MP Materials Corp (MP) 2021 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the MP Materials Financial Results Conference Call and Webcast. My name is Charlie, and I will be coordinating your call today. (Operator Instructions)

I will now hand over to your host, Head of Investor Relations, Martin Sheehan, to begin. Martin, please go ahead.

Thank you, operator, and good day, everyone. Welcome to MP Materials' First Quarter 2021 Earnings Call. With me today are James Litinsky, Chairman and Chief Executive Officer of MP Materials; Michael Rosenthal, Chief Operating Officer; and Ryan Corbett, Chief Financial Officer.

To follow along with our discussion today, we encourage you to download our slides from our investor website. Before we get to James and Ryan's opening remarks, I'd like to remind you that during today's call, we will make certain forward-looking statements that do not constitute historical facts under the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995.

Forward-looking statements are predictions, projections and other statements about future events that are based on current expectations and assumptions and, as a result, are subject to risks and uncertainties. Many factors could cause actual future events to differ materially from the forward-looking statements in this communication. For more information about factors that may cause actual results to materially differ from forward-looking statements, please refer to the cautionary language in the earnings release and in our filings with the SEC, including the Risk Factors section in our recent SEC filings.

During the call, management will also discuss certain non-GAAP financial measures, which we believe to be useful in evaluating MP Materials' operating performance. These measures should not be considered in isolation or as a substitute for the MP Materials' financial results prepared in accordance with GAAP.

A reconciliation of these measures to the most directly comparable GAAP measures is available in our current report on Form 8-K filed today and can be found on our website, investors.mpmaterials.com. And please check our investor website regularly and follow us on Twitter, Instagram and LinkedIn, where we often provide news and information on the company.

With that, I'll turn the call over to Jim. Jim?

Thanks, Martin, and thank you to everyone joining us on the call this afternoon. I'm going to cover a few things today. First, I will recap the highlights of our outstanding first quarter results. Second, I will provide a quick update on our Stage II optimization plan in Mountain Pass. Then I will turn it over to Ryan for some more color on our performance. And finally, I will make some closing comments before opening it up for Q&A.

Let's start with the first quarter highlights on Slide 4. We achieved record first quarter production and sales volumes. These numbers show the significant operating leverage we can achieve when higher NdPr prices meet best-in-class production costs.

Our revenue nearly tripled year-over-year. Adjusted EBITDA was up more than sixfold. And our adjusted EBITDA margin more than doubled year-over-year to over 57%. I will talk more about our record sales and production volumes in a minute.

The other big highlight in the quarter was our Green Convertible bond offering. I would like to spend a moment on the green convert. I know the initial market reaction to the transaction was not as we had hoped, but I would like to take you all through our logic so you can better understand why we did it and what this means for long-term value creation.

First, as we talked about last quarter, we are seeing activity accelerating in the electrification and decarbonization supply chain, particularly related to EVs. The scale of the global acceleration in capital investment is mind-boggling. A recent IEA report stated that while it took 10 years to reach 10 million EVs on the road in 2020, they expected that over the next 10 years, by 2030, this number would climb to 145 million. This may seem like staggering growth, but that will may be up 7% of the global fleet. And this excludes 2- and 3-wheelers, where there is also huge potential for electrification. By the way, the IEA report followed up their EV study right away with a look at critical materials.

So MP is not capital markets-reliant, but we are opportunistic. We now have the firepower to make what we believe are extremely attractive, highly accretive investments towards our mission, regardless of market conditions. And if attractive opportunities do not present themselves, we can always return the capital to shareholders, the largest of whom is me. We believe this option value in our very conservative capital structure is valuable to us all.

Second, some of you have heard me talk about the importance of the green bond market. I have been a vocal proponent of this mechanism for the electrification and decarbonization revolution. Better pricing the externalities across global industry will instill further capital markets constraints on the bad actors and benefits on the good actors. I strongly believe that this bifurcation is just getting started. It is a moral and financial imperative that we position MP to be one of the good actors for this decade-plus seem to come. It will likely shape conversations with industrial and government participants in the years to come. We see it already.

So we look forward to the challenge of our shareholders and the market holding us to these higher standards and believe this is a source of competitive differentiation in our industry, particularly when you look at our competition in rare earths.

So in the end, I think the green bond created very attractive low-cost optionality for us. I believe it enhanced our value creation prospects as various stakeholders gained further confidence that MP is a reliable thought leader. We believe we have the proper platform for the future, and we will continue to build upon our reputation for execution, both operationally and financially.

In conclusion on the quarter, Stage II is on track and Stage III is accelerating. I will discuss these, but let's move on to Slide 5 first to cover more detail on our strong execution in the quarter.

Starting on the top left, you can see that our sales volume was up 18% versus last year. Q1 is usually seasonally weak due to Chinese New Year, but with the impact of a COVID year-over-year comparison, coupled with even greater demand from increased electrification, we do not see much usual seasonal impact. By the way, logistics have been a real challenge throughout the world lately. So our operations team deserves a lot of credit for navigating such difficult conditions to a great result for us all.

