MP – MP Materials Corp – April 21, 2022

Rare earth elements are fundamental building blocks of the modern economy. They impact trillions of dollars in global gross domestic product through the enablement of end products across industries including transportation, clean energy, robotics, defense, and consumer electronics, among others. Separated rare earth elements (REE) are critical inputs for the magnets that enable the mobility of electric vehicles (EVs), drones, defense systems, wind turbines, robotics, and many other high-growth, advanced technologies.

MP Materials Corp is the largest producer of rare earth materials in the Western Hemisphere, owning and operating the only rare earth mine and processing facility of scale in Mountain Pass, California. It is estimated that the rare earth concentrate produced and sold by MP in 2021 represented approximately 15% of the rare earth content consumed in the global market.

MP currently produces a concentrate that it sells to Shenghe Resources, a leading publicly listed company in China, which, in turn, sells that product to refiners. These refiners separate the REE contained in the concentrate and sell the separated products to their customers.

However, MP is currently undertaking a major optimization project, after which it anticipates producing separated rare earth oxides (REO) and selling these products directly to end-users, a move the company expects will create an enormous growth opportunity.

The rare earth industry actually began in the U.S., when in 1949, three venture partners – Herbert S. Woodward, Clarence Watkins, and P. A. Simon – found anomalously high radioactivity in mineral specimens from the Mountain Pass mine. These almost miraculous elements that could change the characteristics of metals, gave rise to an industry for rare earths and related products. From europium used in color TVs, the magnets used in missiles, to the “invisibility” coat on F-117 stealth bombers, all these once came from the facility in California. Between 1965 and 1995, the mine supplied most of the worldwide rare-earth metals consumption.

In 2002, the Mountain Pass mine was closed because it was causing serious environmental damage and the U.S. began to shift polluting industries to China. More significantly, in 2015, China removed export quotas and taxes on rare earths and as a result global rare earth prices plunged, and existing producers at the mine went bankrupt or were acquired by Chinese interests.

With the Mountain Pass ore body providing one of the world’s largest and highest-grade rare earth resources, demonstrating significant viability well into the future, MP Materials acquired the mine out of bankruptcy in July 2017, with the goal of reviving America’s rare earth industry. Following the acquisition, the company began implementing the first stage of its optimization plans, which was to re-establish stable, scaled production of rare earth concentrate, leveraging the existing processing facility.

Subsequently, various changes and updates to processes and operational best practices materially increased plant uptime and reliability, whilst achieving significant production cost savings per processed ton, enabling it to achieve world-class production cost levels. Once the company completes the next stage of its development plans, it is envisaged Mountain Pass will be one of the largest, most advanced, and most efficient fully integrated REO processing facilities in the world, and the only such facility located in the Western Hemisphere.

Since relaunching production at the site in 2017, MP has increased its employee base from eight contractors to 365 employees as of December 2021, and the company anticipates adding a further 250 full-time employees as part of its upcoming expansion plans.

Founder, CEO, and chairman James H. Litinsky has a wealth of expertise in investments and financial markets having also founded Chicago-based JHL Capital Group, which has over $2 billion in assets under management. Litinsky is supported by fellow founder and chief operating officer, Michael Rosenthal, who has managed the Mountain Pass operation since the company acquired the site, after previously being a partner at investment management firm, QVT Financial.

MP is eager to reinvigorate the industrial history of the rare earths supply chain that originated in the United States and provide a domestic alternative to both current and future users of rare earths. It hopes this will help customers avoid the risks associated with the single-point-of-failure currently represented by China in the global rare earth supply chain. In addition, the U.S. government is actively seeking to end the country’s reliance on foreign REE sources.

The uses of rare earth oxides span a diverse array of end markets, including:

• Clean-energy and transportation technologies such traction motors in EVs and hybrid electric vehicles, generators in wind power turbines, and linear motors in mag-lev trains;
• High-technology applications including miniaturization of smartphones and other mobile devices, computing devices, speakers, and microphones, as well as fiber optics, lasers, robotics, medical devices, and optical temperature sensors in medical and industrial environments;
• Critical defense applications covering guidance and control systems, communications, global positioning systems, radar and sonar, drones, and railguns; and
• Essential industrial infrastructure such advanced catalyst applications in oil refining, pollution-control systems in traditional internal-combustion automobiles, glass polishing, and LED lighting and phosphors.

