MP Materials Corp. Q1 2023 Earnings Call
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Good afternoon. Thank you for attending today's MP materials first quarter earnings call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
If you'd like to queue for a question on today's call you can do so by dialing star one.
Now I'd like to pass the conference over to your host Martin Sheen with MP materials you May proceed.
Thank you operator, and good afternoon, everyone welcome to the MP materials first quarter 2023 earnings conference call with me today from MP materials are Jim Lynch, <unk>, 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 have included some non-GAAP financial measures in this presentation reconciliations to the most directly comparable.
GAAP financial measures can be found in today's earnings release, and the appendix to today's slide presentation.
Any reference in our discussion today to EBITDA means adjusted EBITDA Finally, the earnings release and slide presentation are available on website with that I'll 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 quarter, including a stage three update.
Brian will then review our financials and Kpis Michael will then provide an update on our stage two optimization at mountain pass.
I will then return with closing comments and then open it up for Q&A.
So let's get started on slide four.
We continue to execute well in our stage one upstream business for the eighth consecutive quarter, we produced more than 10000 metric tons of rare Earths and concentrate sales.
Sales volumes were similar really strong, allowing us to generate solid adjusted EBITDA and related margin despite challenging realized price comparisons.
I know pricing is a topic on the minds of investors and I will share. Some detailed perspective on that later in the call moving on to stage two.
Commissioning has been making steady progress and we have begun to process a portion of our roasted concentrate through our leach circuits.
This means we are closing in on the even bigger milestone re commissioning our light rare earth separation circuits.
To reiterate what we have said on prior calls the commissioning process is painstaking with stops and starts but we remain on track towards soon producing separate rare Earths.
And reaching run rate production by year end.
Michael will provide a more detailed update in a moment.
Another important development in the quarter relative to our midstream business was the signing of an additional tolling agreement to convert a portion of our MVP, our oxide into metal and Vietnam.
For those of you unfamiliar with tolling agreements tolling is a process whereby a third party processors, our materials for a fee and our case, turning our oxide into a metal for us.
<unk> and selling and EPR metal in addition to oxide ultimately expands the market for our materials supports our low cost production profile and expanded the direct customer base for our products.
Notably, Japan is the largest manufacturer of neodymium magnets outside of China, but Japanese magnum makers have limited oxide to metal conversion capacity and have historically dependent on facilities in China or southeast Asia.
Combined with opportunities afforded by our Sumitomo relationship. This agreement will enable <unk> to maximize and extract more value from our sales of <unk> products to customers in Japan and other global markets.
Moving on to phase III downstream magnetics process engineering and long lead procurement continues to rapidly advance.
Our Fort worth engineering, and manufacturing team is gathering talent and getting stronger.
The internal structure of the factory is taking shape.
We are preparing for the arrival of the first phase of electro winning in strip casting equipment, which will be needed to meet our goal of delivering alloys Lake later this year.
We are observing factory acceptance testing of this equipment at key vendors and are also planning the final connections between this equipment and the building infrastructure importantly, our business development pipeline remains robust therefore to summarize for what was within our control execution Q1 was a quarter.
Of great success across all streams of our business at MGE and.
In addition in April we surpassed three years without a loss day due to injury.
That's over 2 million work hours.
I am very proud of the team for this important achievement that we must continue I.
I will come back for closing comments and address pricing in the marketplace.
For now let me turn it over to Ryan for the financial and operating metrics Ryan.
Thanks, Jim turning to slide six and starting on the left hand side of the page Youll see the consistent level of production Jim mentioned, both in our year over year and sequential comparisons with 10671 metric tons of Oreo and concentrate produced in the quarter, plus or minus one or 2% of the comparable periods in.
In addition, we sold 10215 metric tons of Oreo, which was 13% below last year and 6% lower than the fourth quarter. These variations are virtually all due to timing of deliveries.
As of Q1, we consumed only a small portion of the nearly 2000 metric tons of work in process inventory that will be used and commissioning of our refining circuits with continued progress we are preparing to feed material into additional we're finding circuits, which we're very excited about what that means is that starting in Q2.
We would expect to process a significantly greater volume of our concentrate production through our refinery.
Some of this inventory build will be an investment in permanent work in process, while some will become separated rare earth oxides available for sale.
Meanwhile, as our commissioning teams worked tirelessly, we're continuing to make progress improving the stability and performance of our drawing in Cal signing circuits as such nearly 30% of our sales in the quarter were comprised of roasted concentrate.
Moving on to realized pricing and EPR recovered a bit from the fourth quarter, resulting in a 10% sequential increase to $9365 per metric ton of Oreo.
As you know our realized pricing tends to follow the market price of <unk> oxide with an approximately one month lag. So we benefited from the recovery in prices from December to February .
Still compared to Q1 of last year pricing was down 32%.
Recall that <unk> prices hit recent highs in late February to early March of 2022, which boosted both Q1 and Q2 2022 realized pricing.