And on the top right, you can see the strong pricing we achieved for concentrate as the market appetite for NdPr continues to power higher. Pricing for NdPr increased throughout Q1 and remained very strong through April. Pricing for concentrate saw a similar pattern in Q1 and remained strong. Also, do not forget that our concentrate sales represent commensurate separated NdPr in the market. Stage II production means we will enjoy that massive uplift of refined product revenue without creating incremental global supply of separated NdPr.

Our revenue in a given quarter is, obviously, a function of sales volumes and price. There can be modest timing differences between production volumes and sales volumes over time, particularly due to shipping. Yet, long-term financial results are ultimately driven by our ability to produce as much as we can, as efficiently as we can.

Internally, we closely watch our throughput or feed rate. The recovery or what percentage of the REO fed into the mill results in sale of product on an REO basis and plant uptime as main drivers of our business. And production volumes remained strong in the quarter with 9,849 metric tons produced. Over the last 12 months, we've produced nearly 39,000 metric tons of rare earth oxides in concentrate.

You can also see here that production cost remained very low at $1,475 a metric ton. Costs were up a bit versus last year in large part due to timing of plant turnarounds and the reagent trial we talked about last quarter, which was completed towards the end of January.

We also increased hiring in anticipation of future growth. We now have over 320 dedicated employees doing incredible work towards our mission. These are challenging jobs with high expectations. And the MP team knows we have some naysayers. The idea that an American company can compete globally in rare earths, while preserving stringent environmental standards, does not serve the preferred narratives of certain opportunists. But here we are.

Most importantly, I would like to tell you very humbly that we recently hit a milestone of going 365 consecutive days and over 400,000 work hours without an injury causing someone to miss work. Fantastic results, like we reported today, only mean something when they occur behind a first priority: cultural focus on safety.

Let's move on to Slide 6 for a quick update on Stage II. As many of you know, Stage II is our plan to move from today's profitable concentrate production to separating rare earth oxides. Success means we will have restored the downstream production of these critical elements to the United States of America. Stage II is also expected to provide significant upside to our financial profile, which Ryan will talk about in a bit more detail. Last quarter, we covered some details of our optimization plan, including CapEx, and how we believe we significantly derisked Stage II relative to last year.

We made a lot of continued progress during the quarter. We completed the pre-civil site work. The foundation work for critical new equipment is in progress. The fabrication of the roaster is nearly complete, with delivery expected very soon. Some ancillary components of the roaster and material handling equipment have actually already arrived on site. The fabrication of the salt crystallizer is nearly complete, and we actually have key portions of it delivered in on-site as well. See the cool photo on the left side of the page there.

So net-net, we're making a lot of progress executing Stage II, and I look forward to keeping you posted. Now with that, I will turn it over to Ryan. Ryan?

Thanks, Jim, and hello, everyone. Jim already covered a few of the financial highlights, but let me give you some additional thoughts on the quarter, and I'll begin on Slide 8.

As Jim pointed out, our year-over-year revenue nearly tripled, but we also saw over 40% growth compared to Q4. This was driven by 46% growth in realized pricing to nearly $6,000 per metric ton of REO.

Meanwhile, our adjusted EBITDA increased over 80% from Q4. Jim also mentioned the leverage of our model from NdPr pricing. Our REO product margin increased from just over $1,200 per metric ton a year ago and $2,500 in Q4 to over $4,400 in Q1, driven almost entirely by the price of NdPr and its impact on the price of our concentrate, the result of which is that sequentially, our revenues increased $18 million, whereas our EBITDA increased $15 million. So as we've discussed, the vast majority of incremental revenues flow through to the bottom line, causing our sequential EBITDA margin to improve almost 15 percentage points.

Compared to the first quarter of 2020, the 70% flow-through of revenue to EBITDA is less stark, although still excellent, primarily driven by the growth in headcount as we prepare for Stage II and the build-out of our public company infrastructure. However, our sequential performance is more indicative of what we expect in the future.

And finally, regarding the impact of Stage II on our financials. Assuming current NdPr pricing and our expected cost of operating Stage II we gave back in July, on an apples-to-apples basis, our Q1 product margin of $4,400 per metric ton of REO produced through the mill would roughly double at full run rate production through Stage II.

Now we have a way to go to get Stage II up and running and to run rate production levels in 2023 and anything can happen to the pricing of NdPr in the meantime, but we did want to give you a feel for the improved profitability Stage II brings to the table.

Lastly, I would add that our Q2 is shaping up to be strong, driven by NdPr and concentrate pricing. Of course, the West Coast ports are still experiencing delays and so as with this past quarter, the timing of shipments is the primary unknown. However, for the full year, we continue to expect full year production to increase slightly versus 2020, resulting in very strong full year 2021 results, given what we're seeing in the market.

Moving on to the next slide. Last quarter, we looked at our full year cash flow of Stage I operations. Here, we've updated it for the first quarter. And similar to last quarter as well, in the appendix, you'll see a detailed walk of how we get from our adjusted EBITDA to our reported operating cash flow and then our reported free cash flow.

