Q4 2022 Mp Materials Corp Earnings Call
Good afternoon, ladies and gentlemen, thank you for attending today's MP materials fourth quarter and full year 2022 financial results.
My name is Tia and I'll be your moderator for today's call.
All lines will be muted during the presentation pushing up the call with an opportunity for questions and answers at the end. If you would like to ask a question. Please press star one on your telephone keypad.
I would now like to pass the conference over to your host Martin <unk> head of Investor Relations with MP material you May proceed.
Thank you operator, and good day, everyone welcome to the MP materials fourth quarter and full year 2022 earnings conference call with me today from emptied materials are Jim Lapinski, founder Chairman and Chief Executive Officer, Michael Rosenthal, founder and Chief operating Officer, and Brian Corbett Chief Financial Officer.
As a reminder, today's discussion will contain forward looking statements relating to future events and expectations that are subject to various assumptions and caveats.
Factors that may cause the company's actual results to differ materially from these statements are included in today's presentation earnings release and in our SEC filings. In addition, we've included some non-GAAP financial measures in this presentation reconciliations to the most directly comparable GAAP financial measures can be found in today's earnings release and the appendix two.
A slide presentation any reference in our discussion today to EBITDA means adjusted EBITDA Finally, the earnings release and slide presentation are available on our website.
That I will turn the call over to Jim Jim.
Thanks, Martin and thank you all for joining us today.
Let me start with an overview of today's call.
I will begin with the highlights of the year.
Ryan will then review our financials and Kpis Michael will then provide an update on our stage two optimization at mountain <unk>.
I'll return with a brief update on our stage III magnetics business and some closing comments and then we'll open it up for Q&A.
So let's get started on slide four.
Since founding M. P in 2017 and in our two plus years as a public company, we have been unwavering in our mission to restore the full supply chain to the United States.
We made substantial progress on our mission in 2022, and so far in the early part of this year.
Operationally the team executed we produced and shipped a record volumes again in 2022.
Mining and ore delivery outperformed our updated mine plan.
Maintenance teams stayed focused and relentless which was reflected in outstanding up times. The stage, one operations and engineering teams continue to drive improvements in mineral with recoveries, while also increasing our feed right into the mill.
Execution at this level requires lots of unsung heroes working in tandem taking on challenges anticipating future ones and ultimately thinking like owners.
So to the entire M. P team, we stay safe and we had another excellent year, great job and thank you.
For 2022 the price a N D. P R oxide and therefore, our concentrate product improved nicely versus the prior year.
The combination of better realized pricing and the record volumes produced by the team resulted in a 59% increase in revenue and a 77% increase in adjusted EBITDA.
The stage, one business generated $353 million in normalized stage, one free cash flow.
That is a 67% cash flow margin just for the stage one business.
The stage one business, therefore generated more cash flow than our entire capital expenditures for the year most of which consisted of our significant downstream investments towards stage, two refining and stage three magnetics.
We believe these transformational moves to achieve our downstream mission will improve our profitability reduce the volatility of our business and significantly expand our long term enterprise value.
Our ability to pursue such an important and exciting opportunity while self generating the resources needed to do so is amazing.
More importantly, it means we continue to maintain our fortress balance sheet with over $1 2 billion in gross cash and roughly 492 million of net cash at year end.
In a rising cost of capital and bifurcated economic environment platforms with a high return on capital opportunity set and a capital structure like MPS are scarce.
But as I always say, we must execute and I am proud of what the team has achieved recently, we started commissioning our stage two assets late in the third quarter and began producing roasted concentrate in the fourth quarter.
These were critical first steps in the complex stage two commissioning process.
We also advanced the heavy road separations project in mountain paths with continued progress on the front end engineering design and long lead procurement.
To remind you that had these project is the one where we were honored to receive a $35 million grant from the department of Defense, which was announced live by the president of the United States himself last February .
Next our stage three magnetics efforts are accelerating.
Recall that at the end of 2021 we reached an agreement to supply General Motors with N D P. Our alloy and magnets to support their entire LTM EV platform we.
We signed the G M definitive supply agreement and also broke ground on our initial magnetics facility in Fort worth early in 2022.
We have made rapid progress and our goal remains to begin delivering alloy to G. M. Late this year, followed by magnets in 2020 five.
And finally earlier this week, we announced a distribution agreement with Sumitomo Corporation.
Japan is the largest producer of neo magnets outside of China, and thus the largest market for refined N D. P. R products outside of China.
Sumitomo will serve as our exclusive distributor of N D. P. R oxide in Japan, and we will collaborate with them on the supply of rare Earth metals and other products. We believe this agreement is an important and beneficial development as we now position for stage two sales.
There were many other success stories of the company throughout 2022 including the extension of our positive environmental and safety record the creation of over 120, new jobs in California, Nevada, and Texas in support of our mission.
And the publishing of our inaugural ESG report.
All in we have been busy.
More on stage three end market view, shortly but first let me turn the call over to Ryan to run through our financials for the year and quarter.
Ryan.
Thanks, Jim we'll turn to slide six and as Jim highlighted 2022 was another very strong year of operations for the company.
<unk> volumes increased for the fourth year in a row to a record 42499 metric tons of Oreo and concentrate.
The operations and maintenance teams continue to perform with our up times remaining at roughly 95% for the second year in a row.
In addition, we continue to improve our throughput while optimizing our mineral recoveries. We believe there is incremental room for improvement here, but in the near term and the majority of our focus is on commissioning our stage two assets.
