MP Materials(MP) - 2024 Q2 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements This section provides a cautionary note that the report contains forward-looking statements, which are subject to various assumptions and uncertainties and are not guarantees of future performance Forward-Looking Statements Overview This section highlights that the report contains forward-looking statements, which are not historical facts and are subject to various assumptions and uncertainties - Forward-looking statements are identified by words like 'estimate,' 'plan,' 'expect,' 'anticipate,' and 'believe,' and are based on current management expectations and assumptions, not predictions of actual performance[5] - Actual events and circumstances are difficult to predict and may differ materially from assumptions, with many being beyond the company's control[5] Risks and Uncertainties The company's forward-looking statements are subject to numerous risks and uncertainties, including market fluctuations, competition, operational delays, and regulatory compliance - Fluctuations and uncertainties related to demand for and pricing of rare earth products[6] - Unanticipated costs or delays associated with Stage II optimization and Stage III projects[7] - Risks associated with intellectual property rights and the ability to produce NdFeB magnets and precursor materials[7] - Potential power shortages, increasing raw material costs, and disruptions in transportation services[8] - Regulatory and business risks, including compliance with government regulations and maintaining licenses[8] - Risks related to technology systems, security breaches, and the ability to maintain satisfactory labor relations[8] - Risks associated with the company's share repurchase program and its impact on long-term stockholder value[8] - These risks are more fully described in Part II, Item 1A, 'Risk Factors' in this Form 10-Q and the company's Form 10-K[9] PART I—FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations ITEM 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for MP Materials Corp. and its subsidiaries, including balance sheets, statements of operations, comprehensive income (loss), changes in stockholders' equity, and cash flows Condensed Consolidated Balance Sheets (unaudited) The balance sheet shows a slight increase in total assets and a significant increase in total liabilities, primarily driven by long-term debt, while total stockholders' equity decreased from December 2023 to June 2024 Condensed Consolidated Balance Sheets (unaudited) | Metric | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :--------------------------- | :----------------------------- | :-------------------- | :------- | | Total assets | $2,364,326 | $2,336,452 | $27,874 | 1.19% | | Total liabilities | $1,255,288 | $970,673 | $284,615 | 29.32% | | Total stockholders' equity | $1,109,038 | $1,365,779 | $(256,741) | -18.80% | - Long-term debt, net, increased significantly from $681,980 thousand to $936,610 thousand, contributing to the rise in total liabilities[13] - Treasury stock increased from $0 to $(202,558) thousand, reflecting share repurchases[14] Condensed Consolidated Statements of Operations (unaudited) The company experienced a significant decline in revenue and shifted from net income to a net loss for both the three and six months ended June 30, 2024, compared to the prior year, primarily due to lower rare earth concentrate sales and increased operating costs Condensed Consolidated Statements of Operations (unaudited) | Metric | Three Months Ended June 30, 2024 (in thousands) | Three Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :----------------------------------- | :------------------------------------ | :------------------------------------ | :---------------------------------- | :---------------------------------- | | Total revenue | $31,258 | $64,024 | $79,942 | $159,724 | | Operating income (loss) | $(53,492) | $483 | $(85,924) | $33,445 | | Net income (loss) | $(34,055) | $7,395 | $(17,566) | $44,842 | | Basic EPS | $(0.21) | $0.04 | $(0.10) | $0.25 | | Diluted EPS | $(0.21) | $0.04 | $(0.28) | $0.24 | - Rare earth concentrate revenue decreased significantly, while NdPr oxide and metal revenue, which commenced in the second half of 2023, contributed $6,531 thousand and $14,858 thousand for the three and six months ended June 30, 2024, respectively[16] - Cost of sales (excluding DDA) increased substantially, and depreciation, depletion, and amortization also rose, contributing to the operating loss[16] Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) The company reported a total comprehensive loss for both the three and six months ended June 30, 2024, a reversal from comprehensive income in the prior year, primarily driven by the net loss Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) | Metric | Three Months Ended June 30, 2024 (in thousands) | Three Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :-------------------------- | :------------------------------------ | :------------------------------------ | :---------------------------------- | :---------------------------------- | | Net income (loss) | $(34,055) | $7,395 | $(17,566) | $44,842 | | Total comprehensive income (loss) | $(34,015) | $7,098 | $(17,801) | $44,487 | - Other comprehensive income (loss) included minor changes in net unrealized