According to research by the CRU Group, the aggregate global market for REO totaled approximately 180,000 metric tons in 2021 and is estimated to grow at a compound annual growth rate of approximately 4% through 2030.

The global effort to curb carbon emissions and reverse climate change often focuses on the impact of transportation systems, and MP believes its products will play a significant role in advancing those efforts. To date, nearly all U.S. states have mandated or offered incentives to support the deployment of EVs or alternative fuel vehicles and supporting infrastructure, with similar incentives in other countries globally.

By economic value, Neodymium and Praseodymium (NdPr) is the largest segment of the REE market. NdPr is most often utilized in “permanent magnets” and is critical for many advanced technologies that are experiencing strong growth. The NdPr product that MP intends to produce at Mountain Pass is essential to the motor technology deployed in the majority of current EVs. The integration of magnet production would establish MP as the first and only fully integrated source of supply for rare earth magnets in the Western Hemisphere. By offering magnet customers a complete, end-to-end Western supply chain solution, MP believes this vertical integration represents a material value creation opportunity.

As part of the second stage of MP’s optimization project, the company is focused on advancing its operations from the production of rare earth concentrate to the separation of individual REE. Engineering, construction, and other activities are already underway to enhance the Mountain Pass facility process flow to reliably produce separated REE at a lower cost and with a smaller environmental footprint per unit of REO produced. Once the activities are complete, MP expects to be a global low-cost, high-volume producer of NdPr oxide, which represents the majority of the value contained in its ore.

Moving into the third stage of MP’s expansion strategy, the company recently announced that it will build an initial rare earth, metal, alloy, and magnet manufacturing facility in Fort Worth, Texas. It is projected the facility will have the capacity to produce approximately 1,000 metric tons of finished magnets per year, sufficient to power approximately 500,000 EV motors annually. It also entered into a long-term agreement with General Motors Company to supply U.S.-sourced and manufactured rare earth materials, alloy, and finished magnets for the electric motors in more than a dozen GM models, with a gradual production ramp-up that begins in 2023.

Furthermore, in February 2022, MP was awarded a $35.0 million contract by the Department of Defense to design and build a facility to process heavy rare earth elements (HREE). The project aims to establish the first processing and separation facility of its kind for HREEs in support of commercial and defense applications in the United States. The facility will be built at the Mountain Pass site and tie in with the rest of the company’s Stage II facilities.

Thanks to rapid expansion in production volumes and sales, MP delivered a robust financial performance in 2021. In the last and final quarter, MP produced a record volume of 42,413 metric tons of REO, the highest in U.S. history. The company achieved solid growth in annual revenue year-on-year, recording sales of $332.0 million in 2021, up 147% from $134.3 million in 2020, driven by increases in REO production, sales volumes, and realized price per REO metric ton.

Adjusted EBITDA increased more than five times to $219 million, driven by higher per-unit profitability and production efficiencies, slightly offset by increased growth and development costs. The strong performance resulted in MP reporting an Adjusted Net Income of $168.4 million, representing growth of 693% year on year.

Looking ahead to 2022, consensus estimates have year-on-year revenue growing a further 46% to $483.6 million. While estimated EPS growth of 56% would see earnings per share come in at $1.38, building on the company’s 2021 result of $0.89.

MP also strengthened its balance sheet, ending the year with $490 million in net cash after raising $672 million in gross proceeds from a bond offering, whilst also delivering strong progress on its optimization project.

Like any rare earths producer, MP is subject to several risks and uncertainties, including fluctuations in demand and commodity prices, as well as potential changes in political and regulatory environments. Furthermore, the success of the business depends on the growth of existing and emerging uses for rare earth products.

However, MP believes that its focus on low-cost production gives it a unique competitive advantage. In particular, its location offers significant transportation and operational advantages that create meaningful cost efficiencies and risk mitigation, which should only improve further upon the completion of the planned expansion activities.

In addition, MP believes end consumers will demand that the materials used to build products requiring REE, be extracted sustainably, and its commitment to environmentally responsible production of REO will be a strong competitive advantage in building relationships with product manufacturers.

As electrification drives significant global growth in demand for rare earth elements, geopolitical factors and sustainability mandates are combining to form considerable tailwinds for MP Materials’ opportunity to create shareholder value.

Furthermore, businesses are increasingly prioritizing diversification and security of their supply chains to reduce reliance on a single producer or region for critical materials. As the only scaled source in North America for critical rare earths, MP appears well-positioned to take advantage of a thriving industry.