Since this most recent February however prices have continued a rapid pullback Jim will discuss our views on this in a moment, but expect at least a 35% sequential decline in realized pricing in Q2, given the recent softness assuming current prices hold throughout the quarter.
As always we entered this period of greater pricing volatility with our fortress balance sheet, our low cost and cash generative upstream stage, one business and an unwavering conviction in our downstream integration strategy.
We have been strategic in how and when we raise capital and we have remained committed to preserving our conservative balance sheet, specifically because of the leverage inherent in the business from commodity pricing.
With nearly $1 $2 billion of gross cash and short term investments and the major lift and cost risk of stage two construction behind us our position as the U S champion in this critical industry is even more evident finished.
Finishing on the far right of the slide year over year production costs totaled $1978 per metric ton of Oreo in the quarter up 24% from last year. The primary driver of the increase was the scale benefits of higher sales volumes and last year's first quarter as well as higher head count related to the ramp up stage, two head count and to a much smaller.
All our extent the impact of cost of living adjustments made last year as well as higher materials and supplies costs sequentially cost per metric ton increased 3%.
As a reminder, as we move to the back half of the year and begin preparing to migrate to stage two production. Some of these stage one kpis will become much less relevant and as such we expect to evolve. The Kpis. We report to you as we transition to separated products and rare Earth metals sales.
Moving to slide seven revenue of $95 7 million in the quarter decreased 42% year over year, driven by the 32% decline in realized pricing and a 13% decline in sales volumes discussed on the previous slide sequential revenue increased 3% as the 10% increase in quarter over quarter realized.
And was partially offset by the decline in sequential shipments.
Continued solid cost control allowed us to generate $58 7 million of adjusted EBITDA and related margins of 61% in the quarter, both slightly up from Q4, but down year over year due to last year's strong pricing environment.
You can also see the flow through of last year's strong pricing and the adjusted diluted EPS comparison were in last year's first quarter, we earned <unk> 49.
Versus 27 in this year's first quarter and as you will recall that in the fourth quarter, we had a large discrete tax benefit which helps drive 42 of adjusted diluted EPS.
Cash from operations in the quarter totaled about $55 million and our Capex spend was nearly $75 million were.
Removing roughly $71 million and growth Capex cash flow conversion remained very solid at $51 million after maintenance capex.
<unk> to the stage one operating kpis that will be sunsetting, we expect stage, one free cash flow to be less of a relevant factor in assessing our performance as we turn our production buckets to stage two.
To that end I would add that we remain on track to spend roughly $300 million in Capex. This year was the very tail end of stage, two spend and accelerating investments in our heavy separations and stage III projects.
I would add that in the last two quarters, we've put over $200 million of assets into service and as such we saw a $3 million increase in depreciation compared to a year ago as.
As the remaining stage two assets ramp you should see depreciation continue to increase as more capital assets are put into service throughout this year.
Lastly, we continue to expect to generate and EPR sales in the back half of the year with sales be quite back loaded given our expectation on the ramp in production.
I would also remind you that we expect a lower margin profile on these initial sales as you would expect until we can scale to full run rate production and smooth out our operations.
Before handing the call over to Michael I'd, just like to add a couple of thoughts on our tolling arrangement.
Under this tolling arrangement with Vietnam, where a company MP will retain ownership of the product through the metallization process paying a conversion fee for each metric ton of metal produced.
Therefore, as we ramp oxide production and utilize this channel you can expect to see US report revenue generated from Ed DPR metal with the tolling fee included in our cost of goods sold for our metal products.
Note that this sales channel will in the early stages come with a little longer working capital cycle as we invest in supply chain inventories in order to maintain stable metal production operations.
The oxide material is in transit and being converted he will remain in our work in process inventory a bit longer through the end to end process with that I'll turn it over to Michael to give you an update on operations and stage two commissioning Michael.
Thanks Rod.
It was a busy quarter for commissioning and things have picked up steam into <unk>.
Our commissioning operations and process engineering teams have taken an increasingly active role in checkouts and startup activities in.
In the first quarter much of the focus was on completing the pre commissioning of the remaining legacy and new circuit.
Including equipment checkout.
To run instrumentation calibration tuning loops and trial operations with critical equipment vendors and.
In addressing the finding some of these exercises.
At the same time, we continued to make progress on improving the consistency and throughput of the drawing and roasting asset.
During the quarter, we turn these assets over from the commissioning team to our operations team, bringing the former to focus their attention on the next circuit Smith's associates.
The remaining assets of our Bryan treatment and recycling circuit are in the final stage of commissioning before full commercial operations of the entire system begins.
Importantly, we are moving closer to producing finished and DPR oxide as we enter two to safely advancing through the startup of leaching and impurity removal and ensuring high purity rare earth solutions to feed separation circuits.
Hi, commissioning priorities.
After that product, finishing encompasses precipitation of purified rare earth from solution filtration and conversion to oxide.
It's still difficult to predict the trajectory of a ramp.
There is no doubt we are now on it.
