MP Materials Corp (MP) 2021 Q4 法說會逐字稿

Hello, everyone. Thank you for your patience, and welcome to the MP Materials Fourth Quarter 2021 Financial Results Conference Call and Webcast. My name is Dave, and I'll be coordinating today's call. (Operator Instructions)

I will now hand over to your host, Martin Sheehan, the Head of Investor Relations from MP Materials. So, Martin, Please go ahead.

Thank you, operator, and good day, everyone. Welcome to MP Materials fourth quarter 2021 earnings call. With me today are Jim Litinsky, Chairman and Chief Executive Officer of MP Materials; Michael Rosenthal, Chief Operating Officer; and Ryan Corbett, Chief Financial Officer.

Before we get to Jim's, Michael's and Ryan's opening remarks, 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 the appendix to today's presentation and earnings release. Any reference to our discussion today to EBITDA means adjusted EBITDA. Finally, the earnings release and slide presentation are available on our website.

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

Thanks, Martin. And thank you to everyone joining us this afternoon. I assume many of you saw or heard about the White House event on Tuesday announcing our new partnership with the Department of Defense. That was a really special day for all of us at MP Materials. So, on behalf of the entire team, I wanted to again thank the President, the Department of Defense and the State of California for all their confidence and support in us as we continue to execute on our mission to restore the full rare supply chain to the United States. It was a very busy quarter and year, and we have a lot of exciting things to discuss today.

First, I will recap the highlights of a remarkable year. I will then provide some more detail on our December announcement regarding our initial Stage III magnetics facility and our agreement with General Motors. Next, Michael and I will cover our plans regarding our heavy rare earth expansion and give an update on Stage II process flow. Then, Ryan will summarize our financial performance, provide color on the new S-K 1300 reserve report and discuss our upcoming investment and operating expectations. I would be remiss if I did not address the short report, so I will do that before wrapping it up with some closing thoughts. After that, we'll open it up for Q&A. So let's start with Slide 4.

Here is a summary of some of our major accomplishments in 2021 and year-to-date. MP has an execution-focused owner-operator culture, and I think our outstanding results demonstrate that. We produced over 42,000 metric tons of rare earth oxides in concentrate. This represents the highest production in the 70-year history of Mountain Pass and the highest primary production in U.S. history. This was driven by continued improvement in efficiencies in the plant's operations, including feed rates, mineral recoveries and plant uptimes.

Record production and a focus on efficiencies and costs, combined with strong market pricing, led to a doubling of our annual revenues and an over 5x increase in our adjusted EBITDA for 2021 compared to 2020. And significant growth in adjusted EBITDA resulted in a $154 million of normalized Stage I free cash flow. This cash flow generation meant that we were able to make significant growth investments throughout the year while maintaining around $490 million in net cash. The delta between our gross and net cash holdings is essentially the $690 million green convertible bond we issued last March.

As we scale financially and operationally in pursuit of our mission, being a green bond issuer sends an important signal to key industry and government stakeholders about MP's commitment to the supply chain and the environment. Our fortress balance sheet positions us with firepower to continue to invest in the substantial growth opportunities in front of us, while also being better ready to both absorb any potential volatility and be opportunistic as we work to create long-term shareholder value.

Next, we have wonderful news on our key resource, Mountain Pass. We recently completed the new SEC Regulation S-K 1300 reserve report. Ryan will cover it more in a bit, but it extended our mine life by 11 years and our contained REO reserves by 28% versus the last study from mid-2020. We have consistently said that Mountain Pass is a unique world-class ore body, and we are happy that even more detailed outside diligence on it versus last time, has added significantly to its estimated life and value.

We will talk more about progress on Stages II and III in a moment, but I want to congratulate Michael and his team for something of the utmost importance, an outstanding safety record. We went the whole year without a lost time injury and are now actually approaching 700 consecutive days without such an injury. Our employee count has grown by over 50% since the end of 2020 to nearly 400 strong today. MP is growing in people, assets and complexity, and it is no small feat to do so safely. I want to highlight how proud I am of everyone at MP for this.

We continue to make progress on Stage II and have had some notable recent achievements. We recommissioned our combined heat and power plant and our reverse osmosis water treatment plant. Both of these are needed for Stage II commissioning. In fact, in January, we went into island mode. This means that we are now generating 100% of our heat, power and steam on-site instead of getting it from the grid. This is beneficial for cost and operational reliability and resiliency as we further invest in Mountain Pass. The last part of our earnings deck has pictures from around Mountain Pass, so please check that out.

While Stage II progresses, separating some rare earth at Mountain Pass, a remarkable achievement in and of itself, was never our end goal. We have made clear that restoring the full rare of magnetic supply chain was what we were after, and we have also made clear that this would not happen overnight. It will be painstaking and take time. In 2020, around the time we went public, we were awarded a preliminary contract by the DoD to begin design work and study the feasibility of separating heavies at Mountain Pass.

Heavy rare earths, specifically terbium and dysprosium, are typically utilized in small amounts, along with significantly more MVPR in rare of magnets. These small amounts of heavies typically improve the performance of magnets of high temperatures. Therefore, successfully delivering on MP's mission meant our original Stage II process flow would get us almost all the way there, but not fully. A tremendous amount of work has gone on behind the scenes. Our team has designed, piloted and refined our technological approach. The hope was that we could expand and enhance our Stage II process flow to accelerate towards our overall goal and also grow the economic potential of our site.

The $35 million award from DoD is clearly a huge vote of confidence in MP. We are humbled and grateful, and I will talk more about what this all means in a moment. But that is not it. We are pursuing our mission on parallel fronts. We believe critical industry and government stakeholders are counting on us, so we will move as quickly as we can so long as we preserve our execution-focused owner-operator culture. Over the course of 2021, we built up our world-class MP magnetics team and we continue to grow that team. The pace has been pretty amazing, but also methodical and pragmatic.

In December, we announced we are building our first magnetics manufacturing facility in Fort Worth, Texas, and but we signed a binding long-term agreement with General Motors as the foundational automotive customer of the facility. I am very pleased to report that we broke ground on the new facility last week. We have a long way to go, but what an incredible milestone.