We shipped a record 43198 tons of Oreo and concentrate during the year, a 2% increase over 2021. The increase was generally due to the timing of shipments as a reminder, our concentrate shipments have generally tracked our production volumes over time movie.
Moving forward there will be some lumpiness as we transition to stage two products, which I will discuss in a moment.
On the top right chart, you'll see that our realized price per contained Oreo time increased 55% to $11974 driven primarily by the strong demand for N V P. Our feedstocks and the market is.
By Chinese macro volatility over the course of 2022 continued EV penetration supported rare earth pricing.
Lastly on the bottom right graph, our production costs when excluding the ramp in expenses ahead of our stage two commissioning increased a little over 5%.
Despite some fairly significant inflation in 2021, and 2022, you were able to increase production efficiencies enough to maintain a fairly flat cost per ton for our concentrate.
Note that this operational Kpis as reported focus is purely on our concentrate business. So we will evolve. These kpis over the course of 2023 as we ramp our downstream products.
Moving to slide seven on the top left you will see revenues increased 59% to $527 $5 million driven by the P times Q effect of both higher realized prices and slightly higher shipment volumes.
And given the significant operating leverage we get from higher pricing you will see on the top right that our adjusted EBITDA increased 77% in the year.
That impact is also shown on the bottom left graph, where our adjusted EBITDA margin increased eight percentage points to 74% in 2022.
And finally on the bottom right the significant impact of this leverage creates an adjusted diluted EPS, which increased over 102% to $1.68 per share.
I will discuss some discrete tax items that impacted Q4, but for the full year, our strong earnings demonstrate both our enviable operating leverage and cost structure, but also our strong tax position as a domestic producer of critical materials, which will only get better as we transition to stage two and take advantage of some of the benefits of.
The I R a bill.
Moving onto slide eight and our fourth quarter operational Kpis, you will see in the bottom left that our production remained strong in the quarter up 2% versus last year at 10485 metric tons of Oreo.
Keep in mind that we had a regular one week maintenance shut down early in the fourth quarter, which was the driver of the 4% decline in sequential production.
Sales volumes on the top left increased 12% versus last year's fourth quarter, and 1% sequentially again simply driven by the timing of shipments.
We mentioned last quarter that we would ultimately be diverting about two weeks of inventory into the stage two circuits or a little under 2000 metric tons, which would occur over several quarters.
So while we began this process in the fourth quarter the impact was not material to our sales in the quarter.
As Michael will discuss in a moment, we will have some roasted concentrate available for sale in Q1, but we do expect to begin more significant charging of our showcase as Q1 progresses.
Moving on to the top right you can see realized pricing, albeit very solid at $8515 was down compared to both Q4 2021 in Q3 2022.
About half of the year over year decline was due to unfavorable changes in foreign exchange as the U one weekend versus the dollar.
In addition, Chinese Covid lockdown and the impact on the Chinese economy likely reduced demand for MVP are slightly.
Looking at the volatility in the price of N D. P. R over the last year from a high of approximately $175 per kilogram and a low of 83, it's very important to note that fairly modest changes in supply and demand can move the market price fairly substantially. This is one of the reasons. We are so confident in the long term growth.
Trajectory of our business given forecast of N DPR demand over the next decade, or so or three times todays output.
The challenge of the world producing enough rare Earths to keep up with this demand is clearly a favorable indicator for MVP R pricing overtime.
I'd note that some of the positive leverage we saw in concentrate realized prices as N V. P. R prices went higher in recent quarters ended up going in the opposite direction as prices decline.
This is in part driven by the variability in the implied discount we have to take and selling an intermediate feedstock to refiners overseas.
While this effect will be moot once we're selling our own separated products. It is important to note that the realized price growth or decline in our concentrate sales over the course of this year as always we'll outperform is M. D PR market prices rise and generally underperform as they decline and of course, there was also the timing and volume of shipments.
Which impact our average pricing in any given period.
Moving to the bottom right graph, you will see that our production cost per metric ton increased 26% year over year, and 17% sequentially driven by the timing of maintenance costs during the quarter as well as higher payroll expenses, including an increase in employee head count to support the expansion of stage two operations and the impact.
Cost of living adjustments, which we talked about last quarter.
The year over year comparison was also impacted by higher fuel costs as well as the reconditioning of our CHP plant at the beginning of the year, which is running sub optimally until we get to full stage two power demand.
Excluding the stage two related cost stage, one production costs were roughly $600 per ton in the quarter impacted by the same factors just discussed, but primarily driven by the timing of maintenance events across our mining fleet and our crushing facilities, which we view as discrete.
Flipping to slide nine on the top left our revenue declined 6% compared to the fourth quarter of last year as the 12% increase in shipping volumes was more than offset by a 16% decline in the realized price shown on the previous slide.
Similarly, our quarter over quarter revenues were impacted by a more significant decline in sequential realized pricing.
And on the top right graph, while adjusted EBITDA declined 23% year over year, mainly due to lower realized pricing, we still produced a very solid $55 million of adjusted EBITDA in the quarter and although not on the page $32 million in stage, one normalized free cash flow the lower realized pricing also flowed through to our margins.
Which were nonetheless, a healthy 59%.
Importantly on the bottom right you.
You will see that our adjusted diluted EPS increased 40% over last year's fourth quarter and 17% sequentially.
These changes were driven by two factors. The first was the impact of the higher interest rate environment on our strong cash and short term investment balance in the quarter, we generated nearly $11 million of interest income versus virtually zero a year ago. These total show up on the other income net line of our P&L, which you can find to be appended.
Six of our slide deck or in our press release the.
