MP Materials Corp DE

Distribution Agreement with Sumitomo

In February 2023, we entered into a distribution agreement (the “Distribution Agreement”) with Sumitomo Corporation of Americas (“Sumitomo”), under which Sumitomo serves as the exclusive distributor of NdPr oxide and NdPr metal, produced by us, to Japanese customers. Further, in connection with the Distribution Agreement, we intend to collaborate with Sumitomo on other business opportunities related to rare earth processing and downstream products. Under the terms of the Distribution Agreement, Sumitomo will be paid a variable commission. The initial term of the Distribution Agreement is through the end of 2025 with options to renew annually.

Patent and Intellectual Property License

In August 2023, we acquired a license to use patented technology, technical know-how, and other intellectual property pertaining to the development and manufacturing of magnetic products in exchange for 435,729 shares of our common stock. Contemporaneous with the acquisition of the license, we entered into a long-term consulting agreement in support of integrating the licensed technology and know-how into our existing processes aimed at the development of magnetic products.

Tolling Agreement with and Investment in VREX Holdco

In October 2023, we entered into a tolling agreement with VREX Holdco Pte. Ltd. (“VREX Holdco”) (the “Tolling Agreement”), a subsidiary of Shenghe. VREX Holdco owns Vietnam Rare Earth Company Limited (“VREX”), which owns and operates a metal processing plant and related facilities in Vietnam. Pursuant to the Tolling Agreement, we deliver NdPr oxide to VREX Holdco, which VREX Holdco then causes VREX to process into NdPr metal for delivery to our customers globally. As several of our potential customers that manufacture magnets outside of China prefer to purchase NdPr metal in addition to NdPr oxide, this Tolling Agreement will enable us to distribute NdPr products more widely to customers in Japan and other global markets. During the term of the Tolling Agreement, we will pay VREX Holdco a processing fee per unit of rare earth metal produced. We maintain title to the products and directly enter into sales agreements for the produced NdPr metal. The initial term of the Tolling Agreement is three years and may be renewed for additional three-year terms.

In December 2023, we invested $9.7 million of cash in exchange for a 49% equity interest in VREX Holdco. Refer to Note 6,“Equity Method Investment,” in the notes to the Consolidated Financial Statements for additional information.

New Offtake Agreement

In January 2024, we entered into a new offtake agreement with Shenghe (the “New Offtake Agreement”) that replaced and extended the Offtake Agreement. The initial term of the New Offtake Agreement is two years, with the option for us to extend the term for an additional one-year period. The terms of the New Offtake Agreement are substantially the same as those of the Offtake Agreement with the exception of the addition of NdPr metal into the definition of non-concentrate rare earth products. See Note 20, “Related-Party Transactions,” in the notes to the Consolidated Financial Statements for a discussion of the Offtake Agreement, including its terms.

Key Performance Indicators

We have historically used and/or currently use the following key performance indicators (“KPIs”) to evaluate the performance of our business. However, as our business continues to evolve and transitions from production of rare earth concentrate to production of separated rare earth products, the metrics that management uses to evaluate the business may continue to change or be revised. For example, beginning with the first quarter of 2024, we will no longer present Production Cost per REO MT, which is a metric focused solely on Stage I concentrate operations, as it will no longer be meaningful in evaluating and understanding our business or operating results. In addition, during 2023, upon the production of separated products, we identified three new KPIs of our business: NdPr Production Volume, NdPr Sales Volume and NdPr Realized Price per KG. Our calculations of these KPIs may differ from similar measures published by other companies in our industry or in other industries. The following table presents our KPIs:

REO Production Volume

We measure our REO-equivalent production volume for a given period in metric tons (“MTs”), our principal unit of sale for our concentrate product. This measure refers to the REO content contained in the rare earth concentrate we produce and, beginning in the second quarter of 2023, includes volumes fed into downstream circuits for commissioning and starting up our separations facilities and for producing separated NdPr product, the latter of which is also included in our KPI, NdPr Production Volume. Our REO Production Volume is a key indicator of our mining and processing capacity and efficiency.