Let's discuss some more specifics about it on Slide 5. Our new Fort Worth facility will convert rare earth oxides we produce at Mountain Pass into metal and, ultimately, neodymium iron boron or NdFeB alloy and magnets. Along with the groundbreaking, we are already sourcing long lead equipment. The objective is to have this facility ready to begin delivering alloy in late 2023 and magnets in 2025. We are currently planning to produce about 1,000 metric tons of NdFeB magnet per year with some additional alloy capacity, which could feed roughly 500,000 EV motors. This would consume just mid- to high single-digit percentages of our current expected Mountain Pass NdPr output. So we have significantly more runway to expand the magnetics business over time.

As we position the company to enter the magnetics business, we are also expanding into magnetics recycling. And we believe MP is uniquely positioned for leadership in this burgeoning opportunity. Let me explain. There's a fair amount of waste generated in the magnetics manufacturing process. With such valuable material inputted into the process, maintaining a competitive cost structure is greatly aided by having the ability to do something with that waste. Our team has been conducting extensive piloting at Mountain Pass for the last 18 months, and some of these pilot projects include large commercial partners.

Our extraction assets and the high level of colocation in our operation means we can run a highly integrated closed-loop magnetic manufacturing process where materials are mined, refined, metallized, alloyed and then made into finished magnets. And materials created along the way can be fed back into the process. MP is now positioned to become the only truly integrated magnetic company in the world outside of China that can do this. Plus, as the world electrifies and many electric vehicles when turbines and other like assets get to the end of their lives, MP expects to participate in recycling those end-of-life permanent magnets. Our full integration means we believe we will be able to insert those third-party feeds into various points in our asset base. Michael will explain more on this in a moment.

Lastly, as I mentioned earlier, we have a binding long-term agreement with General Motors as the foundational automotive customer for MP Magnetics and our Fort Worth facility. We expect a gradual production ramp to begin in late 2023, beginning with the supply of alloy to GM with a gradual expansion into finished magnet production in the 2025 time frame. With recent efforts around our heavy expansion and breaking ground in Fort Worth, we believe MP has pulled forward our mission by at least a couple of years, at least certainly compared to where we expected to be at this point back when we went public.

We believe this is incredibly significant for American industry. GM and other future MP customers will have access to rare earth magnets produced in the U.S. entirely of sustainable U.S. sourced materials. That is simply not possible today given the state of the supply chain. And filling this void is significant to both our businesses and the American economy overall.

Let's move on to Slide 6. As the long list of achievements on the last 2 slides suggest, we entered 2022 in a much stronger position than a year ago. The electrification of the global economy, even as the capital markets appear more challenging recently, is accelerating. Our business developments clearly suggest that critical industry and government stakeholders want MP to become a Western champion in our industry, and they want it to happen as quickly as possible.

By the way, our Stage II heavy rare earth addition is being designed to accept third-party feed. So that should expand what we thought of as our previous light and heavy rare earth output potential. And it also means we can help other Western projects develop as we become a potential customer for their intermediate materials. We realize the scale of this opportunity and we are pushing forward on parallel paths. We know that we must execute with precision and we must get it right. Against this backdrop, we continue to see many supply chain, labor, logistical and materials challenges throughout the global economy. I would say that in Q4 of 2021, we did not make as much progress on Stage II construction as we had hoped. Issues around Omicron created labor issues all around the economy that were well documented this past quarter, and we, along with our contractors and suppliers, certainly saw our share of that.

Executing in expansion and scope changes in an inflationary environment is testing all of us. Nothing is happening as fast as we would like, but we remain relentless. Engineering and procurement are wrapping up and construction is accelerating. We are still targeting to mechanically complete their light rare portion, i.e., separation, finishing and related infrastructure of our Stage II later this year. But with the expanded construction and scope around heavies and recycling, next year won't be a full normalized year, but we still expect to achieve full run rate production volumes in 2023.

Ryan is going to discuss our current expectations around CapEx, which was previewed a bit in our announcement on Tuesday and what this all means financially and operationally in a bit. But let me be crystal clear in saying that all this is extremely exciting. We are generating significant operating cash flow today. We are pulling forward the opportunity. We believe we are investing at high returns on capital. We believe everyone, well, almost everyone, is rooting for our success, and we believe we are creating significant enterprise value.

I'll be back after Ryan, but before that, let me turn it over to Michael for more process details around Stages II and III. Michael?

Thanks, Jim. I'd like to start by saying that I couldn't agree more with how exciting the heavy rare earth opportunity is for us. I'd also like to acknowledge our engineering, analytical, maintenance and project team with the significant work that went into this analysis and design. I'd also like to thank the Department of Defense for its support of our project and helping spearhead the government's effort into securing this critical supply chain in the United States.

When we initially conceived the Stage II flowsheet, which is included on Slide 7, we had anticipated heavy rare earth separation being a longer-term possibility. However, as our strategy for Stage III magnetic became more clearly defined and as our magnet recycling capability in support of this project and long-term environmental sustainability has progressed, the necessity and attractiveness of HREE separation sometimes called SEG+ separation has become more apparent.

You can see a simplified depiction of where the heavy rare earth circuit will fit into the flow on the bottom of the slide. As Jim mentioned, certain HREE, namely terbium and dysprosium, add key functionality to high-end magnetics. Our Stage III operation and third-party customers are interested in a stable domestic source of these elements in the same way they are eager for NdPr.

Magnet recycling is a critical component of metal and magnet manufacturing. The U.S. must have both capabilities. [Scent magnet] for metal and magnet facility process waste contains NdPr, along with terbium and dysprosium in many cases. But process waste, a lot of cost was sunk into that material before it fell out of the process. Therefore, the waste must be turned back into a valuable commodity. To do so, the elements in some cases must be reseparated. Therefore, heavy rare earth separation becomes even more intricately linked to magnet production and our Stage III plan.

You can see on the top right how recycled magnet materials could be fed back into our separation process at Mountain Pass. Over the past 18 months, partially supported by our initial DoD brand, we have been working towards a technical and operational plan for HREE separation. We have also evaluated how to incorporate heavy rare earth into the Stage II flow sheet and our site infrastructure. This has contributed to ongoing R&D and capital expenditures throughout 2021.

As our confidence increased and supply chain concerns intensified, last summer, we decided to prepurchase certain equipments that we believe would help improve the efficiency of a future heavy rare earth separation plan. The heavy rare earth circuit largely runs in parallel to the existing Stage II plan. However, there are also important tie-ins to common site infrastructure, storage and systems that minimize our environmental footprint, improve efficiency and reduce costs.