The second factor was a large tax benefit in the quarter.
<unk> of new assets coming into service for GAAP purposes drove a change in the full year effective tax rate, which was recognized in the fourth quarter. We.
We generally benefit from material tax deductions, including foreign derived intangible income and depletion in excess of basis, which we had initially forecasted would not apply for this tax year, but indeed end up providing us permanent tax benefits recognized in 2022. In addition to the temporary benefit of bonus depreciation on the assets we get.
Placement service nodes.
Note that the timing of certain assets entering service. They continue to drive some volatility in book and cash tax rates as we complete our investment program.
Absent this impact I would expect our tax rate to remain in the high teens until our geographic mix materially shifts.
Turning to slide 10, we generated $353 million of normalized stage, one free cash flow in 2022.
As Jim mentioned earlier that more than covered the $308 million of growth capex during the year, which covered the significant completion of stage two as well as material investments in the stage three building shell engineering and early equipment costs very little spend remains in 2023 for stage two with the overflow.
In prior calls relating mostly to timing of payments.
Importantly, our strong cash flow. This year has allowed us to keep all of our powder dry even as we've made tremendous progress on our mission.
We expect Capex this year to be roughly in line with 2022 with about $300 million in expected growth capital primarily supporting stage. Three in addition to our other growth projects.
From an earnings perspective, as we have talked about for some time 2023 will be a transition year as we work to ramp the separation facilities. We will continue to sell concentrate into the market with the revenue and cost profile you are used to seeing.
Michael will discuss our commissioning progress in more detail in a moment, but as it relates to our annual results I would continue to expect stage two separated product sales to begin in the second half of the year and be back loaded.
Park, because there will be added time to recognize revenue as we build out our sales channel and qualified products with customers.
These sales would also initially come with a lower margin profile ahead of us scaling to run rate volumes and profitability and.
And of course, some of our initial production will be shipped to Texas to begin to metal making process delaying the actual recognition of sales until we deliver the end product to general motors.
Importantly, we will continue to prioritize the long term and make the right investments in our mountain Paas people and processes in 2023 to support separated product production for decades to come in.
In addition, we expect to grow our head count and spending for stage three with revenue for magnetic products not far away.
Regarding cash flow, we discussed are spending plans a moment ago and have already flagged the working capital investments, we expect to make as stage two ramps on that note. We are thrilled about the distribution agreement, we announced Tuesday with Sumitomo to facilitate oxide sales into Japan, and we will continue to invest in broadening our geographic reach.
As our markets grow.
With that I'll turn the call over to Michael for a more detailed update on our state shoe progress Michael.
Thanks Ryan.
It has been a productive and fulfilling your months of operation and commissioning, though of course not without its challenges.
On the stage one on the operational front during the quarter, we experienced considerable external headwinds from construction commissioning and weather.
But our teams have done an excellent job remaining focused and we were able to achieve continued improvement in mineral recovery at the mill.
Look at uptime was slightly below the prior year, but exceeded our conservative estimate.
We made good progress in pre commissioning and initial commissioning activities that they do.
This also included completing the remaining upgrade and pre commissioning work of legacy circuit.
Now already for you.
We completed our first quarter operating the new concentrate filter drier in roadster, a great picture of which is shown on slide 11.
Broadly speaking this process is playing out as previewed last quarter.
With a certain expected challenges proving easily resolved a large number of instrumentation loosens tissues that are also easily resolved.
A certain proportion of known unknowns that have readily identifiable resolution timetable.
New reliability issues that will be worked out overtime and then a small number of unexpected issues that generated the greatest headache.
Through it all we made great progress.
The primary process equipment is running quite well and many of the initial bugs that are in the rearview mirror.
Even as we experiment with and tune the equipment, we are able to consistently produce roasted concentrate that meets our desired specification.
The initial testing of the roasted corn suggest that it should achieve the leach yield in theory in rejection that we're targeting.
This is critical to our cost competitiveness and production throughput.
Initially the vast majority of this product will be sold.
But as the subsequent circuits in the flow sheet are brought online.
Laura will be directed or invested towards making oxide.
There are a handful of remaining issues that we're addressing before we were able to run at our full desired run rates through the calciner.
But we will continue to attack these over the coming months as we had full steam into commissioning the balance of the stage two assets.
As we approach the end of the first quarter, we have commenced commissioning all of the remaining stage two assets.
So of course, some are farther along than others.
The most critical next step is putting into operation or at least they're good.
This includes legacy equipment that will be operated under new process condition alongside newly installed equipment and processes.
Continuing the process flow.
Pregnant Leach solution will then pass through legacy purification and separation circuit.
The legacy equipment have already completed their re commissioning activities, while new editions are currently being commissioned.
As with Leach, we expect a period of troubleshooting and rebalancing when the new feed begins to flow.
The last circuits and the process will be N DPR, finishing a portion of which can be seen on slide 12.
I would reiterate that commissioning is and will be a non linear process.
It is a series of two steps forward and one step back.
As it pertains to our production ramp target.
We would not expect commercial scale production of N D. P. R oxide yet in the first quarter.
Well, we look forward to providing additional updates on our ramp in the Q1 earnings call.
It is important to remember that the startup with any one circuit does not determine the timing and ramp towards the final run rate of production.
Britain circuits will be commissioned and troubleshoot it quickly and reach our desired run rates of production.
Others will overcome problems.
Take longer to ramp up throughput.
And others will achieve run rate production easily but struggled with reliability and uptime.
All in all however, we remain confident in our targets.
We are more excited than ever to be putting four years of planning of stage two into operation.
