MP MATERIALS CORP.
The following discussion and analysis of financial condition, results of
operations, liquidity and capital resources should be read in conjunction with,
and is qualified in its entirety by, the unaudited Condensed Consolidated
Financial Statements and the notes thereto included in this Quarterly Report on
Form 10-Q ("Form 10-Q"), and the Consolidated Financial Statements and notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in the Annual Report on Form 10-K ("Form 10-K")
for the year ended December 31, 2020 . This discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions.
The actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, but not
limited to, those set forth under "Part II. Item 1A. Risk Factors" and
elsewhere in this Form 10-Q and "Part I. Item 1A. Risk Factors" and elsewhere in
our Form 10-K. In addition, see "Cautionary Note Regarding Forward-Looking
Statements." References herein to the "Company," "we," "our," and "us," refer
to MP Materials Corp. and its subsidiaries.
Overview
We are the largest producer of rare earth materials in the Western Hemisphere.
We own and operate the Mountain Pass Rare Earth Mine and Processing Facility
("Mountain Pass "), the only rare earth mining and processing site of scale in
North America . We believe the rare earth concentrate we produced and sold in
2020 represented approximately 15% of the rare earth content consumed in the
global market.
Rare earth elements ("REE") are fundamental building blocks of the modern
economy, impacting trillions of dollars in global gross domestic product through
the enablement of end products across industries including transportation, clean
energy, robotics, national defense and consumer electronics, among others.
Neodymium ("Nd") and praseodymium ("Pr") are rare earth elements which in
combination form neodymium-praseodymium ("NdPr"), which represents the Company's
primary revenue opportunity. NdPr is most often utilized in NdPr magnets, which
are also commonly referred to as "neo," "NdFeB," "NIB," or permanent magnets and
are made predominantly from an alloy of NdPr, iron and boron. NdPr magnets are
the most widely used type of rare earth magnets and are critical for many
advanced technologies that are experiencing strong secular growth, including
electric vehicles ("EV"), drones, defense systems, medical equipment, wind
turbines, robotics and many others. The rapid growth of these and other advanced
motion technologies is expected to drive substantial demand growth for NdPr.
We produce our materials at Mountain Pass , one of the world's richest rare earth
deposits, co-located with integrated state-of-the-art processing and separation
facilities. We acquired the Mountain Pass assets in 2017, restarted operations
from cold-idle status and embarked on a deliberate, two-stage plan to optimize
the facility and position the Company for growth and profitability. We commenced
mining, comminution, beneficiation, and tailings management operations, which we
designated Stage I of our multi-stage optimization plan, between December 2017
and February 2018 . We currently produce a rare earth concentrate that we sell to
Shenghe Resources (Singapore) International Trading Pte. Ltd. ("Shenghe"), an
affiliate of Shenghe Resources Holding Co., Ltd., a leading global rare earth
company that is publicly listed in China , which, in turn, sells that product to
end customers in China . These customers separate the constituent REE contained
in our concentrate and sell the separated products to various end users. Upon
completion of our Stage II optimization project, we anticipate separating rare
earth oxides ("REO") at Mountain Pass and selling our products directly to end
users, at which time we may no longer sell our concentrate.
As technological innovation drives anticipated global growth in demand for REO,
we also believe global economic trends, geopolitical realities and
sustainability mandates are combining to further support an opportunity for us
to create shareholder value. We believe businesses are increasingly prioritizing
diversification and security of their global supply chains so as to reduce
reliance on a single producer or region for critical supplies. This trend also
has national security implications, as illustrated by the February 2021 U.S.
Presidential executive order requiring the U.S. government to review supply
chains for critical minerals and other identified strategic materials, including
rare earth elements, in an effort to ensure that the U.S. is not reliant on
other countries, such as China . According to the CRU Group , China accounted for
approximately 79% of global REO production in 2020. We believe an even higher
percentage of the NdPr magnet supply chain is based in China . Finally, public
and private interests are increasingly demanding sustainability throughout
production value chains to limit negative environmental and societal impacts
from business activity, including pollution and acceleration of climate change.
As the only scaled source in North America for critical rare earths, with a
processing facility designed to operate with best-in-class sustainability and a
competitive cost structure, we believe we are well-positioned to thrive in a
transforming global economy.