Importantly, as we consider third-party feedstocks to bolster our heavy rare earth supply, there is an expectation that these feedstocks may come with additional light rare earth elements as well, namely NdPr, lanthanum and cerium. We have long factored this in, but this has resulted in some additional scope to Stage II, primarily related to sizing and optimization of existing rather than new assets to accommodate the potential for higher light rare earth volumes that may come with heavy separation. As such, these investments will help to seamlessly integrate heavy rare earth separation and magnet recycling into the broader Stage II plan and will be factored into our CapEx budget, which Ryan will touch on in a moment.

We expect to implement changes to existing assets to support new and increased flows, and we must expect some disruption as we incorporate additional assets into the Stage II scope. Our long-term interest in supporting a diverse rare earth supply chain is core to our mission. With the announcement of the first step of our Stage III plan and the DoD support for our heavy rare earth project, we now have additional stakeholders sooner than we might have anticipated, ensuring the quality and sustainability of the Mountain Pass feed into the supply chain is a preeminent importance. We will, therefore, be especially prudent with our Stage II ramp and we'll prioritize assuring our long-term success over meeting any short-term deadline.

Moving to Slide 8. The purpose of this slide is simply to show the unique advantage we have as a vertically integrated company. We can take the waste for magnet manufacturing or end-of-life magnet and determine the optimal place in the end-to-end flow to recycle the material, whether it be into the mills or back to Mountain Pass to produce fresh oxide. This level of integration will enable us to maximize value and minimize cost and is highly unique in the global magnet industry.

We have also been working with large commercial partners on piloting these processes at scale volumes at Mountain Pass and at vendor's location.

Hopefully, this slide and the previous one give you a better feel on the process flows and a visual understanding of some of the complexities that we will continue with, particularly as we incorporate heavy separation and magnet recycling into our Mountain Pass processes.

With that, I will turn it over to Ryan. Ryan?

Thanks, Michael. As Jim already hit on the highlights, I will quickly go over our annual results starting on Slide 10. In 2021, we saw modest improvements on all of the key inputs in our production growth algorithm, uptime, feed rates and recoveries all improved compared to 2020, resulting in a 10% increase in total rare earth production. You can see on the bottom left, compared to 2019, production is up over 50%. Obviously from here, incremental improvements get more challenging, but Michael and the team continue to focus on making thoughtful improvements to continually drive higher volumes, which we expect will primarily come through improved mineral recoveries.

On the top left, you'll see that we continue to ship virtually everything we produce despite a very challenging shipping and logistics environment. And moving to the right, you can see the strong growth in pricing, driven primarily by strong demand for our concentrate product due to the contained NDPR. I'll discuss that a bit more later. Finishing up on the bottom right, you can see that production costs were up modestly versus last year, but when excluding about $140 per metric ton of Stage II pre-commissioning costs that hit the P&L, production costs were actually down slightly year-over-year despite the inflationary environment.

Moving to Slide 11. Jim mentioned the strong revenue and adjusted EBITDA growth in the year, which you can see in the top 2 graphs. And on the bottom 2, you can see the leverage we get from solid production and shipping with strong pricing demonstrated by 2021's adjusted EBITDA margin nearly doubling to 66%. On the bottom right, you can see that much of our adjusted EBITDA flows through to adjusted net income. We believe these results show the power of our Mountain Pass sits on the cost curve, and we look forward to building on this success in 2022.

Moving to Slide 12 and our fourth quarter results. Again, a similar story on a year-over-year basis with production volumes up about 10%, driven by improved feed rates and mineral recovery, slightly offset by lower uptime in the quarter. Sequentially, you'll see our production volumes declined about 14%, which was driven by our biannual maintenance shutdown occurring in Q4 this year as we discussed on our last call. While the shutdown was very successful, the starting was a bit choppier than we had hoped for, which slightly delayed our ramp back up to full efficiency.

And similar to the annual results, shipments for the most part tracked our production volumes with some lumpiness in the actual timing of shipments causing most of the variability between our year-over-year comparisons. And you'll recall, despite all of the shipping challenges, we had an exceptional quarter of shipping in the third quarter as we not only were able to ship our record quarterly production then but also catch up on modest inventories that have built up from earlier quarters in 2021.

Shipping and logistics then became even more challenging early in Q4 before finally starting to ease at the very tail end of the quarter, which left us with another very back-end loaded shipping schedule, which is reflected in our higher than average receivables, which, similar to last quarter, we have since fully collected. On the right side, you see the continued growth in realized pricing driven by the tighter supply-demand and concentrate, driven by NdPr pricing, as reflected in the 31% sequential increase in our realized price.

And on the bottom right, production costs were down year-over-year, even with some additional pre-commissioning costs for Stage II as we remain resolutely focused on costs with a bit of an easier year-over-year compare, given our reagent testing in Q4 of 2020 that we previously discussed. Sequentially, costs were up about 5%, all due to higher costs associated with Stage II pre-commissioning as efficiencies, ex Stage II costs, offset cost inflation. These Stage II related costs totaled about $200 per metric ton. So excluding these, costs would have been down approximately 17% year-over-year.

As for our quarterly financials on Slide 13, you can see our revenues were flat sequentially as lower shipments were offset by improved pricing with year-over-year revenues more than doubling. Moving to the top right, the same story can be told for adjusted EBITDA with the strong leverage from pricing and our efficient operations resulting in improved margins both sequentially and year-over-year. And just like our annual chart, our growth and adjusted EBITDA nicely converted to adjusted net income.

And lastly, on our financials on Slide 14. The strong EBITDA from Stage I in large part flows through to our normalized Stage I free cash flow after adjusting for the $55 million of paydown of the Shenghe offtake agreement and about $113 million of growth CapEx. Growth CapEx consisted partly of Stage II optimization spend, in addition to the cost for recommissioning our combined heat and power and water treatment plant as well as other investments primarily at Mountain Pass.