I'd like to reiterate that startup will not be a linear process, we expect a lot of ups and downs literally and figuratively.
The trajectory of the curve will be determined at the equipment level by reliability and throughput.
We expect certain operations to ramp throughput slowly but steadily.
Others to meet run rate quickly, but struggled with reliability.
Others to operate reliably, but struggled with throughput and.
And occasionally we will get lucky with the piece of equipment that operates through design on start up with no problems at all.
We expect this to be the exception.
I continue to be extremely impressed with the quality and dedication of our team.
Experienced the new operators and maintenance staff engineers and trainers are collaborating to speed, our mastery of the new and legacy circuit.
So as long as we remain focused on the safety of our employees and on making decisions that are in the best long term interest of our operation we are.
Confident that we can achieve our planned run rate production by year end, while maintaining our low cost position and industry, leading environmental sustainability.
Not to be overlooked and a key part of maintaining our low cost position our stage one operation continues to operate stably.
Behind the scenes, we are increasing our R&D to address low hanging fruit and longer term growth opportunities.
In the first quarter, we began an implant pilot of alternative floatation equipment.
At the same time, we completed long lead procurement and began construction on the long awaited project to improve our grinding circuit.
We expect this to increase throughput potential in mineral recovery.
As I've mentioned previously we are extremely optimistic about the opportunity to improve the quality quantity and cost structure of our concentrate production.
In addition to the tremendous job that the team is doing in terms of both stage one production in stage two commissioning our focus on safety remains front and center for us.
As Jim mentioned, but I think it's important to reiterate in April we surpassed three years.
Or over 2 million work hours without a lost time injury.
I think this is a testament to our safety first owner operator culture.
I just want to thank the team for all their hard work and their focus on doing it safely.
With that I'll turn it back to Jim.
Jim.
Thanks, Michael.
Before Q&A I would like to cover a few topics that are on the minds of many investors, including pricing trends product substitution and the <unk>.
Potential for Chinese export restrictions around the rare earth processing and magnet, making technologies on.
On pricing.
<unk> began the year around 102, which was down from a 2022 peak of $1 75.
The declines continued throughout the first quarter with pricing now in the low sixty's.
Put it bluntly I'm surprised.
I'd say I'm actually very surprised but not shocked.
As you all have heard me say many times before commodities do almost anything in the short run.
After all oil even traded to a negative price in 2020.
Some of the price action may be explained by recent economic woes for what I would call legacy sectors like hard disk drives or ice autos.
Recall that nearly 80% of the market for railroads today still comes from uses within these kinds of products.
Moreover, global EV sales for Q1, 2023 were weaker than expected due to the expiration of certain subsidies in China, and Europe , and combined with higher interest rates likely had a significant impact.
Sales in China appear to be rebounding strongly since March however, despite this recent blip.
Global EV sales penetration is still only in the low teens percentage. So the long term demand trend remains explosive.
We believe the compounding effect of high growth in electrification will far outweigh any legacy or other short term weakness and then some over even a moderate amount of time.
What is interesting perplexing and quite likely bullish for the medium to long term outlook is that with <unk>, where it is now.
We believe that the Chinese rare earth industry will be unprofitable at current prices.
Chinese debt is admittedly quite opaque, but our analysis as well as industry discussions suggest this to be the case.
Moreover, at these price levels. It is hard to see positive economics for any Greenfield project in the west.
And it is very likely that anything in progress now can expect significant capital disruption.
I will remind you of two important things to consider from <unk> perspective.
First from the beginning of our public life.
We made clear that MP would have an owner operator culture, where we would sacrifice near term opportunism to maintain a capital structure with a fortress balance sheet as.
As I like to say, we want to leverage in the commodity price not on our balance sheet.
Company's capital structure must reflect the underlying volatility of its industry.
Second we believe that <unk> is on track to being the worlds low cost producer of <unk> side.
Our balance sheet operational execution, and long term focus give us the runway to ride through pricing cycles.
I also want to reiterate the point about capital formation.
My estimation with MVP R anywhere lower than around $120 per kilogram, new projects with realistic assumptions are simply on economic.
And that is before one considers the significant time risk and human capital it requires to be successful.
Simply our industry has a very high cost of capital for new entrants right now.
This means the long term upside volatility for MP to benefit from demand trends across the various electrification categories remains very significant.
This leads me to my next topic substitution.
If you listen to our call a quarter ago, you heard me talk about and EPR supply demand imbalances. The world Electrifies I cited estimates, suggesting that the demand for MVP are potentially seeing a 200% increase over the next decade, or so or three times todays current demand.
To meet that demand I highlighted how that was the equivalent of meeting 15 mountain passes to come online over that same time period.
We know this is not going to happen.
For all the reasons, we previously outlined we made clear it likely would not happen with and EPR at virtually any price.
Earl even getting one new mine of globally relevant scale over a decade is no small task <unk>.
Consider all the human financial environmental permitting and political challenges to do so.
