two products.
And key to our Michigan really is developing the ex China supply chain and in some ways that takes time, but at the same time, we continue to see.
Really strong interest for ex China customers.
You are well aware there remains.
China magnet business predominantly in Japan, and we continue to see strong demand for our product there.
And a growing ex China market, who frankly are are relatively starved for diversity of supply that they've had one answer to date.
And so we feel good about executing into that opportunity.
Obviously, there will be a mix of destinations that our products will go to.
And over time of course.
More and more of our outside will be used in our own vertical integration strategy. So we continue to see.
A nice and exciting market opportunity ex China.
We obviously will have a mix of sales into China, and certainly we'll grow.
Our own vertical business as well.
Thank you.
And if I could just one follow up any.
Any visibility on on China.
Quotas, obviously this year, we already know what would happen they increased by 25% I'm curious because it's opaque if you could help us understand a little bit how you see that progressing over the next few years at the expense.
If you have thoughts on that end.
What sort of capacity you see them having over the next call. It two to three years. Thank you.
Okay.
Sure.
So China as you hit the nail on the head with.
China is opaque it's always.
Hard to fully understand what is going on there.
We do think they will continue to move quota reasonably with their industrial demand. You may have heard me talk about this but just to kind of clarify or reiterate.
We've seen what we believe is a sea change in the general industrial psychology, where if you kind of think about the last 10 years versus the forward 10 years.
The key.
The key focus is making sure that there's enough product for their downstream.
Particularly as you see some of the major manufacturers expanding globally and there were some announcements this quarter actually.
<unk> about some of the Chinese Oems launching sales in Germany.
And so I think the way I mean this is again this is our house view, it's opaque, but I think the way to think about it is that that quota will probably grow comfortably with Chinese industry.
But then the question is and why we're so confident that we have such a tremendous opportunity here is is that.
The the rest of the world demand.
Supply chain demand is going to need a home and so.
When we think about that math with respect to what we produce and the availability and how challenging it is to get things online.
We feel very confident that that.
But again its a commodity so I say that with the all of the usual caveat I'd say, but we feel very confident that pricing will be stable and continue to grow quite a bit.
And so.
Again for what our opinions worth on that.
We just think there is there is so much ex China growth to happen.
Very bullish backdrop for our business of course this quarter last quarter, China has essentially shut down Europe is obviously in a very deep recession, and so youre seeing you've seen this pullback.
But.
I think that whatever the extent of this pullback in prices that we see out there it just creates it.
Sort of reflection of it just creates the jump back effect for when things get going.
Again demand wise that snapped back should be should be pretty powerful.
Thank you.
Sure.
And our next question comes from Nielsen that window from Bofa Securities. Please go ahead. Your line is now open.
Yeah.
Thank you operator, good evening gentlemen, thank you for the update Tonight.
I wanted to ask with the natural gas hedges.
It seems like those were very timely and wise thing to do.
Can you share any color on the tenders volumes or a percentage of total volume and price, which those were on plan.
Okay.
Well.
Thank you for the kind words about our.
About our management of cost there.
Ryan if you wanted to give some color we haven't disclosed a lot of a lot on that but why don't you maybe just help contextualize what that is.
Sure.
Say that.
We locked in probably about half of our demand today, which would would step down a bit to about a third of our demand over the next couple of months as we start to commission things.
Relatively attractive prices and toward the low to mid $5 premium btu.
We've also looked at.
Certain.
Incremental hedges starting once our demand for gas starts to pick back up that would sort of bring us back up to roughly.
<unk> hedged in a similar.
At a similar price point those are about three years in duration.
And so overall when you sort of look across the board thats kind of roughly what I would think about.
Okay, that's very helpful.
And then.
From this point forward do you have any sort of sense on a per unit of N. DPR, where you think the sort of cost will settle out.
Once youre up and running so maybe $2024 23 for us.
Okay.
Yeah.
Yes.
We haven't updated any of.
Of our sort of outlook or guidance on that I would continue to point you to.
The context that we've given over time and when we when we initially went public. So we don't have anything sort of more specific to point to at this point obviously.
There are lots of puts and takes there certain input prices have changed quite a bit our efficiency has got better and so certainly puts and takes and a lot of known unknowns, but at this point I would stick to what we've already we've already put out there.
Okay. Thanks for the color.
Thank you.
Thank you and our next question comes from David <unk> from <unk>. Please go ahead. Your line is now open.
Right.
Thanks for squeezing me in guys.
Jim I'm actually interested in hearing some of your thoughts on some macro movements right now.
Are you seeing any behavior changing on the part of Chinese refiners, with where they'd be sourcing feedstock from or attempting to preparing for MP.