I would also like to point out that as of the end of the fourth quarter, there was just over $16 million remaining on our offtake agreement with Shenghe and that remaining $16 million should be paid off by the end of the first quarter of 2022. That will mark the end of our offtake agreement with Shenghe and therefore the recruitment mechanism, which will provide a nice step-up in GAAP operating cash flow for 2022. As you can see on the chart, removing this recruitment feature and all else equal, our GAAP operating cash flow would be $55 million higher.

With the offtake agreement nearly complete, we have recently received offers from several potential distributors, off-takers and refiner groups. Our goal is to maximize our profitability and minimize the various risks associated with exporting nearly 80,000 metric tons of concentrate into China. As market demand has grown, we have also begun laying the groundwork for strategic supply relationships with large multinational customers who are interested in tracing their supply chain back to our ore body. While we are producing and selling rare earth concentrate into China, we expect to continue distributing via Shenghe to our various end customer refiners, which allows us to leverage in-place logistics for a material until we ramp the direct sales of oxides to customers located primarily outside of China.

Moving to Slide 15. As Jim pointed out, one of the most exciting highlights in the quarter was the completion of our updated reserve report in line with new S-K 1300 regulations. This resulted in a suggested mine life of 35 years, assuming consistent feed rates to the mill, which is an increase of roughly 11 years from our last estimate done in July of 2020. This was a very comprehensive program, which included completing an updated geotechnical drilling program, a revised and updated geological block model and updates of product prices, including the improved economics of Stage II as well as our latest operating costs.

I would also note that we believe the results are based off of conservative estimates for most of the key variables, including long-term pricing and volumes. An example of the conservatism we see is the economic cut-off grade used in the report of 2.49% for our reserves is higher than many producing mines today. We expect to investigate upstream technologies that over time should allow us to efficiently process these lower grade ores and better incorporate the lower-grade material in our ore body into our mine planning and reserves. The resulting analysis showed a 43% increase in proven and probable ore reserves to a little over 27 million metric tons and a roughly 380,000 metric ton or 28% increase in the rare earths contained in that ore.

In addition, the report highlights a further 457,000 metric tons of indicated and inferred rare earth resources not currently in the reserve that we will look to incorporate over time. Needless to say, we are really pleased with this update as it solidifies our belief and what a vast resource we have in Mountain Pass to continue feeding our downstream vision, the economics of which, of course, are not yet captured here.

Moving on to the next slide. And before I turn it back over to Jim to wrap up, I wanted to give you some color on our near-term investment levels. At the White House on Tuesday, we committed to investing approximately $700 million into the rare supply chain through 2024. Let me start by saying that the evolution of our business reinforces the need for discipline and planning around how we are allocating capital to these various projects that support our mission. Many of these projects are now both overlapping and integrated, but all are collectively focused on one objective, how best to drive optimal returns as we leverage our asset base at Mountain Pass and execute on our move downstream.

The $700 million investment includes: one, the completion of Stage II, of which a significant portion was still left to be spent as of the end of 2021. This now also includes the additional scope of heavy rare earth separations; 2, our initial Fort Worth magnetics facility and associated investments in recycling at Fort Worth and Mountain Pass. We note that with the groundbreaking and long lead purchasing commencing, we expect to incur a significant portion of this investment in 2022. And 3, various efficiency projects we will continue to embark on at Mountain Pass. In total, we expect to spend approximately $500 million in CapEx in 2022 and the remaining approximately $200 million net of the contribution by the Department of Defense in the 2023 and 2024 time frame.

I would imagine there will be continued additional vertical and horizontal investment opportunities in the coming years to consider, but we will update you with any material changes to our investment plan. So, what will that investment get you, our shareholders, when we are fully operating our separations capability, including heavies and our initial magnet facility is that run rate as a benchmark. And I say this with all of our caveats around forward-looking statements, for we to assume current spot pricing for the full year of 2022, we would expect to be currently at a run rate of $450 million to $500 million of annualized adjusted EBITDA from sales of concentrate, i.e., our current business.

It is important to note though that year-to-date spot NdPr pricing has been lower than current spot and our realized pricing also tends to move with NdPr prices with a small lag. So this run rate is not meant to be calendar year 2022 guidance. After our investments in Stage II, including heavies and the achievement of full run rate in our initial magnetics facility, our model indicates expected total adjusted EBITDA for MP would nearly double to approximately $900 million to $1 billion at current spot prices.

We are not sharing these figures as formal guidance as we don't intend to update it with every tick of rare earth pricing or movements and other operating conditions, but we wanted to give you all detailed insight into how we are modeling plant spend and the potential returns.

I want to reiterate that we are in a challenging and volatile macro environment with inflation, supply chain and other challenges. So like any model, including one where the inputs involve commodity pricing, these numbers could ultimately fluctuate quite a bit. That said, I think this demonstrates that we believe our incremental investment opportunity set is both big in scale and very financially attractive.

Of course, we must execute, as Jim always stresses, but to recap, when aggregating the approximately $113 million of growth CapEx already spent in 2021, plus the anticipated $700 million we intend to deploy, we expect an incremental run rate EBITDA opportunity of nearly $500 million in the current pricing environment, resulting from our downstream expansion. And keep in mind that this assumes a downstream magnetics business that only consumes single-digit percentages of our upstream output. So we will be methodical, but we expect exciting further reinvestment opportunities over time.

Lastly, I would highlight again that given the significant free cash flow generated from our current business, we believe we can continue to invest in these growth projects that significantly expand enterprise value while still maintaining a net cash balance and conservative fortress balance sheet.

With that, I'll turn it back over to Jim. Jim?

Thanks, Ryan. We are still on Slide 16, and I love this picture. Many of you have heard me say how proud we are that we wear the American flag on our sleeves. The mission we have taken on is important, disruptive and very challenging. We are also capitalists, and we believe what we are doing is going to be very rewarding. Yet for 2 quarters in a row, we and our shareholders have been the victim of drive-by stock rate short-seller statement.

Sell-side analysts and investors not taken in by misleading soundbites figured things out. But according to Bloomberg reporting, at least one of these parties appears to be involved in a United States Department of Justice probe around potential trading abuses and other crimes. So, we take addressing this issue very seriously on behalf of our shareholders, many of whom are rightly very angry at those involved in producing these false and misleading short seller statements.