The rare earth concentrate is a processed, concentrated form of our mined rare earth-bearing ores. While our unit of production and sale is a MT of contained REO, the actual weight of our rare earth concentrate is significantly greater, as the concentrate also contains non-REO minerals, loss-on-ignition, and residual moisture from the production process. We target REO content of greater than 60% per dry MT of concentrate (referred to as “REO grade”). The elemental distribution of REO in our concentrate is relatively consistent over time and production lot. We consider this the natural distribution, as it reflects the distribution of elements contained, on average, in our ore.

REO Sales Volume

Our REO Sales Volume for a given period is calculated in MTs. A unit, or MT, is considered sold once we recognize revenue on its sale as determined in accordance with GAAP. Our REO Sales Volume is a key measure of our ability to convert our concentrate production into revenue. Our REO Sales Volume for the year ended December 31, 2023, included both traditional concentrate as well as roasted concentrate.

Realized Price per REO MT

We calculate the Realized Price per REO MT for a given period as the quotient of: (i) our rare earth concentrate sales, which are determined in accordance with GAAP, for a given period and (ii) our REO Sales Volume for the same period. Realized Price per REO MT is an important measure of the market price of our concentrate product. For the year ended December 31, 2021, we adjusted our rare earth concentrate sales for the revenue impact of tariff rebates related to prior period sales, resulting in the use of a non-GAAP financial measure, Total Value Realized. See the“Non-GAAP Financial Measures” section below for a reconciliation of our Total Value Realized, which is a non-GAAP financial measure, to our rare earth concentrate sales, which is determined in accordance with GAAP.

Production Cost per REO MT

We calculate the Production Cost per REO MT for a given period as the quotient of: (i) our Production Costs (see below) for a given period and (ii) our REO Sales Volume for the same period. We define Production Costs, which is a non-GAAP financial measure, as our cost of sales (excluding depletion, depreciation and amortization) (“COS”) less stock-based compensation expense included in COS, shipping and freight costs, and costs not attributable to concentrate sales.

Production Cost per REO MT is a key indicator of our concentrate production efficiency. As a significant portion of our cash costs of Stage I production are fixed, our Production Cost per REO MT is influenced by mineral recovery, REO grade, plant feed rate and production uptime. See the“Non-GAAP Financial Measures” section below for a reconciliation of our Production Costs, which is a non-GAAP financial measure, to our COS, which is determined in accordance with GAAP, as well as the calculation of Production Cost per REO MT.

NdPr Production Volume

We measure our NdPr Production Volume for a given period in MTs, our principal unit of sale for our NdPr separated products. NdPr Production Volume refers to the volume of finished and packaged NdPr oxide produced at Mountain Pass for a given period. NdPr Production Volume is a key indicator of our separating and finishing capacity and efficiency.

NdPr Sales Volume

Our NdPr Sales Volume for a given period is calculated in MTs and on an NdPr oxide-equivalent basis (see example below). A unit, or MT, is considered sold once we recognize revenue on its sale, whether sold as NdPr oxide or NdPr metal, as determined in accordance with GAAP. For NdPr metal sales, the MTs sold and included in NdPr Sales Volume are calculated on the basis of the volume of NdPr oxide used to produce such NdPr metal. For example, assuming a material conversion ratio of 1.25, a sale of 100 MTs of NdPr metal would be included in this KPI as 125 MTs of NdPr oxide-equivalent. NdPr Sales Volume is a key measure of our ability to convert our production of separated NdPr products into revenue.

We expect to have a mix of contracts with customers where we will sell NdPr as (i) oxide, (ii) metal, where the amount of oxide required to produce such metal is variable, and (iii) metal, where we have a guarantee of the amount produced and sold based on the amount of oxide consumed. Among other factors, differences between quarterly NdPr Production Volume and NdPr Sales Volume may be caused by the time required for the conversion of NdPr oxide to NdPr metal, including time in-transit.

NdPr Realized Price per KG

We calculate the NdPr Realized Price per kilogram (“KG”) for a given period as the quotient of: (i) our NdPr oxide and metal sales, which are determined in accordance with GAAP, for a given period and (ii) our NdPr Sales Volume for the same period. NdPr Realized Price per KG is an important measure of the market price of our NdPr products.

Factors Affecting Our Performance

We believe we are uniquely positioned to capitalize on the key trends of electrification and supply chain security, particularly as domestic EV production grows. Our continued success depends to a significant extent on our ability to take advantage of the following opportunities and meet the challenges associated with them.