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Recent Developments and Comparability of Results
Business Combination and Reverse Recapitalization
The Business Combination (as defined below) was consummated on November 17,
2020 , pursuant to the terms of a merger agreement entered into on July 15, 2020
(the "Merger Agreement"). Pursuant to the Merger Agreement, MP Mine Operations
LLC ("MPMO") and Secure Natural Resources LLC ("SNR"), the company that holds
the mineral rights to the Mountain Pass mine and surrounding areas as well as
intellectual property rights related to the processing and development of rare
earth minerals, were combined with Fortress Value Acquisition Corp. ("FVAC"), a
special purpose acquisition company (the "Business Combination"), and became
indirect wholly-owned subsidiaries of FVAC, which was in turn renamed MP
Materials Corp. The Business Combination was accounted for as a reverse
recapitalization, with no goodwill or other intangible assets recorded, and the
acquisition of SNR (the "SNR Mineral Rights Acquisition") was treated as an
asset acquisition. Furthermore, MPMO was deemed to be the accounting acquirer
and FVAC the accounting acquiree, which, for financial reporting purposes,
results in MPMO's historical financial information becoming that of the Company.
Our Relationship and Agreements with Shenghe
Original Commercial Agreements
In May 2017 , prior to our acquisition of Mountain Pass , we entered into a set of
commercial arrangements with Shenghe, which principally consisted of a technical
services agreement (the "TSA"), an offtake agreement (the "Original Offtake
Agreement"), and a distribution and marketing agreement (the "DMA"). Shenghe and
its affiliates primarily engage in the mining, separation, processing and
distribution of rare earth products. We also issued to Leshan Shenghe Rare Earth
Co., Ltd. ("Leshan Shenghe"), the majority stockholder of Shenghe, a preferred
interest in the Company, which was ultimately exchanged for shares of our common
stock in connection with the Business Combination.
The Original Offtake Agreement required Shenghe to advance us an initial
$50.0 million (the "Initial Prepayment Amount") to fund the restart of
operations at the mine and the TSA required Shenghe to fund any additional
operating and capital expenditures required to bring Mountain Pass to full
operability. Shenghe also agreed to provide additional funding of $30.0 million
to the Company pursuant to a separate letter agreement dated June 20, 2017 (the
"Letter Agreement") (the "First Additional Advance"), in connection with our
acquisition of Mountain Pass . In addition to the repayment of the First
Additional Advance, pursuant to the Letter Agreement, the Initial Prepayment
Amount increased by $30.0 million . We refer to the aggregate prepayments made by
Shenghe pursuant to the Original Offtake Agreement and the Framework Agreement
(as defined below), as adjusted for Gross Profit Recoupment (as defined below)
amounts and any other qualifying repayments to Shenghe, inclusive of the
$30.0 million increase to the Initial Prepayment Amount, as the "Prepaid
Balance."
As discussed below, the entrance into the Letter Agreement constituted a
modification to the Original Offtake Agreement for accounting purposes (referred
to as the "June 2017 Modification"), which ultimately resulted in the Shenghe
Implied Discount (as defined below). Under the terms of these agreements, the
amounts funded by Shenghe constitute prepayments for the rare earth products to
be sold to Shenghe historically under the Original Offtake Agreement (and
currently under the A&R Offtake Agreement, as defined below).
Under the Original Offtake Agreement, upon the mine achieving certain milestones
and being deemed commercially operational (which was achieved on July 1, 2019 ),
we sold to Shenghe, and Shenghe purchased on a firm "take or pay" basis, all of
the rare earth products produced at Mountain Pass . Shenghe marketed and sold
these products to customers, and retained the gross profits earned on subsequent
sales. The gross profits were credited against the Prepaid Balance, and provided
the means by which we repaid, and Shenghe recovered, such amounts (the "Gross
Profit Recoupment"). Under the Original Offtake Agreement, we were obliged to
sell all Mountain Pass rare earth products to Shenghe until Shenghe had fully
recouped all of its prepayments (i.e., the Prepaid Balance is reduced to zero),
at which point the Original Offtake Agreement would terminate automatically.