But looking specifically at Slide 9 on the left side of the chart, you can see our free cash flow for the quarter was a use of $10 million. But adjusted for our offtake paydown of $11 million, the CapEx spent on our Stage II optimization, plant recommissioning activities and related projects in the quarter as well as onetime deal expenses, our Stage I process generated over $21 million of normalized free cash flow in the first quarter. That's over $80 million on an annualized basis compared to $34 million in fiscal year 2020. That's also a very strong 35% free cash flow margin, up from 25% for the full year 2020.

Keep in mind that the offtake balance is essentially debt. But per U.S. GAAP, the impact of the paydown of that agreement because our offtake partner retains a portion of the cash from sales of products to pay down the obligation, the impact runs through operating cash flow instead of financing in the cash flow statement as might be expected, which is why we believe it's relevant to add it back to our free cash flow for a comparable metric.

Moving to Slide 10. I'll give a quick update on our balance sheet. As discussed earlier, the green bond resulted in net proceeds of over $672 million and, combined with our performance in the quarter, results in a cash balance of nearly $1.2 billion at the end of Q1.

In addition, the balance of our offtake agreement was reduced to $60 million in the quarter. As many of you are aware, the SEC recently issued guidance regarding the accounting treatment of warrants typically associated with SPACs and de-SPAC issuers. Each company's situation is unique, and we have closely evaluated our specific facts and circumstances considering this new guidance.

In consultation with our outside legal counsel and external auditors, we believe that our outstanding public warrants continue to meet the requirements for equity classification and that no change in accounting treatment or restatement is necessary.

Additionally, regarding the public warrants, we announced on Tuesday our intention to redeem these warrants and require a cashless exercise during the redemption period. Given our capital position, this allows us to reduce dilution to our shareholders by foregoing the cash underlying the warrant strike price. With the strong confidence we have in the cash flow profile of our current and go-forward plan, this was the value-maximizing path for shareholders.

With the conversion ratio discussed in our redemption notice and excluding the impact of the convertible note, as it is out of the money, our current share count is approximately 178.3 million shares.

Now I'll turn it back to Jim to wrap up.

Thanks, Ryan. Before Q&A, I would like to take a moment to summarize why we believe MP is so well positioned to become a Western champion of the electrification and sustainability revolution. First, we have a co-located set of unique world-class assets. These are our ore body and our nearly $2 billion state-of-the-art processing and separation facility.

Let me start with our ore body. We have a bastnaesite ore body, which contains north of a 7% mix of rare earths, one of the highest anywhere in the world. Most mines are in the 1% to 2% range and some speculative mines are well under 1%. That means our competition must mine 3 to 7 times more total rock to get the same REO output out of the ground. And that in turn means more reagents, more processing and more time. That all means much higher operating costs.

Additionally, a bastnaesite ore body allows for roasting without the use of additional chemicals, at lower temperatures and with fewer potential emissions. We also do not have the radioactivity issues you may have read about elsewhere. These factors compound our early advantage from both a cost and environmental impact standpoint.

And then we have a $2 billion state-of-the-art co-located facility in California. There are a few such facilities of this scale, and none in the world that are co-located with the mine like we have at Mountain Pass. This further reduces transportation, shipping and environmental costs. We believe the quality of our ore body, plus this state-of-the-art facility, positions us to become the world's lowest cost producer of separated NdPr, assuming we execute.

Second, we have structural and financial advantages. Those advantages are scale, time to market and scarcity value. All are aligned with a compelling long-term demand outlook for our primary product.

Remember that just building a plant of enough scale to compete will take years and bear significant costs, especially with escalating materials prices like we talked about on our last call. Hopefully, we gave some of you an early hint at this emerging industrial trend that was subsequently confirmed by many companies this earnings season, including Berkshire Hathaway this past weekend.

Materials and labor inflation is happening across the economy, which means the replacement cost of many things is headed much higher. We believe this trend is a powerful tailwind for MP's structural advantage beyond simply a reasonable expectation that the price of NdPr should move up with inflation and then some due to demand.

Other than a competitor potentially building a refining plant in Texas, which is still not financed or permitted, let alone broken ground in construction, we do not see any material western supply coming online anytime soon. There has not even been any significant fundraising for such projects despite NdPr pricing climbing north of $85 a kilo.

The often told joke is that rare earths are not rare. That's true, but it misses the bigger point. What is extremely rare is a scaled, economically viable deposit. And the time, cost and expertise to bring any such deposit online only compound that scarcity.

Third, our Stage I process is profitable and cash-generative. We did go public via a SPAC, and our business is levered to electrification. One could simplistically bucket MP with the hyper-speculative electrification group, many of which, we believe, will not generate cash flow for years and some others which also may have very aspirational projection targets.

Yet, our existing operations are not speculative, and we have materially outperformed the original Stage I projections we laid out at the time of our go-public announcement in July of last year.

In addition, our Stage II is fully funded and expected to come online sometime next year. Obviously, our expectation is that this will accelerate our financial performance.

Fourth, we have an owner-operator culture with a sustainability focus. From my earlier discussion on the green bond, you know that we believe our platform gives us a competitive advantage. Every qualifying employee was granted shares when we went public, and I remain the largest shareholder of the company. We are committed to our vision and our incentives are aligned with you.