Demand for REE

The key demand drivers for REE are a diverse array of growing end markets, including: electric mobility (e.g., traction motors in passenger and commercial xEVs, etc.); renewable power generation (e.g., wind power generators); energy-efficient motors, pumps, and compressors (e.g., heating, ventilation and air conditioning (“HVAC”) systems, elevators, escalators, etc.);

industrial and service robotics (e.g., motors, actuators, brakes and sensors used in industrial and service robots); consumer and medical applications (e.g., smart phones and other mobile devices, computing devices, speakers and microphones, fiber optics, laser crystals, x-ray equipment, etc.); critical defense systems (e.g., guidance and control systems, avionics, global positioning systems, radar and sonar, drones, etc.); and catalysts and phosphors (e.g., vehicle emissions reduction, fuel refining, energy-efficient lighting, etc.). Accordingly, the demand for our products may be impacted by demand for these downstream products, particularly the continued growth in xEVs.

Despite the current macroeconomic conditions, we continue to believe we benefit from the growth of the rare earth market, particularly the market for NdPr and permanent magnets, and from several demand tailwinds for REE. These include the trend toward electrification; geographic supply chain diversification, particularly in relation to China; the U.S. government initiatives to restore domestic supply of critical minerals; and the increasing acceptance of environmental, social and governance mandates.

However, changes in technology could also drive down the use of REE, including NdPr, in the components in which they are now used, or lead to a decline in reliance on such components altogether. Actual, or perceived, decreases in demand for REE, whether through changes in technology or slower growth in the end markets that utilize REE, could result in a decline in the market price of REE, including NdPr, and/or result in pricing volatility. We also operate in a competitive industry, and many of our key competitors are based in China, where competitors may not be subject to the same rigorous environmental standards and production costs are typically lower than in the U.S.

Maximizing Production Efficiency

Since the implementation of our Stage I optimization plan and the achievement of commercial production of concentrate on July 1, 2019, our quarterly REO Production Volume has exceeded 8,500 MTs, and we have achieved at least 40,000 MTs of annual REO Production Volume since 2021. These results were achieved by optimizing the reagent scheme, reducing process temperatures, improving tailings facility management, and committing to operational excellence, which has allowed us to achieve approximately 92% uptime in 2023. Our Stage I optimization plan enabled us to achieve what we believe to be world-class production cost levels for rare earth concentrate.

In November 2023, we announced our “Upstream 60K” strategy whereby we intend to grow our annual REO Production Volume to approximately 60,000 MTs by expanding upstream capacity via investments in further beneficiation, including the ability to process alternative feedstocks and upgrade lower-grade feedstocks. We aim to achieve this initiative within the next four years with modest incremental capital investment.

The success of our business reflects our ability to continue to manage our costs. Our production achievements in Stage I have provided economies of scale to lower production costs per MT of REO produced in concentrate. Furthermore, we designed our Stage II process flow to capitalize on the inherent advantages of the bastnaesite ore at Mountain Pass, that is well-suited to low-cost refining by selectively eliminating the need to carry cerium, a lower-value mineral, through the separations process. Additionally, our location offers transportation advantages that create meaningful cost efficiencies in securing incoming supplies and shipping of our final products.

We currently operate a single site in a single location, and any stoppage in activity, including for reasons outside of our control, could adversely impact our production, results of operations and cash flows. In addition, several of our current and potential competitors are government supported and may have access to substantially more capital, which may allow them to make similar or greater efficiency improvements or undercut market prices for our product.

Development of Our REE Refining and Downstream Manufacturing Capabilities

Stage II advanced our operations from the production of rare earth concentrate to the separation of individual REE. The project incorporated upgrades and enhancements to the prior facility process flow intended to reliably produce separated REE at a low cost while minimizing our impact on the environment. More specifically, we have reintroduced an oxidizing roasting circuit, reoriented portions of the plant process flow, increased product finishing capacity, improved wastewater management, and made other improvements to materials handling and storage. The reintroduction of the oxidizing roasting circuit allows subsequent stages of the production process to occur at lower temperatures, and with lower volumes of materials and reagents, which supports lower operating and maintenance costs and higher uptime than would otherwise be achievable.