First, I want to make clear that we respect honest, rigorous and thoughtfully researched short-selling. This is a critical market function. Some of you already know this, but I ran a sizable hedge fund for nearly 15 years before returning my outside liquid capital, so I can focus full time on creating long-term shareholder value at MP. The reason I bring that up is that I think it is fair to say that I have the appropriate background to be able to delineate fundamental short-selling from outright market manipulation and securities fraud. So let me address the fundamental claims raised about MP, and then I will give you some overall perspective in case this happens to us again.

In a nutshell, the report claimed that we engaged in a scheme with Shenghe, our distributor, to inflate prices, that the Mountain Pass ore body is uneconomic, according to a data German study utilizing inputs from our predecessor 8 years ago and that a single loss shipping container was evidence of round tripped inventory. The disseminator of these false and misleading statements never called us, and its entire thesis would have been debunked by a simple phone call or frankly by reading our SEC filings.

First, regarding the pricing of our products. Shenghe is a distributor. They are paid a commission to achieve the best possible price from a number of refiners in China, who are eager to purchase MP's product and who ultimately set the price that we receive. Trying to overlay our product sales versus import data versus the ultimate sell-through by a distributor, all with completely different timing parameters and in a rapidly rising price environment, is purposely deceptive and misleading in my view.

Next, I think the viability and economics of our ore body speaks for itself. Ryan and I covered it today and the S-K 1300, which reflects extensive outside due diligence, will also be filed along with our Form 10-K next week. Making a claim about MP based on a data German study with 8-year-old information from our predecessor that went bankrupt is also purposely misleading in my view.

And lastly, we shipped roughly 4,000 containers last year. The disseminator of these misleading statements attempted to focus on one container, which got lost and was returned to sender back to Long Beach before being rerouted to its proper destination port, trying to cause the market to believe falsely without any context that a single lost container was evidence of anything, constitutes market manipulation and, again, purposefully misleading in my view.

To the contrary, I would argue the only thing that is evidence of is that our team is pretty darn good at logistics. So, it is clear to me that the disseminator of these false and misleading statements was not actually doing legitimate research. There was no attempt to gather and check facts with context for an actual investment thesis, and it was certainly not about acting in the public's interest. The apparent goal was stock manipulation in the hopes that harsh allegations would create enough doubt to scare our investors for a day or maybe more.

I think the government is going to deal with this kind of behavior eventually. And I think what they are going to find is that there are actors behind these false statements profiting from the chaos they create and the investors they hurt. For those who were hurt by this though, I would ask the following question. Why would someone pay for so-called "research reports" where there is basically no substantive research being done and that are already being given out to the world for free? It would seem to me that a very plausible explanation is that it is for advanced knowledge on timing of manipulation events and/or to influence the stock prices of the companies when they are actually attacked by false and misleading statements.

Let's be clear. If that is the case, and there are purchases and sales of securities, that is securities fraud. I think we might ultimately see criminal charges and/or liability extend to the party's funding and facilitating those involved in disseminating false information and trading in advance on that information.

Before concluding on this topic, I want to address insider sales. I know I have made this point very clear since we went public, but it is worth reiterating. I am deemed the beneficial owner of 2 major blocks of shares, approximately 42 million shares in the name of JHL Capital Group and approximately 16.8 million shares in my name. The JHL Capital Group named shares are almost entirely the institutional investors who were invested with me when this journey began in late 2014, nearly 8 years ago. Those holders are foundations, family offices, insurance companies and many other institutional investors who are entitled to have their capital returned to them over time.

When MP went public, I went out of my way to make this very clear and even segregated my personal position from my investors entity so that I could return money thoughtfully to my investors over time, while also providing the market with more transparency around my primary personal investment alongside shareholders. For an unscrupulous party to make accusations without any contest is again purposefully misleading, in my view.

Thank you to the research analysts and investors who helped clarify all that. I believe in the importance of our mission and the incredible opportunity in front of us. MP is helping to solve a major problem for industry in the country. Many great companies have been through these kinds of challenges. So we just consider it a rite of passage for MP. We will be unwavering until it is done.

And with that, I will open it up for Q&A. Operator?

Thank you very much. Our first question is from Tyler Langton from JPMorgan.

I guess, maybe to start with sort of Stage II. Can I guess -- can you provide a little bit more detail? I know you mentioned sort of obviously Omicron and sort of labor shortage. But are there any, I guess, key sort of processes or equipment that are sort of causing the delays?

No. I mean, I think that what we said pretty much speaks for itself. I think you've heard commentary around companies in the global economy have just the challenges this past quarter. And anytime you have one thing slip up, it can have ramifications with something else, but there's nothing specific, I would say, other than sort of what we said in the comments, Tyler.

And then, just on the CapEx front, the $700 million, is there -- I guess, could you provide any sort of rough numbers in terms of what's going to be directed towards Stage II for Fort Worth and recycling and inefficiencies?

No. I mean, I think -- so obviously we talked a lot about it in the script, but we're -- essentially because we have all of these projects, we're just -- we're transitioning to an overall CapEx number, and we're not breaking that out into individual projects. So, sorry, I can't help you on that front.

(Operator Instructions) Our next question is from Matt Summerville from D.A. Davidson.

A couple of questions. First, with respect to Stage I output and potential outages you anticipate incurring in '22, what would be a reasonable expectation for year-over-year growth in Stage I output? I guess I'm trying to get a feel for how much moving forward, you're able to push the envelope on mineral recovery?

Hey, Michael, why don't you take that one?

Yes, as we said, we continue to work to improve the overall mineral recovery. And we think there's still significant opportunity, although the exact timing of how and when that materializes is difficult to predict. We continue to optimize our existing circuit and make adjustments and upgrades to it to make it better and better. We do expect probably to have some interruption from construction and tie-ins throughout the year, but I don't think that will be terribly material. So overall, we think that the uptime will be probably down slightly but offset by the continued improvements that you saw in the second half of the year, there was some improvement year-over-year, and we think that has not all been reflected fully into the full run rate. Not sure if that answers your question.

And then, as my follow-up question, I'm curious, as the offtake agreement comes to an end here this quarter, where the home might be for where you ultimately can begin to sell Stage I material before it's obviously consumed in Stage II. And then, similarly, I would be curious as to where geographically you might be looking to source Stage II feedstock -- third-party feedstock.

Ryan, why don't you go ahead and cover that since you covered it?