And lastly, we are at the ground floor of what we believe will be a decade-plus transformational growth opportunity. Some of you may have seen a cover story in the Wall Street Journal on Tuesday about the evolution of the auto supply chain for the age of electrification. We also treated it the other day, in case you missed it. The auto industry faces existential risk from the past practice of just-in-time manufacturing.

This new era is one where the ability to vertically integrate the supply chain is a source of strategic advantage. Companies are now competing for the kinds of scarce resources that are exactly what we have at MP. This is why you have seen companies like Tesla and others talking about mining in recent months. The semiconductor mess makes us an even hotter topic, and we see it now in conversations.

Our Stage III efforts continue at a furious pace. I know many of you want lots of details, but we will share with you what we can when we think appropriate. I would point out, though, that regardless of the path we take, our mission is to restore the full domestic supply chain. And remember, this is not just about the auto supply chain, rare earth permanent magnets are also important to so many growth industries of tomorrow, like, wind turbines and drones and then maybe some currently unexpected ones like air taxis. Who knows exactly what will come next, but the opportunity is ours.

With that, let's go to Q&A. Operator?

(Operator Instructions) Our first question comes from David Deckelbaum of Cowen.

I just wanted to discuss, just so I'm clear, on trajectory through the year. The -- in the first quarter, it looks like there was some delayed sales to the shipments. You talked about the ports still having some issues, but was this a global issue? Did the canal at all have any impacts on slowed shipments in 1Q? And should we naturally see a catch-up in the second quarter?

Ryan, why don't you take that?

Yes. Sure. David, I'd say our original expectation that we flagged on the last call was that just given the congestion we had seen in the L.A. Port, given we ship out of Long Beach and L.A. Port, that shipments, frankly, are lumpy. We're only able to get product to the port within a certain period of time of that product planning to leave the port. And so when there is congestion, that limits our ability to ship out product.

What we did see as a pretty heroic effort from our operations and logistics teams to get out, from what you saw, a very significant portion of our production did sell in the quarter, and that's why production volume and sales volume matched pretty closely this quarter and in even better shape than what we even see typically seasonally in Q1, given we tend to see a seasonal Q1 slowdown on the shipping side from Chinese New Year on the import side.

I'd say the ports have become a bit less congested, but it is still something that we watch very closely. And so what I would say is that it's something that we have on our radar that we continue to watch. We think it should improve over the course of the year and, certainly, we think on a medium, long-term basis, it's -- our full year sales in production should match very, very closely. We just want to be clear that in any given quarter, shipping can impact revenue recognized just given that lumpiness.

I'll try to just stick to 2 questions here so I can be kind to others. But Jim, you talked about sort of progressing on Stage III. And I guess, I just wanted to square your comments with, you talked about the success, obviously, in the green convert. When we think about those proceeds, do we think about that as being sort of held for investment in Stage III? Or do you look at those converts as being flexible beyond what you've already outlined between Stage II and Stage III, perhaps, for other potentially accretive opportunities that we're not thinking about?

Well -- so you know that, obviously, if you look at the business, we have a cash flow positive business today in our core. Stage II is limited amount of capital relative to our cash balance. I think the way to think about it is, we have a fortress balance sheet and a platform that is increasingly becoming the thought leader in this western supply chain in our space.

And so what I would say is that convert really created a lot of optionality in our capital structure to take advantage of what we see out there. And if we don't find a very attractive way to utilize that capital, we can return it to shareholders. And again, we are -- we've come at this from an investment perspective.

So we're fully aware of returns on capital and making sure that things make sense. We're going to stay on mission. I mean we're not -- if the question is, is the capital going to be utilized to kind of go in some other direction or something like that, we are plenty busy with our near-term plans of executing Stage II. And then as I've said plenty, we have a pretty great Stage III team that I work closely with of sort of material scientists and technologists and business development folks.

And so we are looking very closely at a number of buy/build and/or JV opportunities, as I've said. You can imagine that the chatter up and down the supply chain has just dramatically accelerated. I mean it was already very loud back last year. I think that, that just -- again, look at the Wall Street Journal a couple of days ago and think about what's happening in the supply chain with semiconductors.

And so I think the fact that we now have positioned ourselves as not only a credible counterparty, not that we weren't, but I think that this just sort of adds to the momentum with respect to that. But also, it shows that we are holding ourselves to account in the capital markets with the kind of standards that both consumers and our industrial potential partners would want to hold us to just creates a lot of value sort of writ large.

And so that's sort of the logic behind it. But again, I would remind you that we're all -- we are the large shareholders here. So we're not looking to go on sort of fantasy directions and other ways. We're really looking to complete our mission, do so in a proper way and make a lot of money for shareholders.

Our next question comes from Timna Tanners of Bank of America.

So I wanted to circle back on the long-standing guidance you've had in the past of $250 million EBITDA by the time that Stage II is fully ramped up, assumably full year 2023. And I might have heard this wrong, so I just wanted to clarify. I thought others might appreciate it. There was a comment saying that when Stage II is fully up and running, EBITDA could be double at current prices what it was in the first quarter.