gains (losses) on available-for-sale securities and foreign currency translation loss[18] Condensed Consolidated Statements of Changes in Stockholders' Equity (unaudited) Stockholders' equity decreased significantly from January 1, 2024, to June 30, 2024, primarily due to repurchases of common stock and the net loss incurred during the period Condensed Consolidated Statements of Changes in Stockholders' Equity (unaudited) | Metric | January 1, 2024 (in thousands) | June 30, 2024 (in thousands) | | :------------------------------------ | :----------------------------- | :--------------------------- | | Total Stockholders' Equity | $1,365,779 | $1,109,038 | | Repurchases of common stock | — | $(202,558) | | Capped Call Options related to 2030 Notes | — | $(49,271) | | Net loss | — | $(17,566) | | Stock-based compensation | $13,942 (six months ended June 30, 2023) | $13,276 (six months ended June 30, 2024) | - The company repurchased 13,012,388 shares of common stock, resulting in a $202,558 thousand reduction in equity[23] - The purchase of Capped Call Options related to 2030 Notes reduced Additional Paid-in Capital by $49,271 thousand[23] Condensed Consolidated Statements of Cash Flows (unaudited) For the six months ended June 30, 2024, the company experienced net cash used in operating activities, a significant decrease in cash provided by investing activities, and a shift to net cash provided by financing activities Condensed Consolidated Statements of Cash Flows (unaudited) | Metric | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :------------------------------------------ | :---------------------------------- | :---------------------------------- | | Net cash provided by (used in) operating activities | $(10,284) | $65,459 | | Net cash provided by investing activities | $10,970 | $728,114 | | Net cash provided by (used in) financing activities | $31,366 | $(7,599) | | Net change in cash, cash equivalents and restricted cash | $32,052 | $785,974 | | Cash, cash equivalents and restricted cash ending balance | $297,040 | $929,483 | - Operating cash flow was negatively impacted by the net loss and an increase in inventories, partially offset by a $50.0 million prepayment from GM[24] - Financing activities were significantly boosted by proceeds from the issuance of $747.5 million in long-term debt (2030 Notes), partially offset by payments to retire $428.6 million of 2026 Notes, purchase of $65.3 million in capped call options, and $200.8 million in common stock repurchases[24] Notes to Condensed Consolidated Financial Statements (unaudited) These notes provide detailed explanations and disclosures for the condensed consolidated financial statements, covering business operations, significant accounting policies, specific asset and liability breakdowns, debt obligations, equity changes, revenue recognition, government grants, and related-party transactions NOTE 1—Description of Business and Basis of Presentation MP Materials is the largest rare earth materials producer in the Western Hemisphere, operating the Mountain Pass Mine and constructing a magnet manufacturing facility in Fort Worth, Texas - MP Materials Corp. owns and operates the Mountain Pass Rare Earth Mine and Processing Facility, the only rare earth mining and processing site of scale in North America[25] - The company is constructing a rare earth metal, alloy, and magnet manufacturing facility in Fort Worth, Texas, to produce NdFeB permanent magnets and precursor products[25] - Rare earth concentrate is primarily sold to Shenghe Resources, a related party, while separated rare earth products, including NdPr oxide, began production and sales in the second half of 2023[26] - A long-term agreement with General Motors (GM) involves supplying U.S.-sourced rare earth materials and finished magnets, with a $50.0 million initial prepayment received in April 2024 for magnetic precursor materials[26] NOTE 2—Significant Accounting Policies This note outlines the company's significant accounting policies, including principles of consolidation, use of estimates, concentration of risk, deferred revenue, investment tax credits, capped call options, and treasury stock - As of June 30, 2024, Shenghe was the Company's principal customer, accounting for more than 80% of revenue, exposing the company to market price volatility in China and exchange rate fluctuations[33] - The company accounts for nonrefundable, transferable Investment Tax Credits (ITCs) under ASC 740 using the deferral method[35] - Capped Call Options, entered into in connection with the 2030 Notes, are classified as equity and recorded in 'Additional paid-in capital' without remeasurement each period, reducing potential dilution upon conversion of the 2030 Notes[36] - Treasury stock, accounted for under the cost method, represents reacquired common stock and is recorded as a reduction of 'Stockholders' equity'[37] NOTE 3—Cash, Cash Equivalents and Investments The company's total cash, cash equivalents, and short-term investments decreased from December 2023 to June 2024, primarily consisting of money market funds, U.S. Treasury securities, and commercial paper Cash, Cash Equivalents and Investments (in thousands) | Metric | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :---------------------------------------- | :--------------------------- | :----------------------------- | | Total