And that of course assumes as project table Stakes the discovery of an economic ore body that would make all that worthwhile.
The idea of that happening with 15 projects within 10 years is not realistic.
So we were not surprised when Tesla at their Investor day highlighted their concern over rare earth supply and environmental challenges around mass market adoption of electric vehicles.
It should not shock anyone that they aspire to produce a vehicle without a rare earth magnet motor.
The issue has been and remains what are the size performance efficiency and pricing tradeoffs of utilizing a rare earth magnet motor versus another solution.
For some applications like an aspirational mass market EV priced under $30 that does not yet have a factory substitution must occur because the math, particularly the supposed volumes suggest it is likely not realistic otherwise.
For most other EV applications like those involving performance luxury Suvs full sized sedans, where consumer trucks and certainly with other electrified motion applications like robotics offshore wind turbines drones or other military uses there is virtually no way.
Material substitution will occur at any price given the constraints.
When you add all that up we believe as even Tesla and many others have pointed out that the demand picture for rare Earth magnets remains exceptional.
I would also add that my team has spent significant time with a number of Oems as well as other producers of a variety of products that utilize various magnets and virtually all have rare earth magnets on their production roadmaps for the foreseeable future and production Roadmaps are not easily changed overnight.
With that let me briefly touch on the recent news that the Chinese Commerce and technology ministries have drafted a list of amendments, which would either ban or restrict exports of certain magnet manufacturing technology.
We will csc's ultimately go into effect as they are evaluating comments from Chinese industry.
Needless to say, we get questions about this potential change.
As you can imagine given that the Chinese dominate the magnetics industry, a similarly dominate magnetics tooling and equipment production, but we have purposely avoided major buys of equipment and technology from China for our Texas facility for this express reason.
We do not expect any issues from this additionally, NDS <unk> permanent magnet had been manufactured for roughly 40 years. The process itself is well understood and approximately 10% of world supply is made in Japan such.
Such limited Japanese share is not due to access to Chinese process technology or equipment. It is primarily due to challenged access to separate it rare earth oxide and metals. Therefore.
Therefore, MP with our upstream and midstream supply chain is in a good position regardless.
The real bottom line of the potential Chinese ban on technology exports is that as further highlights the critical importance of the American Magnetics champion. We are building an MLP as well as the significant overall long term value of our asset portfolio irrespective of spot prices.
With that let's open it up for questions.
Operator.
Absolutely we will now begin the Q&A session, if you'd like to ask a question. Please press star followed by one on your Touchtone keypad. If for any reason you would like to remove that question. Please press star followed by <unk>.
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.
We'll pause briefly to allow questions to generate in Q.
The first question is from the line of Karen Blanchard with Deutsche Bank You May proceed.
Hey, good afternoon, Thanks for taking my question.
On the first one would be maybe more on the film side in Dallas.
Fuel adjustment to the EBITDA this quarter is that.
A train that we can expect in the coming quarter and then the.
On that now.
Tim I think as Lee.
Could you comment on it a bit about the call. So that we can expect the next quarter.
Yeah, Hey, Karen it's Ryan I can take that thanks for the question in terms of the EBITDA adjustments I assume primarily what youre looking at would be <unk>.
<unk> costs, which is a category that we had for the last couple of quarters as we've gotten into.
The depths of commissioning of stage two.
I would say as we get further and Michael gave some color on how that activity is picking up pretty rapidly in this quarter I would expect to see those costs pick up a little bit certainly in Q2.
I'd expect them likely to start to come down over over the course of the year as we move into what we call more run rate for commercial production of separating products.
In terms of your question on the cost per metric ton as.
As I talked about in my prepared remarks. The primary driver. There is the continued growth in head count as we get ready for these circuits to be in service as you can imagine we're going from operating effectively.
Elegant and flotation facility and <unk>.
Ancillary support facilities to adding.
Multiple more facilities into service so the burden from maintenance.
Facilities utilities things like that have started to pick up a head of entering into commercial production of these products and so that's primarily.
The items that youre seeing and so those items that are not specifically related to commissioning activities.
Tend to flow through the cost of goods sold of our existing product.
Those items that are specifically related to commissioning and not related to a salable product find their way into the startup cost category.
As we look out over the course of this year I'd expect a similar trend in cost per metric ton as as I mentioned on the startup cost.
As we bring these things online certainly there'll be an initial.
Margin profile that we'll certainly look a lot different than when we hit escape velocity and hit run rate production. So hopefully that gives you a sense.
Yes.
And maybe as a follow up and shifting gears, Kevin let's think of broader market, but.
Any view on that.
It <unk> meet our processing capacity vessels in southeast Asia, maybe outside of China and Japan.
That would be helpful to get a view of that.
Sure Yes.
I think one of the items that we talked a bit about in the prepared remarks is our tolling arrangement for some metal capacity, there's a variety of potential options for metallization in southeast Asia, maybe six or seven different facilities out there.
We're obviously very pleased with our ability to get dedicated capacity.