And first off, I guess, I just wanted to clarify if that's true? And if that were true, then the run rate would be about, I want to say, $264 million. So can you just let us know if that was indeed the right way to think about those comments?

Yes. So the number...

Go ahead, Jim.

Ryan, do you want to -- well, let me just say, the number that you're referencing refers to the number that was in the go-public transaction from July of last year and that represented a number based on a midpoint of potential NdPr prices with, specifically, $70 NdPr. We obviously are sort of in the mid-80s today. You can do the math.

We also said on last call that we believed that we were able to make some improvements on our potential operating costs from what we see with respect to a normalized 2023 on an apples-to-apples basis versus last year. We haven't updated guidance for new prices, but I think with those moving parts, you can probably put together numbers and think through the significant operating leverage that we have.

Ryan, I don't know if you want to add on to that.

Yes. Yes, Timna, I think there's some confusion. I'm just talking about product margin versus total EBITDA. So I think that's the disconnect. We were talking about product margin looking at our current production in Stage I. If we were separating it, that product margin would double. But to Jim's point, no change in our guidance whatsoever in terms of what we think the cost structure looks like pro forma for Stage II.

So as Jim mentioned, that midpoint of $70 of NdPr, we had guided to approximately $250 million of EBITDA. If you look at the slides and information that we've put it at that time, we did sort of a low and high NdPr case as well, just to sensitize for you what that looks like, in that $90 case that's in our slides was $352 million of EBITDA. Absolutely no change from that guidance.

Okay. That's super helpful. And then if I could, a second question is, I recognize that you talked about Stage III but aren't prepared to elaborate on what that might look like. I appreciate that. But just wondering if you can comment on any thoughts about heavy rare earths and separation or production there and when we might get any update on timing for Stage III, please.

Sure. So on the heavy side, the only thing that we have put out publicly was that we have a project with VOD, and that release sort of was late last year and that speaks for itself. We haven't said -- otherwise said anything with respect to heavies. So I'll just let that speak for itself.

And then as far as Stage III updates, obviously, as you can imagine, we understand the investors want to know as much as they possibly can, and we'd love to be as transparent as we possibly can. But we have to just kind of keep moving forward and do what we think is right.

We want to make sure that whatever it is that we sort of tell you or share is heavily vetted, real or whatever. We're not looking to kind of put out a bunch of stuff until it's appropriate. And so that's really all I have to say on that front. Obviously, we'll make Stage III announcements as soon as we possibly can when appropriate.

Our next question comes from Sathish Kasinathan of Deutsche Bank.

So my first question is on Stage -- commercial side of Stage II -- makers saw any potential offtake agreements for your Stage II products?

So -- you cut out there, but I think you asked, do we have any offtake contracts for Stage II?

Yes, yes. Have you had any discussion on that?

Well, you can imagine that, I mean, from quite a while ago, but you can imagine that conversations are particularly hot these days given everything that's happened in the supply chain and specifically semiconductors and, frankly, the importance of our space I referenced in IEA report that just recently came out. We actually also tweeted that. And then there was a follow-up around critical materials. We really do see what we have as being extremely strategic to the downstream OEMs and, frankly, other industrial participants as the world electrifies.

[I've taken] the view and, frankly, I think it's fair to say we got a little bit of maybe criticism isn't the right word but questioning last year about why we wouldn't sign offtake contracts. And what I had sort of consistently said is that I believe that we are headed into a game-changer regime here. We have a very strategic asset, and the world wants what we've got. And so we want to make sure that whenever we do contract that we are doing so in a way that we think maximizes value for all of us.

And so to the extent that we wanted to go out and sign a contract, I'm highly confident we could do so, but we have not done anything at this time and, obviously, never say never, we could change our minds tomorrow, and you could see something, but we have not to date done anything.

Yes. And this is Ryan...

Yes. Go ahead, Ryan.

Yes. Just real quick, I think I'd flag also, obviously, the thing that I think people lose sight of is, this is not new supply, right? This supply is being consumed in the market today. And so we have all the confidence that this can be consumed in the spot market, and I think, to Jim's point, the reason we're not trying to lock in prices here is because we're incredibly bullish on the future pricing of the materials.

Obviously, never say never, as Jim said. I think the other thing to keep in mind is, we do have what we view as a very strategic asset in our current offtake arrangement and marketing ability into the Asian market. And so I think we can continue to leverage that as we would like to with Stage II product. It's not limited to Stage I product.

Okay. My second question is on the market. So one of your peers talked about Chinese players looking to expand capacity over the next 3 years. Do you have any insights on whether these are processing capacities or just on the mining side? Or what it means to the overall market?

Yes. I'm glad you asked that. I found that -- some of that commentary out there, whether it's companies or analysts or media, I find a little perplexing. I have a totally different view of it. So for -- let me first say, nobody knows what's going to happen in the next month or couple of months on pricing, that, in the short term, commodities can be obviously extraordinarily volatile. So with that caveat, I think when it comes to China, you really have to think -- instead of looking at sort of western media or sort of western protagonists, if you will, I think it's best to actually look what they're doing and saying inside China.