cash, cash equivalents and short-term investments | $937,002 | $997,844 | | Cash and cash equivalents | $295,604 | $263,351 | | Short-term investments | $641,398 | $734,493 | - Interest and investment income for the six months ended June 30, 2024, was $25,272 thousand, a decrease from $27,152 thousand in the prior year period[41] - The company does not intend to sell investments in unrealized loss positions before recovery of their amortized cost basis, and no credit losses were recognized[40] NOTE 4—Inventories Total inventories increased from December 2023 to June 2024, with a significant increase in work in process, and a $17.8 million lower of cost or net realizable value reserve was recognized Inventories (in thousands) | Inventory Category | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :----------------------------------- | :--------------------------- | :----------------------------- | | Raw materials and supplies | $44,556 | $42,371 | | Mined ore stockpiles | $30,638 | $28,507 | | Work in process | $28,350 | $15,019 | | Finished goods | $11,840 | $9,285 | | Total current inventories | $115,384 | $95,182 | | Non-current portion | $17,102 | $13,350 | | Total inventories | $132,486 | $108,532 | - A $17.8 million lower of cost or net realizable value reserve was recorded as of June 30, 2024, an increase of $11.8 million since March 31, 2024, mainly due to elevated carrying costs of initial separated product production during the Stage II ramp-up[45] NOTE 5—Property, Plant and Equipment Net property, plant, and equipment increased, driven by significant capital expenditures primarily for the Fort Worth Facility, HREE Facility, and other Mountain Pass projects, with increased depreciation and depletion expenses Property, Plant and Equipment (in thousands) | Metric | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :----------------------------------- | :--------------------------- | :----------------------------- | | Property, plant and equipment, net | $1,217,073 | $1,158,054 | | Additions to Property, Plant and Equipment (six months) | $96,100 | $128,600 | | Depreciation expense (six months) | $29,994 | $14,434 | | Depletion expense (six months) | $5,895 | $5,763 | - Capitalized expenditures for the six months ended June 30, 2024, primarily supported machinery, equipment, and assets under construction for the Fort Worth Facility, HREE Facility, and other Mountain Pass projects[46] - The increase in depreciation reflects the timing of placing new circuits and facilities associated with the Stage II optimization project and Fort Worth Facility assets into service[47] NOTE 6—Equity Method Investment The company holds a 49% equity interest in VREX Holdco Pte. Ltd., which owns and operates a metal processing plant in Vietnam, and recognized its share of VREX Holdco's net loss for the period Equity Method Investment (in thousands) | Metric | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :---------------------- | :--------------------------- | :----------------------------- | | Equity method investment | $9,339 | $9,673 | - The company recognized $0.3 million of its share of VREX Holdco's net loss for the six months ended June 30, 2024[49] - No impairment charges were recorded for the equity method investment during the three and six months ended June 30, 2024[50] NOTE 7—Intangible Assets The company's intangible assets primarily consist of a patent and intellectual property license with a definite life, which saw a decrease in net value due to amortization, while emissions allowances are classified as indefinite-life intangible assets Intangible Assets (in thousands) | Intangible Asset Category | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :---------------------------------------- | :--------------------------- | :----------------------------- | | Emissions allowances | $316 | $316 | | Patent and intellectual property license, net | $7,967 | $8,565 | | Total intangible assets, net | $8,283 | $8,881 | - Amortization expense for definite-lived intangible assets was $0.6 million for the six months ended June 30, 2024[51] NOTE 8—Asset Retirement and Environmental Obligations The company has asset retirement obligations for land reclamation at Mountain Pass, with major cash outflows expected to begin in 2056, and environmental obligations for groundwater monitoring and remediation - Total estimated future undiscounted cash flows for asset retirement obligations were $52.6 million as of June 30, 2024[53] - Total estimated aggregate undiscounted cost for environmental obligations was $26.4 million as of June 30, 2024, primarily for water monitoring activities[55] - The company maintains $45.5 million in financial assurances, satisfied with surety bonds, for closure and reclamation obligations[56] NOTE 9—Accrued Liabilities Accrued liabilities increased slightly from December 2023 to June 2024, primarily driven by an increase in accrued construction costs, partially offset by a decrease in accrued payroll and related expenses Accrued Liabilities (in thousands) | Accrued Liability Category | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :----------------------------------- | :--------------------------- | :----------------------------- | | Accrued payroll and related | $10,777 | $14,499 | | Accrued construction costs | $51,950 | $46,976 | | Accrued