While we expect 2023 to challenge us to a greater extent than anytime since 2018.
We remain extremely confident and proud of our team and look forward to progressing in communicating our production ramped in subsequent calls.
With that I'll turn it back to Jim.
Thanks, Michael.
Turning to slide 13.
This is a recent aerial picture of our Texas magnet manufacturing facility you.
Can see a lot of construction activity and most of that action is now taking place inside the building given that the shell is complete.
Since we last talked in November most of the key public utility infrastructure has been installed gas.
Gas water and with electrical finishing up shortly.
We are also beginning to see some of the long lead equipment arrived, including the HVAC systems, which are now being installed.
And the procurement of other long lead production equipment continues.
We also now have a fully functioning magnet research lab in place enhanced by a number of key recent hires and with more to come as we continue to expand the team.
Our magnetics team should all be able to move into the new Fort worth facility by late summer.
If you look closely in the picture at the top right of the facility you will see were sizable office and lab space connects into the factory.
Our goal is to make this site the center of the most cutting edge magnetics efforts in the world.
To update you on the market and conclude the prepared remarks, I would like to reiterate that I remain bullish on the outlook for our business.
In 2022, despite an overall market contraction global sales of passenger evs climbed more than 50% to approximately $10 3 million units.
There has been a profound global search in EV adoption and action in the United States, which has trailed China and Europe is accelerating rapidly on the back of policies like the inflation reduction Act and a dramatic increase in new models available to consumers.
And bear in mind that these are just one of several downstream applications driving growth. We also see growth and opportunity in wind turbines robotics consumer electronics and even power tools.
When you put this altogether looking out to 'twenty 35, with analysts predicting a three fold increase in demand for neodymium magnets and strong corresponding growth for N D. P. R E.
A threefold increase in N DPR demand would mean the world likely need the equivalent of more than 15 mountain passes coming online over the next dozen years.
Keep in mind that mountain Palace is one of the largest producers of railroads in the world today.
Assuming such economically viable ore bodies were identified and cleared multiyear permitting processes. It would still take years and multiple billions of dollars to bring that supply to market.
Therefore, even though the macro economy will usually drive short term volatility in pricing. We remain convinced that there are huge tailwind for our sector M.
M P's in place assets are therefore extremely valuable.
And our vertical integration strategy, coupled with our fortress balance sheet will enable us to leverage all aspects of our platform to create additional value.
With that let's open it up for Q&A.
Operator.
We will now begin the Q&A session.
I'd like to ask a question. Please press star followed by one or you touched on keypads. If for any reason you would like to remove that question. Please press star followed by two.
To ask a question press star one.
As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.
Well pause here briefly to allow questions to generate and killed.
The first question comes from the line of Matt Summerville with D. A Davidson. Please proceed.
Thanks couple of questions I guess I wasn't aware that between stage, one output and actual oxides that there would be an intermediary product in the form of roasted concentrate available for sale can you talk about you know what sort of quantity we might be looking at over what what kind of tea.
<unk> frame and how much value does that particular process step add to stage one output I E. How is that priced in the market and then I have a follow up.
Sure, Hey, Hey, Matt its Ryan I can take that and then we'll have a.
Mike talk a little bit about roasted gone and what it means for us and our progress.
As it relates to the roasted concentrate there was not a material difference in economics in terms of selling price. These IV the incremental cost of getting through the roasting step.
And in fact, you know the way I would think about the available volumes is it it's not going to be a material departure from what you've seen.
In terms of regular concentrate sales over the next quarter or so as we mentioned.
We should be and we are all preparing for incremental volumes to begin charging charging the downstream circuits over time, but this is a relatively short stop on the way to a production of finish oxide products.
Mike do you want to talk a little bit about <unk>.
Roasted con and what that means for the process.
Yeah.
Sure. Thanks Ryan.
Producing high quality roasted corn, maybe the most important single step in ensuring the close competitiveness.
All of our separation and finishing assets.
The production of roasted corn is important very critical transition point for stage, two but it itself as a product itself is not.
AME.
But as I've mentioned in the prepared remarks, the initial testing on that roasted corn give us really high.
High confidence that the yields that will get out of that from your preseason to leach yields of getting N D. P. A recovery.
And rejecting the cereal, which is a critical part of our process.
We are going to be in the ranges that we're targeting.
And this is really important for producing region expense and improving the quality of the food that goes to the purification and separation stages.
They're also a minor energy savings and maintenance savings from that as well.
So it's an important product, but not a not a sudden board and long term sales growth.
Yeah.
Understood and then just as a follow up.
One of you guys mentioned in your prepared remarks that you're feeling more and more confident about incremental no real recovery coming out of stage, one, but you know maybe taking a pause on that for obvious reasons as you're ramping stage two.
<unk> wise, how should we be thinking about when you can go attack that opportunity and I guess, how much upside relative to you know the output you you generated in 'twenty two could could we be looking at based on your domain knowledge at this point around that.
Hello, This is Michael I'll take that.
Well.
I think I've mentioned this in the past before.
We do have a lot of optimism that there is significant opportunity to improve.
The way, we do things in a flotation process, we're a beneficiary of some process and in the results of that.
Hmm.
We have a team.
<unk> team dedicated to that effort.
We will continue to work towards that.
Irrespective of the progress of stage two so that's not hindered by the by the Proteus, maybe some of the implementation could be impacted them.
This is my overall destruction, but we're pressing ahead with that and I think there'll be incremental steps incremental progress.
Well, we hope at some point.
<unk>.