Matt, on that front, what we -- what I mentioned in the script is that we do intend for the majority of the Stage I product that is being sold into the market to continue to distribute that through Shenghe. Even today, we do have direct customers that we sell our Stage I product to. And we have the ability to do that to the extent we so choose. But obviously, given the preponderance of refining capacity being in China and the ability for us to easily distribute with existing in-place logistics, we do have an agreement on terms with Shenghe to continue distributing through them once the offtake is complete. We continue to see pretty strong demand directly from customers really, really far up the supply chain who want to have visibility to exactly where their materials are coming from. And so it is a good opportunity for us to continue to develop those direct relationships that we intend to leverage once we are into Stage II and selling separated products. So, I think majority will continue to make their way to where the refining is in China through Shenghe, but we continue to develop our own direct sales force as well.

I don't know, Jim, do you want to cover the third-party feedstock?

Yes, I think -- sorry, what was the question again on third-party feedstock?

I was just curious where geographically you would plan to potentially source that material and how much material could ultimately go through the Stage II process. I guess at the end of the day, I'm curious as to what that 6075 number looks like if you're not only processing even more concentrate than you maybe originally kind of guided to in the SPAC and now you're also willing to take in third-party material.

So, I can't tell you specifically where because, obviously, I wouldn't want to give up a strategic advantage of the company in kind of negotiating and thinking about where and how we make future investments and whatnot. But I think, to the heart of your question, it is -- as we said today, when you look at what we've outlined and you can go back to the slide where we kind of show you the whole process flow. Our ability now to take third-party feed really allows us the ability to take, say, a carbonate from somewhere else in the world, and that can go somewhere into our process in a way that will give us additional lights and heavies. And so, we also mentioned in the script that we have been sort of positioning and adjusting for that. And so, I can't -- I'm not going to give you sort of a specific number, but I think it would be correct to assume that we will be able to do sort of more than we contemplated 2 years ago.

Our next question is from David Deckelbaum from Cowen.

Jim, Ryan and Michael, I appreciate all the color tonight. I was hoping you maybe at a high level, the reserve report is obviously highly encouraging. You pointed out all the conservatism that you see in the report, and yet at the same time, you have 11 more effective economic years at 35 years. You guys have a lot on your plate right now. Stage II is taking on more complexity. You're expanding in the Stage III. But if we get back to Stage I, how should we think about expansions? And is there a correct mine life, given how robust demand is growing right now that you'd like to kind of go seek around your target over the next few years?

I'll cover it, and maybe if Ryan or Michael want to chime in with additional thoughts. I think the way to think about it, I'll start with -- I'll just step back, high level. I think we may have said this on a prior call, but if you think about just the U.S. auto fleet, as that goes from ice to electric, we probably need -- just for our domestic auto fleet, 3 mountain passes. And that's obviously leaving out sort of the rest of the world and all the other applications and growth that we're going to see around electrification. So there's no question, there's a lot more supply needed. Certainly it makes sense to expand the potential output at Mountain Pass vis-a-vis pretty much at least anything I see in the Western world or, frankly, anywhere else in the world to expand what you said is our -- sort of what our Stage I output is.

And I would also say, it's also, frankly, helpful from an environmental standpoint in the sense that before you start doing a brand-new mine with all of the impacts that that could have with a much lower grade, worse economics, potentially other environmental challenges. It makes sense, frankly, from government stakeholders to want to see our site expanded. So, I think we obviously have a strong economic interest. And I also think government stakeholders have that interest.

Yes, you also noted this in your question, we have a full plate of projects. And so, as you can tell already at MP, we work on lots of parallel pads, and we're trying to move as quickly as we can while also getting things right. So, I guess, I would say, to your question, it's definitely something that is top of mind as far as top of mind, it's not mine, as far as things we want to think of. But realistically, that is -- we have a lot to get done first. And so, I would also just add, if you look at the reserve report -- you look at our cutoff grade and that's above where the orebody -- actual orebody grade is of a lot of other hopeful projects. So, there's certainly a lot of -- it makes a lot of economic sense for -- a lot more to be done at Mountain Pass.

But, Ryan, Michael, do you want to cover anything on this question?

I think you hit it, Jim. The only thing I'd add is obviously, there are technologies out there that we'll continue to stare at, to Jim's point, on the lower-grade material that would allow us potentially to make some interesting changes to be able to leverage material that hasn't even needed into the reserve at this point. But I agree with everything that Jim said. Certainly with everything on our plate, we have been adding very capable teams in all of these areas. And this is one that we'll continue to look at doing the same thing.

And then, if I could just ask one more on the GM as a foundation customer and congrats on that announcement in December. You outlined, Ryan, I think, like the size of the prize in terms of EBITDA with, I think, Stage II and Stage III up and running at $1 billion. How do we think about sort of the pricing involved for -- and fabricated magnets? Are these going to be on fixed price contracts where you can just earn back a margin on the hundreds of millions of dollars you're spending on the plant? Or will there be some variability in the pricing with GM?

What I'd say on that is, we certainly are not going to get into the specifics of our agreement with General Motors. But I would say, take sort of Jim's outage that you said many times that we firmly believe is, we're not going to rob Peter to pay Paul. So, we're not going to enter into an agreement on the magnetic side that in any way prevents us from earning a market price on our material in the upstream business. And so, I think the very exciting thing about what we're seeing develop in terms of the demand domestically and across -- globally, ex China, frankly, is a willingness for customers to look at the value that they get from the (inaudible) magnetics that we are going to provide and understand and are willing to pay a fair price and allow us to earn what we believe is a very healthy margin and return on capital to pursue this opportunity.

And so, it allows us to continue to benefit from what we all see as very exciting supply/demand dynamics from a pricing standpoint on the upstream business, but then be able to continue to move downstream methodically, capture what we think are nice high returns on capital and continue to morph the business into something that adds an additional technological component to it, it adds some smoothing of volatility to it. And so, frankly the reason we're so excited about this is, the market has really come our way from that perspective. And so we're excited about the opportunity.

And I would just add on that. Yes, it's hard for us to -- don't expect us to give out economics of any specific customer in the future, as you can imagine. But I do think it's just worth repeating when you think about the way the world is headed and I think we were -- we sort of highlighted this over the past year with the semiconductor issue and now in sort of the very serious situation that we see on our televisions today with Russia, Ukraine. I mean, what would a company or a country pay to have some diversity in their natural gas from Russia, right? What would they pay to have some diversity in their semiconductors?