taxes | $3,391 | $3,373 | | Other accrued liabilities | $8,825 | $9,091 | | Total accrued liabilities | $74,943 | $73,939 | NOTE 10—Debt Obligations The company's long-term debt significantly increased due to the issuance of $747.5 million in 3.00% Convertible Notes due 2030, partially offset by the repurchase of $480.0 million of 0.25% Convertible Notes due 2026 Debt Obligations (in thousands) | Debt Instrument | June 30, 2024 Principal Amount (in thousands) | December 31, 2023 Principal Amount (in thousands) | | :-------------------------- | :------------------------------------------ | :------------------------------------------ | | Convertible Notes due 2026 | $210,000 | $690,000 | | Convertible Notes due 2030 | $747,500 | — | | Total long-term debt outstanding | $957,500 | $690,000 | - During the six months ended June 30, 2024, the company repurchased $480.0 million in aggregate principal amount of 2026 Notes for $428.6 million, resulting in a $46.3 million gain on early extinguishment of debt[60] - In March 2024, the company issued $747.5 million of 3.00% Convertible Senior Notes due 2030, with an initial conversion price of approximately $21.74 per share[63] - Capped Call Options were purchased for $65.3 million to cover 34.4 million shares, aiming to reduce potential dilution from the 2030 Notes, with an initial cap of $31.06 per share[67][68][69] NOTE 11—Leases The company holds operating and finance leases for various assets, including office space, warehouses, vehicles, and equipment, with total operating lease liabilities of $7.3 million and finance lease liabilities of $0.5 million as of June 30, 2024 Leases (in thousands) | Lease Type | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :----------------------------------- | :--------------------------- | :----------------------------- | | Operating lease right-of-use assets | $9,357 | $10,065 | | Total operating lease liabilities | $7,312 | $7,788 | | Finance lease right-of-use assets | $481 | $591 | | Total finance lease liabilities | $477 | $583 | - No ROU asset impairment charges were recorded during the three and six months ended June 30, 2024 and 2023[74] NOTE 12—Income Taxes The effective tax rate for the three and six months ended June 30, 2024, was 29.3% and 28.4%, respectively, and the company was awarded a $58.5 million Section 48C Qualifying Advanced Energy Project Tax Credit Income Taxes | Metric | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2024 | | :-------------------- | :------------------------------- | :----------------------------- | | Effective tax rate | 29.3% | 28.4% | - The effective tax rate differed from the statutory rate of 21% primarily due to the Section 45X Advanced Manufacturing Production Credit, California Competes Tax Credit, state income tax expense, and deduction limitations[77] - A $58.5 million Section 48C Qualifying Advanced Energy Project Tax Credit was awarded in March 2024 for the Fort Worth Facility, with $3.5 million recognized as of June 30, 2024, to be recognized as a reduction to income tax expense over the assets' useful lives[78] NOTE 13—Commitments and Contingencies The company is involved in a dispute with a general contractor for a construction project, scheduled for binding arbitration, and an unfavorable outcome could materially impact its financial statements - The company is currently in dispute with a general contractor for a construction project, which is scheduled to go to binding arbitration[80] - The company believes it has a valid claim against the contractor and is unable to estimate a range of loss at this time, but an unfavorable outcome could be material[80] NOTE 14—Revenue Recognition Total revenue significantly decreased for both the three and six months ended June 30, 2024, compared to the prior year, primarily due to lower rare earth concentrate sales, partially offset by new NdPr oxide and metal sales Revenue Recognition (in thousands) | Revenue Type | Three Months Ended June 30, 2024 (in thousands) | Three Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :-------------------------- | :------------------------------------ | :------------------------------------ | :---------------------------------- | :---------------------------------- | | Rare earth concentrate | $24,426 | $64,001 | $64,502 | $159,667 | | NdPr oxide and metal | $6,531 | — | $14,858 | — | | Other rare earth products | $301 | $23 | $582 | $57 | | Total revenue | $31,258 | $64,024 | $79,942 | $159,724 | - Rare earth concentrate revenue is based on a preliminary market price and exchange rate, with adjustments for ultimate market price realized by Shenghe[81] - A $50.0 million prepayment from GM for magnetic precursor materials was received in April 2024 and classified as current deferred revenue, with performance obligations expected to be satisfied within 12 months[83] NOTE 15—Government Grants The company received $0.1 million in reimbursements from a DOD TIA for light rare earth elements and is advancing the HREE Facility with a $35.0 million DOD contract, recognizing benefits from the refundable 45X Advanced Manufacturing Production Credit - Received $0.1 million in reimbursements from a Defense Production Act Title III technology investment agreement (TIA) for domestic processing of separated light rare earth elements, completing the project's expected reimbursements[84] - Awarded