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GM bets big on MP Materials being the Holy Grail for an American rare earth magnet supply chain

What a difference a year makes as we review the reincarnation of the rare earths mining project in California, just across the Nevada border at the Mountain Pass mine – MP Materials Corp. (NYSE: MP), which began trading on the NYSE on November 18, 2020…announces a new rare earths magnet facility and binding long-term agreement with General Motors (GM).

Looking in the rear-view mirror for a moment, “Best Quarter Ever” would be their headline for their Q3-2021 just announced last month. By the numbers from Q3 alone, they should be proud – 98% uptime, steady and sustainable processing cost improvements, 46% margin – all things that point to a great quarter, especially with the increases in rare earths prices in the past 12 months. MP Materials saw a 127% increase in their realized rare earths oxide price compared to Q3-2020.

My phones are ringing, the experts are whispering a wide range of feedback to me as the ‘new and improved’ MP Materials still has many bridges to cross before the trust of those that rode the dusty trails on Mountain Pass previously will be rebuilt. Surely this is a good sign?

The GM deal with MP Materials is to “supply U.S.-sourced and manufactured rare earth materials, alloy and finished magnets for the electric motors in more than a dozen models using GM’s Ultium Platform, with a gradual production ramp that begins in 2023.”

The selection of Fort Worth, Texas as the location for the MP facility will be worthy of many debates but stands a distant second to the issues around securing the talent that can make this dream come true. These obvious challenges aside for a moment, management has delivered in clearly articulating where they are taking this REE program next. They told the market that the announcement of a Stage III facility would be made before the end of 2022 and here it is.

Kudos.

Mountain Pass is the only rare earths mining and processing site of commercial scale in the Western Hemisphere and currently produces approximately 15% of global rare earth content, according to them. The mine has been in production off and on since 1952 but was restarted in 2017. On going public, the MP Materials team highlighted their plan for Stage I (restore production and get the bugs out), Stage II (facilities to produce separated rare earths oxides) and Stage III (rare earths-based magnet production 2025-ish).

Sometimes you have to have a little luck to be good, toss in some deep pockets and MP Materials are reaching for quite a star, but I must confess their timeline is virtually inconceivable to everyone I know. Their original target for magnet production was 2025-ish and zealous. Now management is now saying 2023. In less than 24 months, MP Materials expects to permit and build a 200,000 square foot greenfield facility and commence commercial production of sintered permanent magnets. They also need equipment to do this – hopefully, it has already been ordered, because this is not a run-of-the-mill facility. Creating a sintered Neodymium-Iron-Boron (NdFeB) permanent magnet is not like building a washing machine, which GM must certainly be aware of. The development of permanent magnets originated in the US, but other than the equipment formerly-owned by Hitachi Metals now acquired by another nascent US rare earth producer, the US has virtually no capacity to produce sintered NdFeB permanent magnets today.

Again, on paper, this looks like an absolutely incredible strategy to re-establish a domestic source of rare earths permanent magnets in NA. Music to many our ears, if they prove they can make this happen. Having been in these trenches for too long, my experience is that the few that have the experience may be counted on one hand, and while MP Materials pockets are deep — it’s going take every bit of their cash to build the magnet facility and get it operational, especially with the Stage II plans for Mountain Pass still to be executed.

With the valuation on this stock being priced as if Stage III has been accomplished and at full production, MP Materials needs this to work, as does General Motors. It’s a big bet.



MP Materials: It is Rare Earths Deja Vu All Over Again.

As we know, MP Materials Corp. (NYSE: MP), successfully closed the business combination with Fortress Value Acquisition Corp. in mid November 2020, amid a wild ride for shareholders. The share price has rocketed to more than a quadruple for initial investors in the $200 million PIPE. Current market capitalization is approaching US$7 billion – it looks like the stock is set for yet another record high today (February 16, 2021).

The company will be releasing Q4-2020 results after the markets close on March 18, 2021. The company had a profitable third quarter 2020 ($14.6 million Net Income and $11.6 million Adjusted EBITDA) and outside the accounting adjustments for contract changes with Shenghe Resources, should show annual results consistent with the quarter.

The company’s Mountain Pass mine and associated processing facilities are in California, just off the Nevada border at Mountain Pass. Production started about 70 years ago in the only rare earths mining and processing site of scale in the Western Hemisphere. By management’s estimates, MP Resources currently produces approximately 15% of global rare earths content. Recall that the mine was restarted in 2017, with mining and processing currently exceeding levels achieved prior to the current management team taking over.

The company has an offtake agreement with Shenghe Resources (Singapore) that was modified in mid-2020. MP Materials is now free to sell to whomever they choose, (are there other buyers?) but will still be repaying the Shenghe Offtake Advance (currently $78 million). Management of MP Materials has estimated that this would be approximately four years from the date of the modification of the offtake agreement, putting it sometime in 2024.

As reported in MP Material’s Q3-2020 Form 8-K (page 12) “The completion of our Stage II optimization plan and any development of Stage III is expected to be capital intensive. We expect to invest approximately $170 million to complete our Stage II optimization plan….”. While the company has stated that it has completed process redesign and engineering for Stage II, we all recall the problems Molycorp had trying to get Project Phoenix to work as designed and arguably being one of the elements that caused Molycorp to go bankrupt. MP Materials has a strong balance sheet, but rare earths processing is not easy – it appears that a North American rare earths supply chain (as far as MP Materials is concerned) may just have to wait.

MP Materials closed the business combination with Fortress Value Acquisition Corp. in November 2020 with the stated objective of the merger to fund MP Materials’ Mountain Pass mine Stage II optimization plan. The company “expects to become a fully integrated provider of separated rare earth oxides, with a focus on Neodymium-Praseodymium, one of the most crucial inputs for magnetics, by 2022.” There is substantial mining and processing infrastructure in place at Mountain Pass with a comprehensive plan developed to even become a downstream magnet producer (Stage III, 2025-ish)

Is this possible? There are numerous detractors who think that this is an unachievable game plan, but clearly the market disagrees. The company also announced on November 18, 2020, that the company had been awarded a Defense Production Act Title III technology investment agreement to establish domestic processing for separated light rare earth elements. Under the TIA, the US Department of Defense will contribute $9.6 million towards MP Materials’ Stage II optimization efforts.

According to the most recent update in the Q3-2020 results presentation, the Stage II Project remains on track for 2022. The front-end engineering design (FEED) is complete, all circuit designs are complete, long-lead procurements were expected to be complete by December 2020 with initial civil mobilization also expected the first week of December 2020 and full mobilization expected in January 2021. An update on these items in March or sooner will be important.

As I said before – it continues to look promising so far, but hang on, with the history at this site and the fast money in the markets right now, let’s hope history does not repeat itself.