And so, you're seeing this theme kind of across the board of people recognizing that as the world economy evolves here, the ability to have a fully integrated offering to a customer has a lot of strategic value. And there are -- it is a difficult thing to create. And so, we really think that our franchise sort of provides that opportunity. And obviously, the foundational deal is suggestive of that, and we expect to have a number of customers like that in the future.

And so, again, I would just highlight that the -- we believe that we will be able to get the economics of our Stage II business and then earn attractive returns on capital in our Stage III business that will add additional total dollars, which obviously is just grows enterprise value. And so, from every indication that we see as we talk to people day-to-day, that thesis, if you will, remains intact and is growing by the day.

Our next question is from Ben Kallo from Baird.

This is George Gianarikas actually. I had a couple of questions. First, on the heavies. Can you help us quantify what the opportunity looks like there from a revenue perspective?

Well, I would just say, high level, we expect to consume all of our heavies into our magnetics business. So, it wouldn't be a separate -- yes, it wouldn't be a separate item.

And next, with regard...

Go ahead, Michael. I think you want to add into that.

The dysprosium and terbium from our SEG+ that we've previously reported, that would be set into the magnetics business. Those represent the vast majority of the value. I just want to clarify that point.

And then, you gave out some numbers, the $450 million to $500 million and the $900 million to $1 billion in EBITDA. Were those Stage I and Stage II numbers? I just wanted to make sure I understood -- I heard this correctly.

Yes. So what we have said is, if you take current spot of NdPr, our expectation is, if you run rated Stage I, our current business, that was the first number, the $450 million to $500 million. If you look at what we expect to be able to earn with current market pricing and all the caveats that come with that, current cost structure and all those sorts of things that we expect, the $900 million to $1 billion was with us fully ramped on Stage II and with the initial Fort Worth magnetics facility ramp.

And that $450 million to $500 million assumes 42,000 metric tons production similar to this year?

We haven't gotten into the specifics of that. And we try to make clear, it's not meant to be calendar year 2022 guidance, obviously given taking today's spot price is not necessarily indicative. But we haven't gotten into the specifics other than I certainly share Michael's sentiment on his discussion earlier on how we would triangulate around our anticipated production for the year.

And so, given that sort of metrics, the $700 million that you've articulated is funded through the business for the most part? Can you help us understand a little bit about the financing needs of the business over the next 2, 3 years?

Well, I mean I can take that. You can look at our balance sheet right now, right? We have a little under $500 million in net cash, right? We have $1.2 billion approximately in gross cash. So -- and if you look at the run rate of the business, look at -- take this quarter, if you want, obviously prices have moved materially since Q4, which is what we reported today. But pick your number in between. And I think if you look at the cash flow that we're generating and do that math, you can see that we believe we'll be able to fund all this with our net cash position. So, we feel very comfortable with the balance sheet and we want to maintain a fortress balance sheet because we -- and I said this in my remarks earlier, when you're in a business with volatility, you want to make sure that you can absorb volatility. But you also, in times of volatility, want to be able to be opportunistic. And I think that our balance sheet and our investment program and where we see the state of the business today affords us at that that we can do all of those banks.

Our next question is from Carlos De Alba from Morgan Stanley.

So, first question is, do you envision that for Stage III, the current Mountain Pass deposit and the heavies that you have there, combined with the recycled production that you will generate will be enough to support your -- at least your first plant of magnetic plant or do you expect the pressure you need to buy from third-parties?

Carlos, I think it would be fair to say that you should assume that we would not go do business that we didn't think we could deliver on. So, I think, you can make your conclusion that we believe we'll be able to provide the heavies that we need.

But not necessarily from your deposit?

Yes. From our deposit with initial facility, yes. Obviously as we scale beyond that, it's a different question, but we do believe that we'll be able to provide from our existing deposit, yes.

And then, the other point, I don't know if it is for you, Jim or Michael, what stage of completion is the Stage II project right now? And how do you see the progress throughout the year? I mean, basically it seems from the commentary that we should expect only really to start late in Q4 and then have a sort of gradual ramp up in 2023 until you reach full capacity at some point in 2023, right?

Yes, I think that -- as I said in the prepared remarks, Carlos, we expect to be mechanically complete. And later this year and sometime in 2023, we will be hitting run rate production. This past quarter was -- you know what's going on in the world, it was a little slower than we would have liked, but we're progressing forward and trying to execute this as quickly as we possibly can.

And final question is, in terms of the cash flow generation. So once the offtake agreement is done, you guys will be -- you will basically have a step-up in your cash from operations that you show in your financials, right?

Yes, that's exactly right. If you look at the cash flow waterfall that we provide over the course of the year in the current offtake arrangement, we obviously pay down with each sale. And so, going forward with the offtake complete, if you just take last year's numbers from an operating cash flow perspective, we'd have a step-up of about $55 million in operating cash flow purely from transitioning away from the prepaid offtake arrangement.

And if I may squeeze a last one. Since you were talking about cash generation, you're talking about cash regeneration, how should we think about working capital, particularly receivables, for the quarter? I guess it depends on the sequencing of the shipments. But how is it going so far? Is it a smooth quarter? And maybe you can't reduce by the quarter end the amount of receivables that you hold in your balance sheet?

I'll refer you back to my remarks on sort of the pace of shipping in Q4, which was sort of a repeat of Q3 and even a bit crazier. So far, what we've seen is encouraging in terms of how the port is operating and our ability to get product out the door. I'd never, in this environment, want to make a hard prediction on timing of shipments. But I would say that the improvement that we saw towards the tail end of Q4 so far has continued.

Our next question is from Lawson Winder from Bank of America.

Also, congratulations on the free money from the government. That's never a bad thing. I just wanted to ask about the $500 million of incremental EBITDA that you spoke to on the call. So, it would seem to me that the vast majority of that would likely be from the separation facility, both the combination of the light and heavy rare earth. Am I thinking about that correctly? Is the bulk of that being from that? Or is there going to be a significant portion coming from this mag facility?

So, Laurence (sic) [Lawson], that was another creative way of asking the same question, but we haven't broken that out. But Ryan, if you want to address that, you may go ahead.