a $35.0 million contract by the DOD for the HREE Production Project Agreement to design and build a heavy rare earth elements (HREE) processing facility at Mountain Pass[85] - Recognized $1.9 million and $2.4 million in 45X Credit benefits as reductions to 'Cost of sales' for the three and six months ended June 30, 2024, respectively, and $0.5 million and $0.9 million as reductions to 'Depreciation, depletion and amortization'[88] NOTE 16—Stockholders' Equity and Stock-Based Compensation The Board approved a $300.0 million share repurchase program in March 2024, under which $200.8 million was used to repurchase 13.0 million shares, and Capped Call Options related to the 2030 Notes were purchased for $65.3 million - In March 2024, the company's Board approved a $300.0 million share repurchase program, with $200.8 million used to repurchase 13.0 million shares of common stock by June 30, 2024[89][90] - Capped Call Options, covering 34.4 million shares, were purchased for $65.3 million and recorded as a reduction to Additional Paid-in Capital (APIC)[91] Stock-Based Compensation Expense (in thousands) | Stock-Based Compensation Category | Three Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :---------------------------------------------------------------------------------------------------- | :------------------------------------ | :---------------------------------- | | Cost of sales (excluding DDA) | $617 | $2,076 | | Selling, general and administrative | $4,776 | $10,538 | | Start-up costs | $121 | $235 | | Advanced projects and development | $189 | $321 | | Total stock-based compensation expense | $5,703 | $13,170 | NOTE 17—Fair Value Measurements The company classifies its financial instruments within a three-level fair value hierarchy, with cash, cash equivalents, restricted cash, short-term investments, and Convertible Notes as Level 1, and equipment notes as Level 2 Fair Value Measurements (in thousands) | Financial Instrument | June 30, 2024 Carrying Amount (in thousands) | June 30, 2024 Fair Value (in thousands) | June 30, 2024 Level 1 (in thousands) | June 30, 2024 Level 2 (in thousands) | | :-------------------------- | :------------------------------------------ | :-------------------------------------- | :----------------------------------- | :----------------------------------- | | Cash and cash equivalents | $295,604 | $295,604 | $295,604 | — | | Short-term investments | $641,398 | $641,398 | $641,398 | — | | Restricted cash | $1,436 | $1,436 | $1,436 | — | | 2026 Notes | $208,091 | $186,638 | $186,638 | — | | 2030 Notes | $728,519 | $671,330 | $671,330 | — | | Equipment notes | $3,651 | $3,580 | — | $3,580 | - The fair value of accounts receivable, accounts payable, and accrued liabilities approximates their carrying amounts due to their short-term nature[97] NOTE 18—Earnings (Loss) Per Share Basic and diluted earnings per share both reflected a loss for the three and six months ended June 30, 2024, a reversal from positive EPS in the prior year, with potentially dilutive shares excluded when antidilutive Earnings (Loss) Per Share | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Basic earnings (loss) per share | $(0.21) | $0.04 | $(0.10) | $0.25 | | Diluted earnings (loss) per share | $(0.21) | $0.04 | $(0.28) | $0.24 | | Weighted-average shares outstanding, basic | 165,344,511 | 176,984,917 | 169,950,658 | 176,933,605 | | Weighted-average shares outstanding, diluted | 165,344,511 | 177,859,118 | 176,068,146 | 193,528,819 | - For the three and six months ended June 30, 2024, 34,380,440 shares related to 2030 Notes and 1,869,835 shares related to RSUs were potentially dilutive but excluded due to their antidilutive effect[105] - In March 2024, the company fixed the settlement method for 2026 Notes conversions to a combination of cash and common stock, with only amounts exceeding the principal considered in diluted EPS[108] NOTE 19—Related-Party Transactions The company's primary related-party transactions involve Shenghe Resources through Offtake Agreements for rare earth concentrate and NdPr oxide/metal, and VREX Holdco through a Tolling Agreement for NdPr metal processing - A new 2024 Offtake Agreement with Shenghe replaced the 2022 agreement, extending the term and adding NdPr metal to the definition of non-concentrate rare earth products[113] Related-Party Transactions (in thousands) | Metric | Three Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :----------------------------------- | :------------------------------------ | :---------------------------------- | | Related-party rare earth concentrate revenue | $24,426 | $64,502 | | Related-party NdPr oxide and metal revenue | $1,699 | $2,245 | | Related-party cost of sales | $21,477 | $40,709 | | Purchases of materials and supplies from Shenghe | $1,200 | $2,300 | - The Tolling Agreement with VREX Holdco involves the company delivering NdPr oxide for processing into NdPr metal, with the company paying a processing fee and maintaining title to the products[114] NOTE 20—Supplemental Cash Flow Information This note provides supplemental cash flow details, including cash paid for interest and income taxes, and non-cash investing and financing activities such as common stock issued for services and excise tax obligations related to stock repurchases Supplemental Cash Flow Information (in thousands) | Metric | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :---------------------------------------------------------------- | :---------------------------------- | :---------------------------------- | | Cash paid for interest | $910 | $1,045 | | Cash payments related to income taxes | — | $23,101 | | Common stock issued in exchange for financial advisory services | $3,737 | — | | Excise tax obligation related to repurchases of common stock | $1,794 | — | ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition, results of operations, liquidity, and capital resources for the periods presented, covering business overview, recent developments, key performance indicators, and non-GAAP financial measures Business Overview MP Materials is the leading rare earth materials producer in the Western Hemisphere, operating the Mountain Pass Mine and developing a NdFeB magnet manufacturing facility in Fort Worth, Texas - MP Materials operates the Mountain Pass Rare Earth Mine and Processing Facility, the only large-scale rare earth mining and processing site in North America[120] - The company is constructing a Fort Worth Facility for manufacturing NdFeB permanent magnets and precursor products, as part of its Stage III downstream expansion strategy[120][121] - Production of separated rare earth products, including NdPr oxide, commenced in the second half of 2023 following the commissioning of the Stage II optimization project[121] - Rare earth elements are critical inputs for electric vehicles, wind turbines, robotics, drones, and defense applications, aligning with the company's commitment to sustainability[122] Recent Developments and Other Information Recent developments include the issuance of $747.5 million in 2030 Convertible Notes, the purchase of Capped Call Options, and the repurchase of $480.0 million of 2026 Notes and 13.0 million shares of common stock - In March 2024, the company issued $747.5 million in 3.00% unsecured convertible senior notes due 2030 and entered into Capped Call Options covering 34.4 million shares of common stock[123] - Concurrently, the company repurchased $480.0 million of 2026 Convertible Notes for $428.6 million and 13.0 million shares of common stock for $200.8 million[124] - A new 2024 Offtake Agreement with Shenghe replaced and extended the previous agreement, now including NdPr metal in the definition of non-concentrate rare earth products[125][126] - The company was awarded a $58.5 million Section 48C Qualifying Advanced Energy Project Tax Credit to support the construction of its Fort Worth Facility[127] Key Performance Indicators The company's KPIs show a decrease in REO Production and Sales Volume, and a significant drop in Realized Price per REO MT for the three and six months ended June 30, 2024, compared to the prior year Key Performance Indicators (YoY Comparison) | Metric | Q2 2024 | Q2 2023 | Change Amount | Change % | 6 Months 2024 | 6 Months 2023 | Change Amount | Change % | | :-------------------------- | :------ | :------ | :------------ | :------- | :------------ | :------------ | :------------ | :------- | | REO Production Volume (MTs) | 9,084 | 10,863 | (1,779) | (16)% | 20,235 | 21,534 | (1,299) | (6)% | | REO Sales Volume (MTs) | 5,839 | 10,271 | (4,432) | (43)% | 15,171 | 20,486 | (5,315) | (26)% | | Realized Price per REO MT | $4,183 | $6,231 | $(2,048) | (33)% | $4,252 | $7,794 | $(3,542) | (45)% | | NdPr Production Volume (MTs) | 272 | N/A | N/A | N/A | 403 | N/A | N/A | N/A | | NdPr Sales Volume (MTs) | 136 | N/A | N/A | N/A | 270 | N/A | N/A | N/A | | NdPr Realized Price per KG | $48 | N/A | N/A | N/A | $55 | N/A | N/A | N/A | - REO Production Volume includes volumes fed into downstream circuits for commissioning and starting up separations facilities[129] - NdPr Sales Volume for NdPr metal sales is calculated on an NdPr oxide-equivalent basis using an assumed material conversion ratio of 1.20[134] Factors Affecting Our Performance The company's performance is influenced by growing demand for rare earth elements, geopolitical supply chain diversification, and government initiatives, while facing challenges from market price volatility and intense competition - Demand for REE is driven by electric mobility, renewable power generation, energy-efficient motors, robotics, defense systems, and consumer/medical applications[138] - Performance benefits from electrification trends, geographic supply chain diversification away from China, U.S. government initiatives for critical minerals, and ESG mandates[139] - Risks include potential technology changes reducing REE use, market price volatility due to supply/demand shifts, and intense competition from Chinese competitors who may have lower costs or government subsidies[140] - The 'Upstream 60K' strategy aims to grow annual REO Production Volume to approximately 60,000 MTs within four years through further beneficiation and processing alternative feedstocks[141] - Stage II advanced operations to individual REE separation, with expected improvements in per-unit production costs of NdPr oxide as production ramps up, though unstable operations and elevated costs may occur initially[144][145] - The company is developing the HREE Facility at Mountain Pass and constructing the Fort Worth Facility to process NdPr oxide into metal and magnets, aiming for integration into magnet production to mitigate