And in March, the current Head of the Ministry of Industry and Information, MIIT, who's also the previous Chairman of Chinalco, the largest -- one of the large state-owned aluminum and rare producers, made some very interesting public statements. And by the way, the MIIT is the primary regulator of the rare earth industry and much of China's overall industrial development. So this was the head of that.

And so according to the reports, he stated that rare earth producers face a number of environmental problems with excessive mining and refining kind of creating low prices. He actually went on to say that the prices reflect earth, not that they're rare. And then -- and I was surprised this didn't get further coverage. He went on to say that over the course of the Chinese dominance, market dominance, rare earths have been over-extracted, resulting in environmental devastation and that prices for these, and this is a direct quote, "Industrial gold doesn't reflect their full value."

So he -- and by the way, he obviously -- these are -- to refer to it as industrial gold is quite an interesting thing. And for the head of MIIT, in an organization that's really focused on the economic development, to talk about externalities in such a strong way was fascinating.

And so I actually believe and our team believes and, again, it's China. We're just kind of trying to read tea leaves that Chinese government policy has shifted from one of market dominance at any cost sort of to wanting a more sustainable, profitable industry that better reflects the overall costs of the externalities.

And if you think about it, this actually flips with common sense. The rare earth industry is, call it, $4 billion, $5 billion globally. Now I think it's going to grow by many multiples over the coming years. But this is a -- this feeds into a $1 trillion-plus opportunity downstream. And look at the New York Stock Exchange, right, there are massive Chinese companies that are now competing globally.

And so why would the Chinese government -- and again, this is just our opinion from what we read, so -- but why would they subsidize industrial gold for the rest of the world when they're competing against the rest of the world? And so I think that because the last cycle was really sort of a quick boom-bust around the demand shock and there was, obviously, the debacle of our predecessor that really had nothing to do with China, and there's sort of a lot of talk in the media, I think people are missing the bigger picture thing of what's happening here. And I always like to say that the next decade very rarely looks like the last decade.

And so I think people are backward-looking. And I'd also like to just sort of slap a $70 number on NdPr and say, "Oh, okay, at $70, that's the price of marginal development and then therefore prices can't go beyond that." And that's just not how things work in the real world. This is painstaking work. We've been at this for quite some time. These are multibillion-dollar facilities. Even if you had unlimited capital and unlimited human capital and you have the ore body and you had the permitting, none of which exists in scale right now in the western world, this still takes several years.

And so China, in our view, has already shifted to a policy of profitability because they're not focused on the last prior decade, they're focused on the forward one. And so I just think people are missing that. Again, it's our opinion. It's what we see. Things could always change. But that's really our perspective on this. And so I think that we are headed into -- again, with a caveat that the short term is always potentially messy, we are headed into a 2.0 cycle. And I do believe, I've said this repeatedly, that prices in the new cycle typically go to the inflation-adjusted prior peak and then some. And I believe that. So that's our perspective for what it's worth.

Our next question comes from Ben Kallo of Baird.

We're ending our 2 weeks of heavy earnings, and you've been there before. Inflation comes up a bunch and labor and -- when you talk about Stage II, Stage III. I guess my question is just about -- in Mountain Pass where it is, how you -- how labor is. I guess, again, people are working at your company. I guess that is my first question.

And then the supply chain, like, through China, you talked about it a bit. Is there more on-shoring, like, a greenfield is better opportunity to do something else, like, to acquire something in China because of worries about the trade tensions?

Yes. So on your point on inflation, it's a great question. I believe you were on our last call, and I think we, hopefully, can get credit for giving folks an early kind of view on this before it became commonplace this quarter. We were seeing significant rises in prices across materials, across lots of things. And we worked furiously to get our Stage II optimization contracted. And so I think that, that was a great strategic asset that we achieved for our shareholders.

I think that -- and you're seeing this in the capital markets, there's a bit of a regime change, where you're seeing the commodities producers really starting. And it's not -- obviously, it's not rare. It's steel. It's copper, where you're seeing some of these things get going, and there's -- I think people aren't realizing this is a new cycle, right? We've had a decade long bear market. And in the real world, things are just not as easy to just slap our new supply. It's not all [shale].

And so the way to think about it is, these kinds of businesses typically actually have the most upside operating leverage to that phenomenon. So to the extent that you believe inflation is here, to the extent that you believe commodities prices are higher, these are the kinds of companies you want to be investing in. And if it's a cycle just getting going, it's just getting going. Again, that's my personal view.

As far as our labor, to answer your question, it's -- when you look at the math, it's very small relative to the operating leverage that comes from pricing as the sort of the cycle kicks in.

And so we, I would say, from a talent perspective, our -- like anyone out there, we're looking -- we're actually growing quite a bit. We've sort of stated that, but I think our going public and, frankly, the importance of our mission, both from an environmental and national security standpoint, really sort of strikes the passion of a lot of people. And so I think that we've seen a lot of really talented people who want to come join us and then obviously we've been hiring them.