As you can imagine with the Japanese magnet industry and the growth that they expect.
They are seeking the ability to purchase both metal and oxide so with the ability to do toll lane.
Of oxide into metal that just broadens our market opportunity for our products and so I would expect that this announcement. We had this quarter is hopefully the beginning of many we continue to evaluate other metal tolling facilities through our sumitomo relationship and otherwise and of course this.
Yes.
<unk> to our downstream strategy in the United States and so putting all of that together. We're we're excited about the potential for a significant amount of our oxide to make its way through that sales channel, which again is just a great way for us to continue to broaden our market opportunity.
Alright, Thank you Ian and I will jump back in the queue.
Yeah.
Thanks, Greg.
Thank you Ms. Blanchard. The next question is from the line of Carlos de Alba with Morgan Stanley You May proceed.
Yes, thank you very much gentlemen.
Just in terms of head count ramp up as you expand the operations.
Stage, two and stage III what are you on that process, maybe trying to calibrate.
From the prior question also.
Cause will look like in the coming quarters.
That'll be my first question and then my second question is just coming back a little bit to the prepared remarks on inventories I just wanted to make sure that I understood.
Two thirds of your sales will comprise over also concentrate in the second quarter already or more likely in the second half of the year.
And then the level of inventories that you currently have.
Around 2000 tonnes of inventories that will be consumed in the coming quarters.
The separation circuit.
Hey, Carlos This is Ryan let me take the second part of that first and then I'll flip it to Michael to talk about staffing.
What we mentioned on the inventory and thinking about how we.
Consume our current products.
Into the downstream circuits I'd note that the point, we're trying to make is this quarter you did not see a significant departure of production versus sales as we move into Q2 and into Q3, we will see an increasing amount of our production of Oreo.
Being consumed into the downstream circuit.
I think the other question that you asked is that is about the amount of roasted concentrate that's going to get sold or was sold and just to clarify. Thank you might've had the numbers backwards. It was about 30% of our sales. This quarter was of roasted concentrate the rest was our standard concentrate product.
As you know what we planned to feed the downstream circuits with is the roasted concentrate and so I think the two things to keep in mind that we wanted everyone to be sure to understand as they model the business over the rest of this year as you will start to see that detachment of Oreo sold versus Oreo produced as we can.
Soon that over the next couple of quarters, and we flagged up to about 2000 metric tons of Oreo that will find its way into the downstream circuits and certainly that 2000 tons will be made up of real estate concentration.
Hopefully that answers your question, Mike do you want to jump in on staffing.
Yeah.
Thanks Ryan.
We've had a significant number of these stage two steps.
On our payroll already for several months or more than several months in training.
Cross training.
And cleaning up and commissioning activities re commissioning activities.
So we've gotten.
Probably through at least three quarters of the total hiring perhaps even a little bit more.
We will see a slight increase.
Increase.
And some of those staff over the next quarter or two that maybe offset by some third party contractors, which will be not including the construction, but third party contractors, which will will come off so I think overall the cost.
Structure.
Includes a significant portion of that that burden.
Alright, Thanks, John Thank you Michael.
Thanks Carlos.
Thank you. The next question is from the line of Matt Summerville with D. A Davidson you May proceed.
Hi, Good afternoon. This is Jonathan on for Matt Summerville I wanted to start out by asking you about phase III.
Looking a bit further into the future.
Back to you as a building block approach to further activation beyond Texas, although the success build out essentially be considerably larger than what you are starting out with and forward today.
Sure I'll take that.
So as you know with Fort worth Fort worth really represents.
Below 10% of our current expected output out of mountain pass and so we really view that as the initial magnetics facility.
We're obviously working we've made clear from the beginning that we're we're really taking a buy build and or JV approach here, we're maniacal Lee thinking about return on capital and the most creative thoughtful lowest risk ways, we can build out that business and so that's a long winded way of saying that.
And everything is on the table as we build out that business.
But the.
You can certainly expect that that business should grow substantially because the current facility will really only represent a small percentage of our upstream output.
And we obviously want to make sure that we focus in the near term on executing that well and we do expect to have some some good lessons from that experience that.
Will help dictate how we pursue the continued downstream buildout.
Understood. Thank you Jim and then as a follow up I wanted to ask about capital deployment.
Sure.
To the extent that there is capital available to do so and I certainly understand if there isn't but given the stock where it is today I'm wondering how you think about.
Essential for share buybacks as being an opportunity to deploy capital for shareholders.
Curious about that given where the stock is today.
Sure.
I thought I might get that question.
I'll give you the really short version, but then I'll give you a longer expanded version.
I am the largest shareholder of the company.
We have set up an owner operator culture, we're very focused on creating value for shareholders. It's in our DNA, We think about return on capital and capital allocation I mean that really drives everything that we do in the business. So you can imagine I'm spending pretty much every waking hour thinking about that.
So.
When and if we do something we will certainly do it we wouldn't telegraph it but let me give you sort of a.