During the third quarter of 2023, we began producing separated rare earth products. However, we expect that it may take several quarters to achieve our designed throughput of separated products. As we increase production of separated products over time, we expect to improve our per-unit production costs of NdPr oxide, which represents a majority of the value contained in our concentrate.

Partially supported by a $35.0 million award from the Department of Defense’s Office of Industrial Base Policy, Industrial Base Analysis and Sustainment program, we are currently advancing the facilitating works, engineering and procurement on the HREE Facility, which will be built at Mountain Pass and will be integrated into the rest of our Stage I and Stage II facilities. The HREE Facility is expected to support the separating of HREE contained in the Mountain Pass ore as well as from third-party feedstocks.

In addition, we are constructing the Fort Worth Facility and developing engineering and manufacturing technology to process NdPr oxide into metal and magnets, while incorporating magnet recycling capabilities. These initiatives support our long-term plans to become a leading global source for rare earth magnets. We believe integration into magnet production will provide some protection from commodity pricing volatility, while also enhancing our business profile as the producer of a critical industrial output in addition to a producer of resources. We expect our Stage III efforts to continue to benefit from geopolitical developments, including initiatives to repatriate critical materials supply chains.

Our Mineral Reserves

Our ore body has proven over more than 60 years of operations to be one of the world’s largest and highest-grade rare earth resources. As of December 31, 2023, SRK Consulting (U.S.), Inc., an independent consulting firm that we retained to assess our reserves, estimated total proven and probable reserves of 1.86 million short tons of REO contained in 28.46 million short tons of ore at Mountain Pass, with an average ore grade of 6.20%. These estimates use an estimated economical cut-off grade of 2.43% total rare earth oxide. Based on these estimated reserves and our expected annual production rate of REO upon production ramp-up of Stage II, our expected mine life was approximately 33 years as of December 31, 2023. Over time, we expect to be able to continue to grow our expected mine life through additional exploratory drilling and improved processing capabilities, which may result in changes to various assumptions underlying our mineral reserve estimate.

Mining activities in the U.S. are heavily regulated, particularly in California. Regulatory changes may make it more challenging for us to access our reserves. In addition, new mineral deposits may be discovered elsewhere, which could make our operations less competitive.

Results of Operations

Comparison of the Years Ended December 31, 2023, 2022, and 2021

The following table summarizes our results of operations:

N/M = Not meaningful.

(1)Excludes depreciation, depletion and amortization.

(2)Non-GAAP financial measures are defined and reconciled to the most directly comparable GAAP financial measures in the“Non-GAAP Financial Measures” section below.

Rare earth concentrate revenue consists primarily of sales of traditional and roasted rare earth concentrate. The sales price of rare earth concentrate sold to Shenghe under both agreements is based on an agreed-upon price per MT, with an adjustment for the ultimate market price of the product realized by Shenghe upon sales to their customers, including the impact of changes in the exchange rate between the Chinese Yuan and the U.S. dollar.

The decrease in rare earth concentrate revenue for the year ended December 31, 2023, as compared to the prior year, was driven by lower Realized Price per REO MT, which decreased by 43% when compared to the prior year, as well as lower REO Sales Volume, which decreased by 15% when compared to the prior year.

Realized Price per REO MT for the year ended December 31, 2023, reflects a significantly softer pricing environment for rare earth products, as compared to the prior year when pricing peaked in February 2022. As noted above in the“Factors Affecting our Performance” section, market prices for rare earth products may be volatile due to actual or perceived changes in supply or demand. The decline in the market prices for rare earth products in 2023 was largely attributable to lower than anticipated growth in demand for magnetic products, which negatively impacted the price of REE. The decrease in REO Sales Volume for the year ended December 31, 2023, was due to the start-up of Stage II operations. A significant portion of the REO produced, which could otherwise have been sold as rare earth concentrate, was used to charge the Stage II circuits, establish separations work-in-process inventory, or produce packaged and finished separated rare earth products, the majority of which have not yet been sold.

Historically, our REO Sales Volume had generally tracked our REO Production Volume over time with slight period-to-period differences caused by the timing of shipments. However, as we continue to ramp up production of separated rare earth materials, we expect that significant volumes of REO produced from Stage I operations will be retained for separation and not sold as concentrate. In addition, a significant portion of the contained cerium in the REO produced will be intentionally rejected and may not result in finished product. Accordingly, as evidenced in the third and fourth quarters of 2023 (see the“Quarterly Performance Trend” section below), we expect that REO Sales Volume will be significantly lower than REO Production Volume in the future as we produce and sell more separated products.