commodity pricing volatility[146][147] - As of December 31, 2023, proven and probable reserves at Mountain Pass were 1.86 million short tons of REO, with an expected mine life of approximately 33 years[148] Results of Operations For the three and six months ended June 30, 2024, total revenue decreased significantly due to lower rare earth concentrate prices and sales volumes, operating costs increased, and the company reported an operating loss and net loss Results of Operations (YoY Comparison) | Metric (in thousands) | Q2 2024 | Q2 2023 | Change $ | Change % | 6 Months 2024 | 6 Months 2023 | Change $ | Change % | | :----------------------------------- | :------ | :------ | :------- | :------- | :------------ | :------------ | :------- | :------- | | Total revenue | $31,258 | $64,024 | $(32,766) | (51)% | $79,942 | $159,724 | $(79,782) | (50)% | | Operating income (loss) | $(53,492) | $483 | $(53,975) | N/M | $(85,924) | $33,445 | $(119,369) | N/M | | Net income (loss) | $(34,055) | $7,395 | $(41,450) | N/M | $(17,566) | $44,842 | $(62,408) | N/M | | Cost of sales (excluding DDA) | $41,463 | $22,704 | $18,759 | 83% | $77,057 | $46,920 | $30,137 | 64% | | Selling, general and administrative | $21,434 | $18,865 | $2,569 | 14% | $42,701 | $38,268 | $4,433 | 12% | | Depreciation, depletion and amortization | $18,210 | $12,203 | $6,007 | 49% | $36,595 | $20,325 | $16,270 | 80% | | Start-up costs | $1,373 | $4,121 | $(2,748) | (67)% | $2,660 | $8,789 | $(6,129) | (70)% | | Interest expense, net | $(6,745) | $(1,392) | $(5,353) | 385% | $(9,602) | $(2,751) | $(6,851) | 249% | | Gain on early extinguishment of debt | — | — | — | N/M | $46,265 | — | $46,265 | N/M | - The decrease in rare earth concentrate revenue was due to a 33% and 45% lower Realized Price per REO MT and 43% and 26% lower REO Sales Volume for the three and six months ended June 30, 2024, respectively[150] - Cost of sales increased primarily due to $11.8 million and $17.8 million in inventory reserves for the three and six months ended June 30, 2024, respectively, related to Stage II ramp-up, as well as higher repairs and maintenance and payroll costs[156] - Depreciation, depletion, and amortization increased due to new circuits and facilities from the Stage II optimization project and Fort Worth Facility assets being placed into service[159] Quarterly Performance Trend Quarterly performance shows a decline in REO Production and Sales Volume and Realized Price per REO MT from Q1 2024 to Q2 2024, reflecting market softness and the shift to separated products, while NdPr production and sales volumes have been increasing Quarterly Key Performance Indicators | Metric (in whole units or dollars) | Q2 FY2024 | Q1 FY2024 | Q4 FY2023 | Q3 FY2023 | Q2 FY2023 | Q1 FY2023 | | :----------------------------------- | :-------- | :-------- | :-------- | :-------- | :-------- | :-------- | | REO Production Volume (MTs) | 9,084 | 11,151 | 9,257 | 10,766 | 10,863 | 10,671 | | REO Sales Volume (MTs) | 5,839 | 9,332 | 7,174 | 9,177 | 10,271 | 10,215 | | Realized Price per REO MT | $4,183 | $4,294 | $5,622 | $5,718 | $6,231 | $9,365 | | NdPr Production Volume (MTs) | 272 | 131 | 150 | 50 | N/A | N/A | | NdPr Sales Volume (MTs) | 136 | 134 | 10 | — | N/A | N/A | | NdPr Realized Price per KG | $48 | $62 | $70 | N/A | N/A | N/A | - The timing lag between production and sales, influenced by shipments and material conversion, can cause volatility in quarterly results[165] - Quarterly production is impacted by scheduled maintenance outages, typically in the second and fourth quarters[165] Liquidity and Capital Resources The company's liquidity is supported by cash, cash equivalents, short-term investments, and recent debt issuance, but is impacted by volatile rare earth prices, with significant capital expenditures planned for Mountain Pass and the Fort Worth Facility - As of June 30, 2024, the company had $937.0 million in cash, cash equivalents, and short-term investments, and $957.5 million principal amount of long-term debt[167] - The issuance of $747.5 million in 2030 Notes in March 2024 provided net proceeds of $731.4 million, used in part to repurchase 2026 Notes, common stock, and purchase Capped Call Options[167] - Working capital needs increased materially in 2023 and are expected to continue in 2024 due to the ramp-up of separated rare earth product production and Stage III magnetics initiatives[169] - Expected capital costs for 2024 are between $200 million and $250 million, primarily for further investment in Mountain Pass (including HREE Facility and Upstream 60K) and completing the Fort Worth Facility[170] Cash Flows Summary (Six Months Ended June 30) | Cash Flow Activity | 2024 (in thousands) | 2023 (in thousands) | Change $ (in thousands) | Change % | | :------------------------------------------ | :------------------ | :------------------ | :---------------------- | :------- | | Net cash provided by (used in) operating activities | $(10,284) | $65,459 | $(75,743) | N/M | | Net cash provided by investing activities | $10,970 | $728,114 | $(717,144) | (98)% | | Net cash provided by (used in) financing activities | $31,366 | $(7,599) | $38,965 | N/M | Non-GAAP Financial Measures The company presents Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Diluted EPS, and Free Cash Flow as non-GAAP measures to supplement GAAP results, excluding