And so we -- our team just continues to grow. And so I think that our ability to kind of build talent is still there. I think we have the benefit of, again, being such a unique company, unique set of assets. But I would imagine it is sort of very hard out there in general for what that opinion is worth.

And I would also say, I think that, again, speaks to the strategic advantage we have because whoever is out there trying to raise capital and, again, we have seen no capital formation in the western world for this stuff. Whatever they thought it cost last week, it's a lot more expensive, and it's going to be a lot more expensive next week.

And so that just sort of speaks to the reflexivity of kind of what we're facing today. And so again, yes, labor costs can go up, but I think that we have attracted a lot of talent and, hopefully, we'll continue to attract great talent. If you have friends that are engineers, send us their resumes. We're always looking for great people. But I think that's what we're seeing. Those trends that you're witnessing are a tailwind for us, we believe.

The only thing I'd add on that...

Yes. Go ahead, Ryan. Go ahead, Ryan.

Yes. Ben, I think some context to -- just on sort of location. I think we obviously are proud of the fact that we have really what we think is the only co-located asset, and we're in the Mojave. And so when we say that, people think of us being in the middle of the Mojave, but we're 45 minutes outside of the city of Las Vegas. And so our ability to attract talent, it has not been an issue at all. We've been able to grow pretty well, both on the corporate side and the operations side, and I think you can see in the results.

The reason we continue to be able to drive pretty significant efficiencies, growing production despite many fewer production days this quarter year-over-year is the fact that we have been adding, for example, probably the best maintenance asset we've had, plant maintenance, ever. And we expect that to continue. And we're gearing up ahead of Stage II, and we expect to be able to kind of extract efficiencies out of that as well just given the quality of the folks that we've been able to attract.

So that has not been an issue. And to Jim's point, importantly, if inflation is here, the leverage for us is just right, where prices on our product will go up. We'll have a bigger impact than the impact to our costs from a labor perspective.

The one thing I wanted to hit on, on your second question about sort of the on-shoring, and is it better to do something greenfield in the U.S. versus having some sort of JV or something, we're obviously not going to comment on specifics of Stage III, but I think your question hits on exactly why we think we have such an incredible competitive advantage, both in our current business and in our potential Stage III, where we are the only co-located asset of scale.

And so absolutely, our customers and the end users of these products, the industrial end users, are seeing what has happened with the supply chain with semiconductors. And having a mine on one continent and a processing facility on another continent and then another piece of that on a third is just not an acceptable risk for some of these customers.

And so I think we're just absolutely in full position, given our co-location and the scale of our asset. And I think that will sort of -- that is the competitive advantage when we think about Stage III and moving into magnetics is access and secure access to raw materials.

Right. Maybe on that front, too, just -- so we had some lithium guys report today. And the question always is like how difficult is to get lithium. And there's a bunch of -- I think, Jim, you talked about like the juniors out there trying to make a mine. And so you've got Lynas down there in Australia. How long does it take to make a mine like you guys have -- if you guys had to guess from your engineers?

Yes. I mean -- well, that's -- and we -- it's a great question, and we try to make that point because there's -- this is hard. It takes years. I mean it's -- and you need -- one, you need an ore body to start, right? If you don't have an economic ore body -- you often -- sometimes you'll hear from juniors, sir, we have this new technology, right? We have -- we're going to -- we have a smarter way to process that. I'm typically skeptical of those claims.

I mean you might as well -- I think if someone came out and said, I have a new way to make -- [some guy in his garage said], I have a new way to make a computer chip, and I'm going to compete against Intel and build a fab, and it's only going to cost me $1 billion, I think people would be a little skeptical in -- with some of these juniors out there that are making these claims. I think there's a little bit of that. We're just -- there needs to be a significant capital raised, but it really does require -- this is a chemical plant. I mean it's complex and difficult to do.

And so one, you've got to start with the ore body. And so if you have 1% ore body, you just can't be economic, again, unless you change the laws of chemistry.

And then -- but then from there, you've got to get financed, you've got to get permitted. And then by the way, you have to go and hire tons of people who know what they're doing. And frankly, the only people in the Western world who have any experience doing this is at -- are at MP Materials. And so we just think that this is really just such a powerful source of strategic advantage for us.

We've also said that we believe the lowest risk, nearest term, highest return on capital, source of new supply would be, one, us getting more efficient in Mountain Pass. That's obvious. But it is us doing some kind of expansion at Mountain Pass, where we made an investment. And now obviously, I'm not saying anything today, and we would obviously kind of be very specific if we were to make an announcement on that front. But that would be likely the nearest term sort of source of western supply, at least as far as we see it today.

And so again, I just think that this idea that you'll see all sorts of western supply -- I mean, we haven't even yet really seen real capital formation, let alone actual facilities, and that will take time. And by the way, even with an experienced operator that, in theory, would ship material from the other side of the world to here, you still have to be -- you have to get the financing in place and you have to get permitted, and you've got to build it. And so anyway, you get my point. I just think that there's a lot of stuff here.

You have -- you basically have people. I get this question all the time. "Jim, rares aren't rare." Well, yes, we -- that's totally beside the point. What's rare is actually having an ore body that can be done economically than having the human capital, the financial capital, the expert -- and then going out and making it happen over a number of years.