So great progress, but we can't exactly predict the timing some of it is just the ink.
Incremental process improvement and some is more.
Small investments that we believe could have a significant improvement.
Hopefully that addresses your question mostly.
Yes, Thank you guys.
Thank you.
The next question comes from Nevada, David <unk> with Cowen. Please proceed.
Yeah.
Congrats Jim.
Michael I appreciate you guys, taking my questions. This afternoon.
Thank you Hi, I'm sure you do it.
I don't have it thank you.
First I just wanted to start off on the Sumitomo agreement.
Obviously, a landmark agreement I'm trying to understand I know, it's early but if you could give any.
Sort of guidance around the potential volumes that could be sold here should we think about this as sort of consuming all of the available on DPR oxide that you would have for sale not consumed in the stage three operations for now.
And would there be an inherent premium that you would expect in terms of pricing relative to what you would sell into China.
Sure David It's Ryan I'll take that.
Obviously, we're pretty excited about our deal with Sumitomo.
Horton step as you mentioned.
There are also market in Japan, which as you know is the largest magnetics center outside of China.
The way I think about this agreement is it's a distribution agreement you know this is a relatively proven and efficient way to get to market in Japan.
I think it's pretty clear that there's a growing need for diversity in Japan sourcing and so what we see is with their desire to grow production.
And our view of unexpected demand supply imbalance coming in the market, we and clearly sumitomo are confident there's gotta be a fair amount of demand for our oxide there.
So.
Overall, it's an exciting first step for us with a major player in the market.
As we talked about certainly an opportunity hopefully to expand the relationship over time.
I think the other thing I'd say on the economics part of your question.
As you've heard from US just a minute ago, we certainly believe and the demand picture in our market and so we do expect to transact on market based prices.
And so importantly, you know I'd say the the terms that are offered to the end customers in Japan remain in our control, we haven't locked ourselves into any particular model and and so from that perspective, we'll continue to do well.
What's best for the business.
Thanks, Ryan and I have a maybe kind of a follow up for you you talked in your prepared remarks about the benefits I know.
Perhaps 10 days ago, the treasury kind of defined.
What would be eligible under 40 H C.
Can you give us a sense on the line of of.
And what you think is eligible at this point in terms of your capital being spent on the expansion projects are for 48 C and.
What would you would certainly see on their production.
Credit side, and when you might think that the timing of those benefits would be realized.
Okay.
Hey, David It's Jim.
So we're watching all of the 48 C stuff like you are as well it's still preliminary there. There you have to do the kind of the government is coming out with with stuff and then there's going to be a period of submitting and so it's still early to to make sort of any kind of specific predictions.
Our thoughts are.
Could you as to how we're thinking about that obviously, we're watching it very closely.
Yeah, the only thing I'd add ons on 45.
Yeah, just real quick on.
45 Yep.
Yeah, the difference there being.
Obviously different being a production tax credit versus you know based on capital and so from everything we see I think the guidance there is a bit more clear and straightforward and we will be producing a product that we believe clearly qualifies them to the.
The 45 X framework and so as.
As we ramp our oxide production, we expect to start benefiting from that by default as we produce those products.
Sounds good guys. Thank you.
Okay.
Okay.
Thank you.
The next question comes from the line of chlorine blank God like Deutsche Bank. Please proceed.
Hey, good afternoon, and thank you for taking my question I'm, just trying to understand better maybe what could be one COO and maybe you know the cabinet itself politics. Sharon says then you'd be definitely yeah, and I know you don't give them defined guidance, but maybe if we go from call Center.
How comfortable or do you see where the stress test you mean, almost flat price I think you mentioned or we think going through a transition and I mean, maybe know what margin to loved them and I'm thinking here. So I'm just trying to frame like out of them.
You know a cadence for the year.
Sure Hey, Karen this is Ryan I'll take that.
What I would say is our expectation obviously that we laid out in our prepared remarks was that you should expect us to begin to transition to oxide sales in the back half of the year, obviously there'll be a little bit of a gap between as we bring production online versus when were recognized.
Those sales into the P&L.
And so we wanted to two importantly make that distinction I think to your point.
We look out at at the way several folks have modeled the business one of the reasons. We flagged to you. All you know the margin profile as you know certainly we feel as Michael laid out.
The results that we've seen from our roasted concentrate you know, we're more confident than ever and what our eventual yielded results will look like as we get to run rate, but the important thing to keep in mind is just you know we've said this over and over again 2023 is a transition year. So you can't expect our first kilogram of bauxite to come out at the same cost profile.
As you know the kilogram, that's coming out once we hit run rate.
You know from that perspective, hopefully that gives you a little bit of color.
I'd say that while we make the transition certainly we've got our concentrate business and our roasted concentrates business in the background.
But we will continue to build the team and get operators online ready for production and commercial production of stage two as we get further into the year.
So those are sort of the puts and takes from a production and sales perspective.
Alright, Thank you and then sorry, if I missed it but did you provide any commentary on the market I'd say, if I can tell it looks like China pricing and kind of maybe why you think it could go over the next six to 12 months.
Sure I'll take that so I don't typically provide any commentary on pricing just because.
Ultimately its a commodity and and it is volatile I think China, China has been it's been really tough as it always is to read the tea leaves in China.
You know because it's China.
And in particular, given the opening post COVID-19 as well as Chinese new year, and all the moving parts and I think I think if we look at the markets over recent months there were sort of some excitement just in advance of the Chinese opening.
With the expectation that there would be sort of an explosion of growth out of that and then sort of a pull back around new year and sort of maybe a settling in as far as the world figures out what it means my.