A longer view.
View into my psychology.
Which is.
We really believe that.
I really think of the world and probabilistic terms.
I think it's pretty clear if you look at the enterprise value of our business and what we expect to be doing over the next decade.
It wouldn't shock me if our business is.
Earning more than our enterprise value today in a handful of years out there. So certainly there is an enormous amount of value.
That said, it's also a probabilistic world.
I've made clear that the capital structure really has to reflect the underlying volatility of the business as well as the stage of the business.
We are we are in the early growth stage.
And lastly.
Lastly, we really and I think we've made this clear so I don't think this will surprise any shareholders and certainly for our long term shareholders. They should think of it this way or we're not the right company for you, but we're really country first capital as this is a very unique set of assets. We think there's an enormous opportunity there is.
This is also something important that has to happen.
So we really want to make sure that we take a conservative and thoughtful approach to <unk>.
Make sure that this platform has the firepower.
To do the variety of things that we want to do overtime and so when you add all of that.
That's kind of what what's.
Going on.
Our heads as we think about these things.
It doesn't necessarily serve us to do something small that creates some signal value. We're long term focused folks around here and so when we do something we're going to.
We want to we want to think about it as.
<unk> heard me say on these calls before we really want to take a Henry Singleton type approach here.
And so hopefully that gives you kind of some window into how we're thinking about it.
Yes.
No. That's certainly very helpful. Thank you.
Sure.
Thank you. The next question is from the line of George generic <unk> with Canaccord Genuity you May proceed.
Okay.
Hey, good afternoon, everyone and thank you for taking my questions.
I'd like to start with George maybe just focusing on I.
Hey, guys.
Focusing on Fort worth.
Just trying to understand any update there.
Due to start production there by the end of the year.
Wondering how the hiring is going.
Early indications on production are going and any Kinks, you need to continue to work out of the system to get to production by the end of 2020.
Sure.
Well I think George hopefully you saw the.
Recently treated a picture of the facility the sort of the April 2022 versus April of 2023.
We essentially broke ground there I mean this was a piece of land a little over a year ago and now the shell of the factory is done and we're already.
At work on the inside I would say that in this past quarter.
There's been a lot of work not just in the facility, but also with the team.
Good.
We have a really impressive team and that team continues to grow by the day.
We've made a lot of progress on that front.
And so I would say that it continues to go really well. This is this is not easy stuff I mean, we are building a magnum, making business from scratch. So.
Certainly don't want to downplay the scale of the challenge that we've taken on.
But certainly we have an incredible foundational customer and GM and.
And we continue to have a.
A lot of great customer conversations and we're hopefully taking a methodical risk managed approach to this process and.
I guess, that's a lot of quality qualitative ways of telling you that.
We continue to work really well on that front and we're.
We think we are on track and.
Just continuing to execute.
And then as a follow up you are going through this transition this year.
Moving.
The stage two and just as luck would have it we have seen a.
Massive reduction in the spot price.
And you talked about allocating some of your production to inventory to two to stage two.
But how do you manage profitability in that scenario.
Yes. My question also is we're getting close to a point I think where you might be hitting the edge of being shipped.
Flipping into EBITDA.
Negativity as opposed to profitability. So how do you manage that scenario do you is it your goal to stay EBITDA positive even if the spot price reduces further.
And you maybe don't allocate some of that of some of your volume to inventory or do you just kind of focus on the task at hand in and continue to move to stage two throughout the year, despite what's going on at spot.
Well first and foremost, we wake up and pray for higher prices every morning.
Good.
No I'm kidding.
It's a challenge.
We're.
We are.
As we've sort of the theme of this call as you know.
We believe in both fronts of our business on book in stage, one certainly in all stages, two and three we're executing really well those are the things that we can control.
We believe in both fronts of our business on book in stage, one certainly in all stages, two and three we're executing really well those are the things that we can control.
Tough being in a commodity business.
Unlike some other businesses, where you can make a lot of great progress and maybe.
Maybe 80% of that converts into the financial result, whereas in a commodity business you can do an incredible job and maybe 20% converts and the rest is sort of the inherent volatility of prices that.
Maybe Nick you look not so smart and down price times, and probably much smarter than you deserve an up price times.
But.
The reality is is that we really not much change in the sense that we're always focused on capital allocation I mean, we're thinking about.
We're thinking about these things.
Every step of the way and when prices are high.
Or higher than here and not necessarily as high as we think they are going we're always aware that prices could be much lower right. That's why we set up the capital structure of the way, we did and when prices are very low.
Look back to some of the comments that I made.
Of course plant the seeds for the next huge price spike and so we try not to be.
Two impacted by that volatility and just focus on the things that we.
Can control but.
Michael if you want to touch on any aspects of what you see out at mountain pass and kind of how youre thinking about commissioning if you want to chime in here.
Well, thanks, Tim and thanks for the question.
Yes.
We are very.
Prudent in how we're going about commissioning and we always have been thinking of this as a.