NdPr oxide and metal revenue consists of sales of NdPr oxide under individual sales agreements, which commenced in the fourth quarter of 2023. As we ramp up production of separated rare earth products, we expect our NdPr oxide and metal revenue to become a larger portion of our total revenue. Accordingly, to the extent we are able to sell a greater portion of NdPr oxide and NdPr metal, we expect that rare earth concentrate revenue will decline in future periods.

Other rare earth products revenue for the year ended December 31, 2023, decreased as compared to the prior year, primarily driven by $8.5 million of revenue related to a sales agreement with Shenghe entered into in March 2022 for certain stockpiles of rare earth fluoride (“REF”).

Cost of sales (excluding depreciation, depletion and amortization) consists of production- and processing-related labor costs (including wages and salaries, benefits, bonuses, and stock-based compensation), mining and processing supplies (such as reagents), parts and labor for the maintenance of our mining fleet and processing facilities, other facilities-related costs (such as property taxes and utilities), packaging materials, and shipping and freight costs.

COS for the year ended December 31, 2023, remained relatively flat year over year, primarily due to an increase in Production Cost per REO MT of $330 or 19%, offset by a decrease in REO Sales Volume and $5.5 million in lower shipping and freight costs, which are included in COS but excluded from Production Cost per REO MT. The increase in Production Cost per REO MT was driven by higher payroll costs, including the increase in employee headcount to support the expansion of operations, and to a lesser extent, higher materials and supplies costs as well as higher property and other taxes. Shipping and freight costs decreased due to reductions in trucking rates and diesel fuel prices, as well as lower sales volume. In addition, COS for the year ended December 31, 2023, included a $2.3 million write-down on certain of our inventories (refer to Note 4, “Inventories,” in the notes to the Consolidated Financial Statements for more information). Production Cost per REO MT varies period to period based on the timing of scheduled outages of our production facilities for maintenance. See the“Quarterly Performance Trend” section below.

With the commissioning of Stage II in 2023, the expected headcount growth to support our refining operations is largely complete as of December 31, 2023. Therefore, we do not anticipate payroll cost growth to be as significant in future periods, although year-over-year comparisons may still be impacted given the timing of hiring in 2023. In addition, as noted below, given the commencement of initial production of separated products in late 2023, we expect certain salaries and wages of employees previously involved in start-up activities will no longer be considered start-up costs in 2024 as commercial production ramps. Instead, such costs will primarily be included in COS to the extent such costs are not absorbed into inventories. Lastly, we expect other operating costs associated with our Stage II operations, particularly chemical reagents, maintenance expenses, and consumables, which have a significant variable component, to grow in line with production in future periods.

Selling, general and administrative (“SG&A”)expenses consist primarily of personnel costs (including salaries, benefits, bonuses, and stock-based compensation) of our administrative functions such as executives, accounting and finance, legal, and information technology; professional services (including legal, regulatory, audit and others); certain engineering expenses; insurance, license and permit costs; corporate office lease cost; office supplies; and certain environmental, health and safety expenses.

SG&A expenses for the year ended December 31, 2023, increased by $3.4 million, or 4%, as compared to prior year, driven primarily by $5.4 million in higher personnel costs (excluding stock-based compensation expense), along with other general and administrative costs required to further build out our corporate infrastructure in support of our downstream expansion. Additionally, with the commencement of the lease for corporate office space in April 2023, we recognized $0.9 million in higher building rent expense compared to the prior year and are expected to incur higher rent expense going forward, when compared to prior year periods. The increase in SG&A was partially offset by $8.0 million in lower stock-based compensation expense due primarily to the timing of grants and the recognition of stock-based compensation on an accelerated basis for virtually all of our stock awards.

Depreciation, depletion and amortization primarily consists of depreciation of property, plant and equipment and depletion of mineral rights. The year-over-year increase in depreciation, depletion and amortization for the year ended December 31, 2023, primarily reflects an increase in depreciation of $38.2 million, resulting from the continued placement of new circuits and facilities associated with our Stage II optimization project into service, which began at the end of the fourth quarter of 2022.