My guess is that you know.
Some of the some of the things driving pricing in the very short term are probably the the non critical areas for the long term and what I mean by that is <unk> and I. Just think you might find it helpful. Karen if if you.
Listen to if you remember in my prepared remarks, I referenced analyst research that you know kind of talk about the market for M. D. P. R. A N in magnetics being three times the size. It is today by 2035 and that that's actually if I can.
For people who are interested in it that's not my data that's been adamant intelligence Research report kind of looking at the the rare Earth magnet market outlook, what's really interesting about.
About that and the reason I mentioned it is that if you look at the the market today for N D. P. R demand.
In the growth what are what are the current high growth areas, which of course, there will be some others, but in evs and wind turbine that today is only.
Little under 20% of the overall demand and the rest is kind of standard things in general auto or consumer electronics or some of the others and so that other 80% might be you know some of it will be much more volatile impacted by the economy.
In the short term, but then if you think about the 20%.
Many have heard me say this before but if you think about that 20% that is the ultra high growth.
Growing compounding it takes 30% a year or whatever as you look out a decade from now.
Just because those areas get you to maybe three times the market immuno and 15 years from now or so.
Today, let alone the fact that that other 80% that's kind of like a GDP influence area also may have some other areas that are high growth like robotics or power tools are so again my my you know.
My guess is that the very short term is that.
We've sort of seen.
You know.
Weird Chinese opening in and sort of general malaise in the economy, but.
The areas of growth that we think are critical for long term pricing and you think about long term I mean, just a couple of years out R. R.
Through all of this are growing extraordinary and so we feel really confident that that's a great trend for us.
Alright, thank you for that color.
Thank you.
The next question comes from the line of Carlos de Alba with Morgan Stanley . Please proceed.
Yeah. Thank you very much gentlemen, congrats on all the progress a couple of questions just coming back to this when he told me agreement.
Is there any color you can give or you disagree.
Disagreement.
Take or pay.
Are there any specific volumes attached to the deal Oh and any color that you can you can provide there would be useful and then.
My second question ease up around Capex of 300 million guidance for this year senior notes due two 2022 I think I remember you mentioning that 700 million whether they are comprehensive capex that you saw for us if they should do at a state Street, how do you see then and.
The overall 700 million in violence that you're still remains in place or has there been any any shift on that number.
Hey, Carlos to try and I will I can probably hit both of those quickly.
In terms of the Sumitomo agreement.
This is a.
Pretty standard type of distribution.
Agreement and so you know volumes and pricing is going to be market based and in consultation with our end customers.
You know as I talked about clearly there is a desire and need for incremental volumes and diversity in our in Japanese sourcing. So we are confident there's a there's a fair amount of demand for our upsides there.
And so ultimately yes.
I think you're probably referencing some of our existing distribution agreements and ultimately over time, we're gonna have different contract terms and contract types and so ultimately that's that's the most efficient way for us to sell into the Japanese market and at this.
At this point.
As it relates to your Capex question.
What I would say there is in terms of the overall $700 million guide, which you are right that was an all in number thinking about the completion of stage two bringing online the fort worth facility as well as the heavy roller separation facility at mountain pass and so if you take that 700.
We guided you to I guess almost exactly a year ago I would say in terms of what we see in those projects other than sort of the normal inflation that I think everybody has seen for materials and things like that there were no material departures from from that guidance. So we still.
We still feel good about that number.
You saw that of the Capex, we reported this year about $308 million was growth capital for this year, we're talking about another $300 million in 2023, and so we continue to expect to be on track with the investment program that we communicated to you guys.
Alright, great. Thank you very much right.
Thank you.
The next question comes from the lineup George Yeah.
Kenacort. Please proceed.
Hey, good afternoon, everyone and thank you for taking my questions.
So so recently China. According to press reports has begun restricting the export of several technologies related to M. D. C. B magnet production and rare Earth refunding and I'm curious as to whether you think that will impact your ability to make magnets here in the United States.
Sure, Hey, Hey, George.
So no we don't think that will impact our ability at all we've been.
On this mission for quite some time, you certainly see the pictures of.
But where we're at and we have a long way to go but we've got a really incredible team and Ah you know I think I think if anything it just speaks to the importance of what we're up to and how important it is to have diversity in the supply chain for no. Other reason that single point of failure risk and.
But to directly answer your question, there's no specific magnetic technology that we're counting on out of China or anything like that so it should have no impact on us.
Thanks, and as a follow up here.
I'm sure you've noticed that there have been seen.
It seems like every day, there's an announcement of some OEM or some larger companies, taking a stake getting or outright buying mines related to lithium or other metals and I'm curious as to why you think we haven't seen that flurry, yet when it comes to rare earth material.
And whether you think that that's possibly on the come in and I will give you. Some credit here that this is something that you've talked about.
Over the last couple of years is happening and it's finally here, but we haven't really quite seen it impact you.
Your sector, yet any thoughts there I appreciate it. Thank you sure well, yes sure Great question I mean, as you know I've kind of been talking about this for a while what I call. The a O L time, Warner moment of the auto supply chain, where people realize that you know that.
These worlds need the need to collide I.
I think it's still early innings. So when you say it's here I mean, I think that this is it's sort of a just beginning process.
We'd argue as far as rare Earth I mean, the practical reality is is that.
There arent that many parties out there you know lithium is pretty widespread.
Around the globe. So you know so our copper nickel somebody you know the other commodities that you might think about but with rare Earth. You. You know you know who the key players are and I think we.