non-recurring, non-cash, or non-operating expenses - Adjusted EBITDA is defined as GAAP net income or loss before interest, taxes, depreciation, and amortization, further adjusted for stock-based compensation, initial start-up costs, transaction-related costs, accretion of obligations, disposals of assets, gain/loss on debt extinguishment, and other income/loss[191] Adjusted EBITDA Reconciliation (Six Months Ended June 30) | Metric (in thousands) | 2024 | 2023 | | :------------------------------------------ | :--- | :--- | | Net income (loss) | $(17,566) | $44,842 | | Depreciation, depletion and amortization | 36,595 | 20,325 | | Interest expense, net | 9,602 | 2,751 | | Income tax expense (benefit) | (6,954) | 13,366 | | Stock-based compensation expense | 13,170 | 12,743 | | Initial start-up costs | 2,425 | 8,392 | | Transaction-related and other costs | 4,680 | 5,482 | | Gain on early extinguishment of debt | (46,265) | — | | Adjusted EBITDA | $(28,293) | $85,651 | Free Cash Flow Reconciliation (Six Months Ended June 30) | Metric (in thousands) | 2024 | 2023 | | :---------------------------------------------------------------- | :--- | :--- | | Net cash provided by (used in) operating activities | $(10,284) | $65,459 | | Additions to property, plant and equipment, net | $(98,230) | $(130,236) | | Free Cash Flow | $(108,514) | $(64,777) | ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The company's market risk exposures, particularly for Convertible Notes, are more sensitive to equity market price volatility of its common stock than to changes in interest rates - The fair values of Convertible Notes are more sensitive to the equity market price volatility of the company's stock price than changes in interest rates[202] - Changes in interest rates and market value affect the fair value of Convertible Notes but do not impact the company's financial position, cash flows, or results of operations due to the fixed nature of the debt obligations[202] ITEM 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2024, with no material changes to internal control over financial reporting during the quarter - The company's disclosure controls and procedures were effective as of June 30, 2024, ensuring timely and accurate reporting of information[204] - No changes occurred during the fiscal quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[205] PART II—OTHER INFORMATION This section provides additional information including legal proceedings, risk factors, equity sales, mine safety disclosures, other information, and exhibits ITEM 1. Legal Proceedings The company is not currently a party to any material legal or governmental proceedings, and none are known to be threatened - The company is not currently a party to any material legal or governmental proceedings, and none are threatened[206] ITEM 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Form 10-K for the year ended December 31, 2023, and its Form 10-Q for the quarterly period ended March 31, 2024 - No material changes to the risk factors disclosed in the company's Form 10-K for 2023 and Form 10-Q for Q1 2024[207] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds The company's Board of Directors approved a $300.0 million share repurchase program in March 2024, under which no shares were repurchased during the three months ended June 30, 2024 - A $300.0 million share repurchase program was approved on March 1, 2024, expiring March 1, 2025[208] - No shares were repurchased during the three months ended June 30, 2024, and $99.2 million remains available for repurchases[208] ITEM 4. Mine Safety Disclosures Information regarding mine safety violations and other regulatory matters is provided in Exhibit 95.1 to this Form 10-Q - Mine safety disclosures are included in Exhibit 95.1 to this Form 10-Q[209] ITEM 5. Other Information No directors or executive officers adopted, terminated, or modified Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the three months ended June 30, 2024 - None of the company's directors or officers adopted, terminated, or modified Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the three months ended June 30, 2024[210] ITEM 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including Inline XBRL documents, CEO and CFO certifications, and mine safety disclosures - 101.INS: Inline XBRL Instance Document[211] - 101.SCH: Inline XBRL Taxonomy Extension Schema Document[211] - 101.CAL: Inline XBRL Taxonomy Extension Calculation Linkbase Document[211] - 101.DEF: Inline XBRL Taxonomy Extension Definition Linkbase Document[211] - 101.LAB: Inline XBRL Taxonomy Extension Label Linkbase Document[211] - 101.PRE: Inline XBRL Taxonomy Extension Presentation Linkbase Document[211] - 104: Cover Page Inline XBRL File[211] - 31.1: CEO Certification pursuant to rule 13a-14(a) or 15d-14(a)[212] - *31.2: CFO Certification pursuant to rule 13a-14(a) or 15d-14(a)[212] - 32.1: CEO Certification pursuant to 18 U.S.C. Section 1350[212] - 32.2: CFO Certification pursuant to 18 U.S.C. Section 1350[212] - 95.1: Mine Safety Disclosure pursuant to Section 1503(a) of the Dodd-Frank Act[212] Signatures The report was duly signed on behalf of MP Materials Corp. by Ryan Corbett, Chief Financial Officer, on August 6, 2024 - The report was signed by Ryan Corbett, Chief Financial Officer of MP Materials Corp., on August 6, 2024[214]