Assessing their own concentrate and separating their own at mountain tests.
Hey, David So great question I think it's just so opaque in China right now given.
Given the fact that things are mainly are shut down.
We historically have seen and haven't seen any change in the fact of there are a number of refineries that want our product.
And so obviously at any point in time Theres, a number of them that are bidding for our product is.
As far as how how some of those businesses will react when they don't have our product, yes, I don't really we don't really have good color into that I'm, certainly I would imagine it's top of mind.
And.
It's it's certainly.
Our concern and it means that.
Our product will come out of the overall, obviously when we switch.
And are making oxides.
That will come out of the current market.
Sure.
But.
We don't really have good color into what people might be doing specifically.
Other than I would say that historically, we have <unk>.
Lot of people, who reach out to us wanting.
Wanting various things off take long term off takes or whatnot.
And.
That remains the case.
Nothing nothing major has changed on that front recently.
Fair enough.
Speaking of people, reaching out to you.
Just wanted to ask on stage here, obviously, you have an anchor customer with GM.
You guys have built this facility and very impressive timing at least with Michelle we talked about all the IRI incentives to accelerate potentially stage III. It sounds like youre getting inbounds from potentially interested customers.
Are all of those customers one coming from the automotive segment.
And two how are these customers do they ever bring up the price and how they're thinking about what they would be willing to pay relative to global baskets or is it just specific to.
What they would agree to pay you on sort of a negotiated basis.
Yeah.
Sure. So what I would say on that is it's definitely not just auto.
A number of the verticals I mentioned some of the key ones, but it's you know it's a.
A variety of verticals, whether it's you know.
Wind or or some of the others.
Even some that you might not expect so much. So there is definitely a diversity of of reach out and parties, who want to understand what it would take to to buy from us and our.
Getting educated and lots of conversations that we're having with a variety of them I would say that there's certainly a range there.
We have noticed a material change over the last year certainly even in just in the last six months, where before there was.
I think post Covid and the semiconductor shock there obviously was a lot of interest and you know Jeremy.
Russia, Ukraine happened.
And a lot of the supply chain have have not gotten better and I think that the.
Practical reality of the globalization.
Is really setting in and a lot more of the companies then aside from frankly, just like the Gms that were sort of the first thinkers on this.
And and so there is there is a lot of discussion and interest and then of course, the IR ABL set that into.
Into added added interest and we feel like we're in a great position.
In these conversations because we have we have a unique amount of product in and there's only so much we can execute and so we and I know you've heard me say this but I think it's just really worth.
Repeating is that we believe that our constraint is only in our our time and our ability to execute and we want to execute in a very high return on capital thoughtful way, we want to make sure that the stage three business is not.
Robyn Peter to pay Paul were.
We have a we have an attractive.
<unk> product and we want to make sure that we capture that value, but then if we're going to make investments downstream, we should have a very attractive return on that capital and frankly.
No one really disputes that I think I think that when you have conversations with people people understand that if we're going to invest capital we should get a.
A return on that.
And we position the company to have the fortress balance sheet that we have.
So we don't need to sometimes youll see people have to enter into deals.
Maybe are half deal have financing.
And we just don't have those considerations we've positioned the company to think solely about what are the most thoughtful ways of by building <unk>.
<unk>.
To get this done right and so that's a long winded way of saying we continue at this.
It's not a demand constrained.
What we think we can thoughtfully execute for our customers and partners and have made very clear that I.
I believe that one day, our magnetics business will.
We'll exceed the current expected implied output out of today. So when you say if you look at our 2023 run rate number and you say that that could be a 10000 tonne magnet business, just give or take kind of spit balling.
There is no reason why we couldnt grow a business beyond that once we develop the the leadership that I think we are developing in the magnetics business again that will take a lot of time, but the team is really amazing and growing by the day and I think again just back to this slide 11.
I'm very proud of it we just think about everything that's happening in this world and you look at on the left there is an empty field on the right. We've got we've got now the shell and I know Theres a lot of hard work to go I don't I don't mean to belittle that but we.
We are moving really quickly and just.
Just building the scale that will give us leadership in this space in the <unk>.
West.
Really globally.
No.
Hope that answers your question Jim.
It does thank you and good luck with the rest of the commission and final construction. Thank you.
Yeah.
Thank you.
This concludes our Q&A session for today for how Mckew back to Tim for closing remarks.
Okay. Thank you operator.
Thank you everyone. It was a great quarter and we've got a lot to do so we'll get back to work and everyone have a great night. Thank you.
Yeah.
Ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines.
Yeah.
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