Executed our definitive agreement with GM about a year ago, and so certainly you know G. M is now has recognized with space and it's very early and you know as.
As I've said.
Repeatedly we have had conversations with lots of Oems are our deal is not exclusive and we expect to build a bigger broader magnetics business, but so.
So I think I think the answer to your question is that it has a touch.
Touch their aerospace I think what's a little bit unique about us is that we have.
We have a remarkable asset that we we are cash flowing today. So when some of these other deals you have essentially.
Essentially greenfield sites that need a lot of financing they need to get potentially government capital other equity capital and so some of the deals that you may see our you know offtake slash financing type deals and every deal is going to look different but you know so for ours.
We're obviously very proud and excited of the deal we have with G M and I think you'll see a ton of.
Big variety of deals in this space and you have certainly you you're seeing some of the same rumors are that we're seeing but I think all roads lead to it speaks to the value of the franchise that we're building. So we're obviously excited to see all that in it obviously it feels really good to know.
Predicted something happening and seeing that come through and I'll I'll continue by saying that I, just I think that.
You know you're going to see a lot more about.
Yes.
Thank you next question the next.
The next question comes from the line of been Kilo with Baird. Please proceed.
Hey, guys.
Along the same lines.
Uh huh.
Jim I guess Purdue how do you think about <unk>.
Off take agreements, although that you guys want to maximize about before signing off take agreements, but just with the volatility we saw this year.
All the Oems.
Lucky.
Or other materials.
That has anything changed in your view.
Long term agreements.
Sure Ben I think it connection to and and I think I can expand on on what I was saying a little earlier, but.
I'll take the offtake theres a variety of off take agreements and so I think some of the recent deals you might be seeing its always hard to tell what component of that offtake financing versus what component of that offtake is just okay, right and I think the good thing about the strong.
Position that we're in with with the fortress balance sheet that we have is that we don't need to view off takes as any form of financing right. We can be totally agnostic as far as that goes we can look at it.
Uptake or or any kind of structure as what is the highest return maximizing value option for shareholders and so you know as I've said from the very beginning we'll continue to do that and where we're in a really good position and I think particularly in our space and maybe I should have touched on this earlier, but because of the platform that we have I do think.
And maybe it's a.
A little early.
But maybe not.
We're going to have some exciting opportunities given our platform you know to to to be in situations, where maybe you know sort of earlier expectations of a things didn't work out so much and we can kind of come in and provide.
Solutions, and so I think that's sort of an exciting opportunity for us but.
We're seeing such an early stage of growth in the space that you know who knows but I would also just say, obviously I kind of say this repeatedly and I appreciate the answer but we'll we're not going to you know we're not going to telegraph those before they happened. So if we if we do something you'll you'll see it announced.
We're not going to you know.
Sort of say Hey, we're pursuing this off takers I don't think or whenever it will you know we're gonna you can imagine behind the scenes, we're having a conversation that we're trying to do the best that we can do to to create value in and it picks up it it's exciting.
Thank you.
And Michael Yeah, you bet.
Between book, a couple of times, but if we think about the flow chart for me try roasting to separation.
I think.
Is there one more difficult steps.
Although I think you said this.
Sure.
Your opening statement better but.
I think separation gets people tripped up is that wrong or or what do you worry about most.
Okay.
I think.
It's important that we do the leaching right if we want the other parts.
Yeah.
But I don't think I would say one part is easy.
Yeah.
Obviously, they all ultimately up to work the way we need them to.
Well.
So we're optimistic about all.
We're very excited to be.
This evening with Leach another way, we think it should be.
Alright, thanks, guys.
Yes.
Thank you. Thank you.
The next question comes from the line of Lawson Winder with Bank of America. Please proceed.
Yes.
Thank you operator, and good evening, gentlemen, nice quarter.
Maybe just one question for me the.
The research center, I mean, developing cutting edge maintenance research center in Fort worth in a matter of years sounds very very exciting and also potentially very expensive.
Maybe you could give us an idea of what the annual run rate cost of running a cutting edge research center would be and then.
Are there challenges in the staffing.
Thanks.
Yeah.
Sure well the good news is there's nobody positioned.
Really in the Western World really outside of China to co lead in this effort.
So unlike a lot of areas that that might be sort of more competitive out there in the world given our set of assets.
We have that unique position, where we can we can as I like to say talent begets talent scale begets scale were sort of in the early early days of this and so it's an extraordinary opportunity you know as far as where the the getting the talent I mean, the good news is.
If you're if you're in metallurgy or magnetics M. P is the place to be right, where we are we had a lot of talent and that's reached out to US we brought some incredible talent on board.
You will continue to do that and lastly, what I would tell you is I mean with this cost.
It is nothing compared to the opportunity and I hope that we've at least earn the right to.
Have you believe us when we say that we are maniacally focused on shareholder value and we you know we're not looking for a research project, we're looking to create a magnetics champion and and so everything that we do is geared towards that and when we think about research.
These are not this is not like a.
I think tank. This is research oriented towards creating a franchise that's gonna be enormously valuable in the in the decades to come so.
Thank you.
A great question, because we do ask ourselves that question every person that we hire every penny that we spend but it is it is a commercially focused resource organization.
And I'm very confident that overtime well.
Will yield a.
Extraordinary returns from that investment, but it may take some time right. This is this is very long lead stuff.
And so you'll you'll see those impacts are in the in the company today it'll be in the company and in the near term, but I'm you know I'm very comfortable that that theyre going to pay off in many many multiples and b.
We'll be glad we did it.
Okay fantastic Thanks, Jim.