Start-up costs relate to costs associated with restarting an existing facility or commissioning a new facility, circuit or process of our production, manufacturing, or separations facilities prior to the achievement of commercial production, that do not qualify for capitalization. Such costs, which are expensed as incurred, include certain salaries and wages, outside services, parts, training, and utilities, among other items, used or consumed directly in these start-up activities.

Start-up costs for the year ended December 31, 2023, increased by $13.8 million year over year, of which $12.8 million was associated with our Stage II optimization project and the remaining $1.0 million was associated with our Stage III initiatives. Given the commencement of initial production of separated products in late 2023, we expect start-up costs associated with Stage II will decrease meaningfully in 2024 as commercial production ramps, specifically since salaries and wages of certain employees will no longer be considered start-up, and instead will primarily be included in COS to the extent such costs are not absorbed into inventories. In addition, we currently expect start-up costs pertaining to our Stage III initiatives will increase in 2024 as we advance in starting up and developing our magnetics capability.

Advanced projects and development consists principally of costs incurred in connection with research and development of new processes or to significantly enhance our existing processes, and certain government contracts, as well as costs incurred to support growth initiatives or pursue other opportunities. Advanced projects and development for the year ended December 31, 2023, increased year over year primarily due to costs incurred for legal, consulting, and advisory services to support growth initiatives, such as potential acquisitions, mergers, or other investments, which increased by $9.0 million, and continued investment in research and development activities, which increased by $1.5 million and related primarily to Stage III magnetics.

Other operating costs and expenses consists primarily of accretion of asset retirement and environmental obligations; gains or losses on disposals of long-lived assets, including demolition costs; and write-downs of legacy stockpile inventories. Other operating costs and expenses for the year ended December 31, 2023, increased by $5.4 million year over year as a result of $5.5 million in demolition costs associated with demolishing and removing certain out-of-use older facilities and infrastructure from the Mountain Pass site to accommodate future expansion in rare earth processing.

Interest expense, netprincipally consists of the expense associated with the 0.25% per annum interest rate and the amortization of the debt issuance costs on our Convertible Notes (as defined in the“Liquidity and Capital Resources” section below) and the amortization of the discount on a prior debt obligation to Shenghe, offset by capitalized interest. Interest expense, net for the year ended December 31, 2023, decreased year over year due to the full repayment of a debt obligation to Shenghe in the first quarter of 2022.

Other income, net consists of interest and investment income and non-operating gains or losses. Other income, net for the year ended December 31, 2023, increased year over year as a result of interest and investment income earned on our short-term investments, which were purchased starting in the second quarter of 2022. Interest and investment income is principally generated from accretion of the discount on such investments.

Income tax expense consists of an estimate of U.S. federal and state income taxes in the jurisdictions in which we conduct business, adjusted for federal, state and local allowable income tax benefits, the effect of permanent differences and any valuation allowance against deferred tax assets. The effective tax rate (income tax expense as a percentage of income before income taxes) was 26.5%, 15.3% and 15.7% for the years ended December 31, 2023, 2022 and 2021, respectively. The effective tax rate for the year ended December 31, 2023, differed from the statutory tax rate of 21% primarily due to a deduction limitation on officers’ compensation and a valuation against certain deferred tax assets, offset by the California Competes Tax Credit.

The Section 45X Advanced Manufacturing Production Credit (the “45X Credit”) provides a credit equal to 10% of eligible “production costs incurred” with respect to the production and sale of critical minerals, including NdPr oxide. In December 2023, the Internal Revenue Service released proposed regulations on the 45X Credit, which, among other things, clarified the definition of “production costs incurred.” The proposed regulations exclude direct and indirect materials costs, including costs related to the extraction or acquisition of raw materials, from the definition of “production costs incurred.” If the proposed regulations are approved as currently written, the exclusion of these costs may result in the 45X Credit being materially less than we originally anticipated. We formally submitted comments on the proposed regulations in support of including materials and extraction costs in the definition of “production costs incurred” related to critical minerals under the 45X Credit. For additional information on the 45X Credit, refer to Note 12, “Income Taxes,” and Note 16, “Government Grants,” in the notes to the Consolidated Financial Statements.