And so that's -- again, I just -- I think people miss that. And so we try to -- hopefully, that's helpful color. I don't know, Ryan and Michael, if you want anything on that?

No. That's good.

Yes. I mean the only thing I'd say is, to your point on lithium, I think that's why we're so incredibly bullish about our particular piece of sort of this electrification materials is the supply-demand function in rare earths. It is just much more difficult to add supply than many of the other materials. I think we're all incredibly bullish, all of these materials, given the demand that we see, but I think the critical differentiator. All of us likely will see this demand boom, but the supply and how difficult it is to add supply is what's very unique and, pun intended, rare in our space.

Yes. And just -- I'm glad, Ryan addressed the lithium point. I guess I forgot to do that. Lithium just, as an example, there are -- you have a lot of production in South America, then you have sort of the North Carolina area and Nevada. There are lots of areas where, to the extent the investment is made, with time, you can get product online. And again, as Ryan said, we're bullish all of this stuff. I think just the game-changer that's happening in the commodity space with respect to electrification is pretty amazing. But this is very different than lithium for the exact reason that you have to find an ore body that can be economic just to get in the game. And we don't know of one that exists in the western world today.

Our next question comes from Serena Rocha of Morgan Stanley.

I'll apologize in advance if this was already asked. I got disconnected for a minute from the call. But I'm wondering if you could give us some additional color in terms of the pace of CapEx, either as we think about the rest of this year or thinking Stage II? Overall, how do we -- do we assume just a steady pace within that budget and the timeline minus what was spent this quarter? Or could it be more weighted towards the back end of the project or lumpy throughout? What's the best [way to think] about that?

Yes. We have not given any guidance around sort of specific timing on Stage II CapEx. But maybe, Ryan, you can sort of not answer the question in a more artful, detailed way and give any helpful color.

Yes. No, there is certainly the chance for it to be lumpy. I think we did sort of discuss at a very high level. As with any of these projects, it's a little bit lighter in the beginning, and it gets a little bit heavier towards the end as parts of the project complete. So I wouldn't -- I certainly wouldn't draw a straight line. There will be lumpiness just based on certain milestones that are achieved. But certainly, I'd say, you saw our spend this quarter. Next quarter will be lighter than I'd say the following few quarters.

We have time to take one more question. So Subhasish Chandra from Northland.

You might have explicitly referred to it -- I hopped on the call late. You might have explicitly referred to it. But that IEA report, it talks of 2 things: reduced supply through control of illegal mining in China and then also perhaps tightened processing because of this revised waste solution act -- solid waste solution act, which seems like it's about 6 months old. Can you elaborate on that? And sort of, do you have an opinion if those are meaningful events to kind of a response to that scenario that China will just flood the globe with supplies?

Yes. And so I covered this, but I'll just -- I will -- I think it's a great question because it's really critical to understand, I think, that there's -- that idea of flooding -- in our opinion, from what we read there, obviously, anything can change. But that idea of flooding is really a backward-looking thing without recognition of sort of Chinese strategic imperatives and pronouncements. The most senior Chinese rare earth official, the Head of the MIIT, refers to rare earths as industrial gold and wants the prices to reflect the environmental externalities.

And so -- and if you just think about it logically, I don't see how China would benefit from subsidizing in the industry so that the western world can now compete better with their dominant downstream companies, which is where the jobs and dollars and yuan are at stake, right?

So I just think that the world has evolved enough where the access to resources are really of such strategic value and that they want to compete downstream. And so they don't want to destroy their environment to help western competitors.

Again, opinion -- we just -- this is just based on kind of what we read in here. And so I think that -- I take that at face value to the extent that the head -- rare earth regulators are saying that prices need to reflect the idea that they're rare, not that they're earth and calls an industrial gold, I think that it's fair to think that rare earth prices particularly relative to where they are today and, frankly, on a dollars basis, are probably headed higher. But that's our perspective on it.

Yes. And Subash, on your question on illegal mining and the reduction there, I think one important nuance that some don't appreciate also is, when you've seen announcements about increased quotas, which I think people like to focus on those headlines, but in our opinion, a significant amount of that is bringing illegal mining into the regulated fold because of exactly what Jim just laid out kind of trying to clean up the environmental impact which their country and their citizens are demanding.

And so it -- when people look at supply models and take the increased quotas and just add that and don't make the right adjustments to illegal mining, which admittedly is hard, so by its nature, it's hard to measure. But that is -- with what we've seen in the industry there, that is a lot of what's going on. And so I think that, that is a pretty important factor in driving the supply balance in China.

Okay. No, that's very helpful. So we might be double-counting if we don't include the illegal mines when it comes to...

Exactly. And when it comes to -- yes, when you're adding to supply from increased quotas, I think the thought would be look very closely at how much of that is already contained in the market but is illegal mining.

There are no further questions. So I will now hand the call back over to James Litinsky.

Okay. Sure. Thank you. Well, thank you, everyone, for listening today. We are sort of very proud of our execution here. I think the team did a really great job, and we look forward to next quarter's updates with you, and have a great night.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.