Maximizing value to shareholders as well as our long term.
Success of our of our operation in the ore body. So, particularly in this period of time with lower prices, we're going to be especially careful to avoid any major mistakes, obviously any safety issues.
But also think about how and when we optimized the ramp or.
They are maximizing efficiency.
Commission of circuits as we commission them versus the speed of commissioning and so we will probably be a little bit.
Even more thoughtful about that.
As we proceed obviously our stage one business still has very low cost producer and we will look to keep that stable.
Profitable and see where we can eke out additional.
Profitability for that.
Okay.
Or is that next question.
Thank you. The next question is from the line of David <unk> with Cowen You May proceed.
Yes.
And Tim are online.
Thanks for the questions. This evening.
Hey, David.
Okay.
Curious just one on the <unk>.
Tolling arrangement with the Vietnamese rigor Toller I guess.
Yes.
Sumitomo I guess was responsible.
Responsible for negotiating some of this but I guess in terms of.
Qualifying your own in the PR oxide should we think about it.
I suppose I haven't had any of your energy and <unk> side to work with your other qualify.
But is the assumption that that would be like.
Fairly seamless process to convert the oxides of the metal.
Yes, Hey, David It's Ryan.
Just to clarify this opportunity with the number of company is separate from our Sumitomo relationship, but we certainly view.
Sumitomo as an incremental outlet, where we expect to do very similar things. So this is just a further broadening of our of our market opportunity.
In terms of qualification. Thank you certainly we feel very confident.
And what are what our specifications of our product will be.
In order to.
Properly convert them in an efficient way in electro winning for metal making.
I think importantly, and as tolling arrangement, we will maintain title to the product throughout the process and so through that we will maintain responsibility frankly for the quality of the end product as we interface directly with our end customers.
And so we're we're deeply involved in the requisite conversations to ensure that we're making a quality product.
At this tolling facilities. So we feel we feel good about that.
I appreciate that.
Agenda conductor.
One of the conversations earlier about substitute products.
Obviously, the conversation around Tesla has aspirations for building a non rare earth magnet.
In your conversations with other Oems.
We read it too is it sort of like ringing the alarm for a constrained supply chain.
Are you seeing the same sort of concerns from some of the other domestic Oems obviously have a partnership arrangement our customer arrangements already but is there is there a palpable concern around the supply chain for installing rare earth magnets and EV deliveries in the future.
Yes, David well you hit a really good point about ringing the alarm it was in a sense kind of like a commercial for this issue to a very broad audience of just sort of the.
The scale of <unk>.
What is unfolding here and how much more material is going to be needed.
As far as sort of a sense of urgency.
I would I would tell you that we've really sensitive a sense of urgency with the Oems at least going back a couple of years at this.
If you kind of rewind, probably pre COVID-19, there was less of a sense of urgency.
<unk> was sort of theoretical and then when people saw that.
The healthcare stuff in the semi.
Was like sort of the the.
The big Wakeup call, where all of a sudden this became sort of something down the road to access potential and I would say that that's maintained I don't think ive seen that much different although what's interesting I mean, there is there is.
Here and there we still hear of these supply chain things that pop up I think Ford had an issue the other day.
So I would say that across the industry and it's not just the autos I mean, its in other areas sort of other standard industry areas that that.
People focus on this so I would say I wouldn't necessarily say it increase or decrease in the last couple of months, it's been pretty intense.
For the last sort of two year almost three years now.
It's really just the one thing I would say though is.
You probably over the next year or two is a lot more in at least in the EV space a lot more models are coming on the market and so even though the planning has happened the physical build that haven't yet happened right and so I think youre going to see and then again I think that goes back to kind of this past quarter was spot.
Anything can happen in the very short term, but as these as this stuff really starts to come online maybe there'll be a sense of urgency and again you've heard David you've heard me say this a bunch going back a couple years now I still believe I think we will see.
At least one but probably a number of household name global Oems.
Fail or meet a bailout due to supply chain issues around critical materials are critical items and so I still think that that is all ahead of us, but admittedly the last quarter or so.
China has been a lot weaker than I think people expected and so that sort of works its way through the system, but the macro trends remain very strongly intact on that front.
I appreciate the color on that Jim.
The last one I'm sure. That's helpful. Maybe on yes go ahead, David I'm just curious.
Have you guys tested the functionality of every part of the separation circuit are at a stage to surface at this point I know like as you've described the commissioning process. We're moving from one part of the flow sheet to the next but I guess are there are still elements that have not been tested today.
The vast majority have been tested in one way or another and certainly they've all been touched.
In some sort of pre commissioning not all of them have flown a material through them.
But that.
And so it will change quite quickly.
Thanks, Michael.
Thanks for the responses guys.
Thanks.
Sure. Thanks, David.
Sure.
The next question is from the line of Lawson Winder with Bank of America. You May proceed.
Hey, good evening gentlemen, thanks for fitting me in I wanted to ask about a couple of questions on cost.
One you spoke to costs.