Sure.
Thank you the.
Your next question comes from the line of Bobby Singh Heartwood, North kind of capital markets. Please proceed.
Yeah, Hi, Thanks for taking my question I.
And I think Ah right Esteban Beth and I apologize if I missed it I just wanted to get the production cost in terms of dollar per ton to 1928 figure.
How should we think about like how does how do you give up in as we move on to include three as you get better messaging CHP or you know how how.
How should that flow and what should we be looking at the run rate for the production cost as we move forward.
Yeah sure Robbie.
What I would say, we don't provide specific forward looking guidance, but just to give you some color on what's in that that number so looking at the reported metric.
That you mentioned a moment ago, the largest drivers there as you'd expect our costs related to stage two that find their way into Cogs, even at this point before we're producing and so for example, certain personnel expenses as we build the team you mentioned at the combined heat and power plant.
That is is running sub optimally until we've got the full stage two power draw, but one of the things we talked a little bit about last quarter was our gas hedge position and a significant portion of that did not come into effect until January 1st. So we were we were exposed on on some gas prices in California.
Prices with all the weather there.
For a good portion of our burn in Q4, and so that had an impact that we don't expect to repeat.
I guess pulling the onion back a little bit more and just trying to pull out the cost that I. Just mentioned that are that are not related to stage one.
Stage, one standalone costs were closer to 1600 in the quarter I'm, a little bit higher than what we normally see in the 14 1500 dollar range.
And that was predominantly due to two items that showed up in the quarter Firstly.
Any impact from just really timing of maintenance as we've talked about we take our biannual plant shut down and in the fourth quarter and in addition in this fourth quarter.
We incurred some costs in relation to maintenance activities on our crushing facilities as well as our our mining fleet and so those just kind of happened to hit all at once.
With enough scale to kind of be noticeable in the quarter, but.
When you look at the frequency and scale of these events over time.
The cost burden of those are generally captured in and what is kind of a more normal run rate costs. So if you look at the adjusted stage, one only cost growth year over year over the course of the whole year, which is in that mid single digit range. I think that is much more representative of the stage one business, but as I mentioned of course the.
Costs related to stage two as we get closer to stage two ramping will continue to pick up a bit as we bring new heads on board, new maintenance team members and and things like that so.
Hopefully that gives you some color on the moving parts and what to expect.
Sure. Thank you and then just one more if I could.
You talked about in terms of production volumes that was like being adversely impacted by some lower feed grade and recoveries.
To get some color on that if you could elaborate like what you know where you're getting lower feed grade in the middle of the Covid what about that.
Yeah.
Maybe you you might've misheard part of that.
What we saw in the quarter actually was slightly lower feed grades, but improvements had mineral recoveries.
So I would say when you put all of the moving pieces together.
Obviously looking at the results there there there was not really a meaningful or material change from our overall sort of production cadence and so we don't expect anything particularly material to change here over the next year or so Michael.
A nice idea of the various items, we have in the hopper to hopefully.
Tackled mineral recovery and improve what we believe is certainly world class levels over time, but nothing nothing really material to report there.
Sure. Thank you very much that's all I have.
Thank you. The last question is from the line of Laurence Alexander with Jefferies. Please proceed.
Good afternoon, just a couple one is can you talk a little bit about how you expect staffing to evolve over you know over the course of this year and then over the next few years.
Where that would take your SG&A to once you have the magnet production.
Up and running you know once you finish the vertical integration.
And secondly have you been discussing with various.
Customer is about to move into magnet production.
Is the expectation or the baseline for discussion about any potential agreements.
That you would have a return on capital at current Maggie.
Magnet prices.
Or is it that you would.
Due to current market to get adequate return on the capital you would be investing.
Sure.
I can take that.
In terms of the growth in staffing you know I wouldn't attribute.
All of the growth in staffing certainly to SG&A.
What I would say is that.
Significant portion of the staffing that we expect to bring online for.
And in hiring plans at <unk>.
Stage two so at mountain Paas will probably bring another 60 to 75 people on board.
Over the next year or a four.
<unk> stage three it will probably be shy of 100 incremental folks.
So hopefully that gives you a rough sense, but I would just caution on sort of attributing all of that to one particular line item in the P&L.
On your second question, Jim do you want to start off on that one yeah sure Yeah, I mean, I'll, just hey, Lawrence I.
Blank and very clearly we have.
Said consistently over time that we look at the stage two and three businesses as separate businesses that certainly benefit that we're on the same platform, but that we have to make sure that incremental investment has a very attractive risk adjusted return on capital and so we you know we have.
No interest in shifts.
Shifting money from the stage two business to that stage three business and lose capital you know as I as I like to say I'm, we're not going to Rob Peter to pay Paul what is great about our platform, though is that it does allow us to think holistically about the verticals and ultimately.
Where where we where and how we choose to structure whatever deals maybe we're going to think about the fact, the baseline of okay, well, we have a commodity and stage two that we can sell at a market price.
How should we think about this incremental opportunity and if that incremental opportunity.
Is attractive that that is how we're going to think about it so.
You know I want to reiterate that that is of utmost importance to us.
Because we you know as you've heard me say, we think like owners where were large shareholders. So we want to make sure that any growth in the business that is driving value. We're not in we're not in it for charity.
Thank you.
Okay.
Thank you.
I will now hand, it back to the management team for closing remarks.
All right well. Thank you everyone. Congrats on the team was a great quarter and a great start to the year and we will get back to work so I'm certain that everyone.
Okay.
That concludes today's conference call. Thank you you may now disconnect your line.