Yes. I mean, look, obviously just given the scale of the upstream versus the downstream, majority of the portion would be coming from 2, including light and heavies. I think we've given -- I'd refer you back to some of our prior commentary to try to triangulate around what our expectations are from a production cost perspective. And so, you can do that math and think about what are the potential volumes that we talked about in Stage II. We told you that we were referencing that number at today's spot. And if you do that math, you do get a very attractive return on capital for the magnetics business. And so, I think there are a lot of moving parts that go into that math, but I think we've given you guys hopefully the pieces to be able to do it. And just given, as we talked about a little bit earlier, we don't want to get into the specific economics of any one customer's arrangement. We don't want to get much more detail than that.

Also, could I ask about sort of the time line on all the moving parts here? So -- and I'm just trying to understand Stage II. So when Stage II starts up towards the end of 2022, is it going to be a start-up for both the light and the heavy or should we think about it as being Stage II starting up for the light and then a possible future shutdown to tie in the heavies?

Michael, why don't you go ahead and take that?

When we start up the light, one of the products that we've shown on the chart is the SEG+ concentrate. So that is a product that we had originally planned to sell and now we'll probably stock pilot, but we won't start up with the heavy rare earth separation facility until a later date, more coinciding with the start-up of the magnetics production in Stage III. We would hope to start up slightly earlier for heavies, but no -- certainly not with Stage II. So we'll be running Stage II, normalizing that operation and preparing for tie-ins for the heavy rare earth separation.

And then, how should we think about how disruptive the tie-ins of the heavies would be, actually both the heavy and the sort of recycling and recycled material handling angle of that?

Michael, go ahead.

We would say, the primary thing is whether we have to do any facilitating investments to ensure smooth handling or any preprocessing of any additional material, third-party material, recycled material into our circuit. I wouldn't expect a hugely disruptive impact, but there will be periodic impact. And then the throughput potentially could be modestly impacted for short periods of time while that normalizes. But they are discrete in many cases. And so, the disruption wouldn't be lengthy for the most part.

And then, just finally, I wanted to ask a question or perhaps 2 on the updated reserve. Obviously an additional 11 years is really exciting, especially if the price of NdPr keeps rising. But what I wanted to understand is, with the lower grade material that is coming into the mine plan now, does that start into the mine plan in the near-term? Or is this something that's going to be back-end loaded?

The way we've built out the mine plan is that over time, the grade will continue to sort of average down, if you will. It's not sort of a stair step in any way. And the way that we've built out to this mine life obviously is with an assumption is as you see head grade come down, you have the obvious impacts on recovery throughout the mill. I think what we see is very conservative assumptions in the report about how that will come to pass. And certainly with some of the comments I made earlier about our ability to look at potential upstream technologies and new processes to look at some of the lower grade material, I think those things would also translate very well into our ability to continue to maintain and grow recoveries, even with a lower average head grade coming into the mill over time.

And so, obviously when you look at the reserve slide, you see the difference between the contained REO. If you look though at recoverable REO versus contained REO, the increase is almost the same. And so, I think 25% versus 28% that you'll see in the report and so there really is not -- nothing super meaningful there, and particularly with the investments we intend to make, we feel very good about multi-decade ability to continue to improve.

And then, with the estimated distribution of TREO content that you guys had previously disclosed, so with this updated reserve estimate, does that change at all?

No, it does not change meaningfully. The distribution -- you'll see when we file the distribution that we see coming out of our con product today has been quite stable. The way the reserve report was put together, certainly with the primarily light rare earth ore body, was focused on the light rare earth content. And so, I think we have an ability particularly now that we've got real plans in place at this point that had developed and accelerated towards the end of 2021, whereas this report is actually an effective data of Q3 and then depleted to the end of the year. I think, an opportunity for us absolutely going forward is to invest some more time in incorporating better the heavy rare earth portion into the reserves.

I don't know, Mike, if you have any other thoughts on that on distribution over time.

No, you hit on it. I think the natural distribution has been very stable over very long periods of time, going back decades.

If I could just fit in one more question, on the SEG+, 1.7% of the total TREO content, what percent of that 1.7% is DY and TV?

We haven't disclosed that. I think we would prefer not to other than referring back to Jim's comment about being sufficient to handle our initial commitments for the Stage III facility.

We have time for one more question and that is from Laurence Alexander from Jefferies.

Can you just flash out your thinking about recycling? I mean, any incremental color you can give us now that you've been, as you say, pursuing multiple tracks at the same time in terms of potential CapEx over the next few years? How the margin structure might compare with the Stage II, Stage III, just can you give some thoughts on how that's going to fit into the mosaic?

Well, I would say on the CapEx, I would just refer you back obviously to the statements Ryan made in the prepared remarks, just because we're not going to break out any of these specific parallel investments. We want to make sure that we guide you to an overall CapEx figure.

But maybe, Michael, if you want to address sort of have any thoughts on recycling and kind of how you see it integrating with the operation, go ahead.

Yes, I think there's 2 parts and they're similar but slightly different. The one is the process waste that would come off of magnetics plant, which -- some of which could be recycled within the magnetic operation itself in the Stage III, and some of which would come back to Mountain Pass to be separated. And the other would be end of life magnets. We've done a lot of hard work on end of life magnets in terms of digesting them, removing iron and boron and other things and producing separated oxides.

You could see it as, and probably the most efficient would be to leverage the existing assets in this existing infrastructure, which largely can handle all of these processes. There could be certain customers who may want purely recycled material that doesn't interact, which would have different economics. And we'd have to evaluate whether that's attractive or not. But I think the attractive thing for Mountain Pass is leveraging existing processes, which too essentially the exact same thing that magnet recycling requires. But having material that has fewer complex impurities and larger separation factors between the elements given that they have in the rare earth, generally neodymium, praseodymium, terbium, dysprosium, maybe very, very trace amounts of others, but it makes it a simpler separation.

This is all the questions we have time for today. So I'll hand back over to Jim for any closing remarks.

Okay. Thank you, operator. And I just wanted to thank everyone. I know it was a long call today, but we obviously have had a lot of exciting things to report to you. So, thank you for your time today and we look forward to future updates. Have a good night, everyone.

Thank you, everyone, for joining today's call. You may now disconnect your lines and have a lovely day.