During your prepared remarks, and I wanted to get your view on.
Where you think the.
The global cost curve is relative to the pricing now in the low $60 like what percentage of <unk> production now is underwater.
Well the the data in China is really tough so and.
Remember that the industry.
It's not necessarily consolidated you can have minor.
Myners refiners.
And so depending on and a lot of them are affiliate Theyre all affiliated so depending on the month.
<unk> can move around a different buckets.
But.
As I.
<unk> said in the prepared remarks site.
Oh.
Every indication that we see I think it's fair to say that at these prices I think we will see Chinese industry is just not profitable.
And so I think that Thats, that's obviously.
It's something that we view to be a bullish dynamic at current prices.
Yeah. So my question gets to the fact, you mean like the entire industry.
Pretty much I mean.
The industry is.
Maybe maybe I can expand on and again this is just.
Our guests from reading the tea leaves the data is always okay. So I mean I'm trying to be caveat. This as much as I, possibly can but.
Remember that this is all consolidated ultimately into a couple of players.
So certainly money can move from various buckets of the of the up and downstream if you will and things can show profitability or losses or whatnot.
But.
Thats kind of roughly what we what we believe.
Okay well that's.
That's a big statement and very helpful color. Thank you I wanted to ask about well, we were surprised where surprises we're here.
Yes.
Yeah. Thanks, Thanks, a lot for that color is very helpful and I wanted to ask about one cost item of yours and that would be nat gas and to start off with could you remind us just what percentage of your overall cost is Nat gas and then.
Have your <unk>.
Gas costs falling in line with Henry hub or is there still a pretty significant premium for west coast Nat gas and then.
Thinking about the hedges that you guys put on how effective are those being and then for how long are those still going to be in place before they roll off thanks very much.
Yeah.
Sure.
What I would note is certainly the proportion this is Brian by the way the proportion of our cost structure that is natural gas is going to change as we bring.
The rest of the circuits online and obviously have an incremental power draw from.
Our CHP.
But I'd say, we haven't given specifics on exactly the percentages, but let's call it.
Single digits.
We have seen certainly our hedges that we've put in place be quite effective this quarter.
You can actually see that manifest loss and then when.
When you look at the proportion of the costs that we call out specifically related to incremental stage two costs in our cost per metric ton framework.
<unk> in the deck you can see that that went down sequentially thats, primarily due to effective hedging.
We have hedges close to similar levels.
That start to roll off in 12 months, and then more roll off in 24 months.
And we're constantly sort of looking at potential opportunities to continue to lock that in given where we are in California, We don't very closely follow Henry hub.
There are very specific transportation dynamics in terms of where we sit.
So I would say Nymex or Henry hub is probably not a great proxy for us I would be looking at the California delivery point, certainly to give you a sense and you see when certain storms happen or certain parts of the transportation infrastructure offline that tends to get quite volatile which is.
Why certain just like our commodity price on.
On the revenue side in certain quarters, we're going to feel like geniuses in certain quarters, we won't feel quite a smart, but overall, we're trying to approach this very methodically to minimize volatility in our cost structure.
That is fantastic. Thank you very much.
Thank you.
Final question is.
Is from the line of <unk> Sinha with Northland Capital markets. You May proceed.
Hey, this is Scott.
But again savi.
I was just wondering about your Hello.
Magnitude.
I was just wondering about your outlook for permanent magnet generators and <unk>.
<unk> since that's most recent announcement on Evs Entre quieting.
Metals I was just wondering about your outlook on <unk> OE, you see that going.
Sure.
So we covered quite a bit of that on the call. So.
But I'll just maybe I'll.
Again.
The first part of the question, we're very confident in the demand outlook for our industry for for our products.
It's.
Rare Earth magnet motors will continue to be the most powerful and efficient option.
So.
In.
A variety of carriers you asked about wind turbines, specifically offshore wind turbines.
Okay.
Everything that we see.
Remains extraordinarily.
Intact, I mean, theres really been no change that the key thing with offshore turbines.
If you if you go with an alternative option.
Is there is a dramatic change in your maintenance because you might have to replace.
Earlier, and so when people look at the total cost of ownership of an offshore wind turbine.
Matt.
The big difference in your maintenance cycle is enormous relative to the cost of a permanent magnet. So.
<unk>.
<unk>.
I don't have the exact number in front of me, but it's above just like Evs, it's above 90% for offshore and we've seen no indication other than.
That remaining intact.
Those are very long lead.
Long lead production items, so even if you saw something changing when it would probably wouldn't impact demand for several years, but we've seen nothing but increased demand on that front.
Sure Patrick.
Sure.
Thank you that concludes our Q&A session I'd like to turn the call back over to Jim <unk> CEO for concluding remarks.
Well. Thank you everyone for the call today, and we will get back to work and look forward to seeing you next quarter.
Have a good night.
This concludes today's MP materials first quarter earnings call. Thank you for your participation you may now disconnect your lines.
See you next quarter.
Have a good night.