As originally entered, the DMA was to become effective upon termination of the
Original Offtake Agreement. The DMA provided for a distribution and marketing
arrangement between the Company and Shenghe, subject to certain exceptions. We
retained the right to distribute our products directly to certain categories of
customers. As compensation for Shenghe's distribution and marketing services,
the DMA entitled Shenghe to a portion of the net profits from the sale of rare
earth products produced at Mountain Pass . See below for further discussion of
the DMA termination and associated accounting treatment.
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Framework Agreement and Restructured Commercial Agreements
In May 2020 , the Company entered into a framework agreement and amendment (the
"Framework Agreement") with Shenghe and Leshan Shenghe that significantly
restructured the commercial arrangements and provided for, among other things, a
revised funding amount and schedule to settle Shenghe's prepayment obligations
to the Company, as well as either the amendment or termination of the various
agreements between the parties, as discussed below.
Pursuant to the Framework Agreement, we entered into an amended and restated
offtake agreement with Shenghe on May 19, 2020 (the "A&R Offtake Agreement"),
which, upon effectiveness, superseded and replaced the Original Offtake
Agreement, and we issued to Shenghe a warrant on June 2, 2020 (the "Shenghe
Warrant"). Pursuant to the Framework Agreement, Shenghe funded the remaining
portion of the Initial Prepayment Amount and agreed to fund an additional
$35.5 million advance to us (the "Second Additional Advance" and together with
the Initial Prepayment Amount, inclusive of the $30.0 million increase pursuant
to the Letter Agreement, the "Offtake Advances"), which amounts were fully
funded on June 5, 2020 . The Shenghe Warrant was ultimately exchanged for shares
of our common stock in connection with the Business Combination.
Upon the funding of the remaining obligations on June 5, 2020 , among other
things, (i) the TSA and the DMA were terminated (as described below) and (ii)
the A&R Offtake Agreement and the Shenghe Warrant became effective (such events
are collectively referred to as the "June 2020 Modification"). Thus, at the
present time, Leshan Shenghe's and Shenghe's involvement with the Company and
Mountain Pass consists of only the A&R Offtake Agreement.
The A&R Offtake Agreement maintains the key take-or-pay, amounts owed on actual
and deemed advances from Shenghe, and other terms of the Original Offtake
Agreement, with the following changes: (i) modifies the definition of "offtake
products" in order to remove from the scope of that definition lanthanum, cerium
and other rare earth products that do not meet the specifications agreed to
under the A&R Offtake Agreement; (ii) as to the offtake products subject to the
A&R Offtake Agreement, provides that if we sell such offtake products to a third
party, then, until the Prepaid Balance has been reduced to zero, we will pay an
agreed percentage of our revenue from such sale to Shenghe, to be credited
against the amounts owed on Offtake Advances; (iii) replaces the Shenghe Sales
Discount (as discussed and defined below) under the Original Offtake Agreement
with a fixed monthly sales charge; (iv) provides that the sales price to be paid
by Shenghe for our rare earth products (a portion of which reduces the Prepaid
Balance rather than being paid in cash) will be based on market prices (net of
taxes, tariffs and certain other agreed charges) less applicable discounts; (v)
obliges us to pay Shenghe, on an annual basis, an amount equal to our annual net
income, less any amounts recouped through the Gross Profit Recoupment mechanism
over the course of the year, until the Prepaid Balance has been reduced to zero;
(vi) obliges us to pay Shenghe the net after-tax profits from certain sales of
assets until the Prepaid Balance has been reduced to zero (this obligation was
previously contained in the TSA ); and (vii) provides for certain changes to the
payment, invoicing and delivery terms and procedures for products.
The sales price and other terms applicable to a quantity of offtake products are
set forth in monthly purchase agreements between the Company and Shenghe. As
with the Original Offtake Agreement, the A&R Offtake Agreement will terminate
when Shenghe has fully recouped all of its prepayment funding. Following that
termination, the Company will have no contractual arrangements with Shenghe for
the distribution, marketing or sale of rare earth products.
Accounting for the June 2017 Modification
Pursuant to the Letter Agreement, Shenghe agreed to provide additional funding
via a short-term non-interest-bearing note in the amount of $30.0 million to the
Company (defined above as the "First Additional Advance"), which required
repayment within one year. Furthermore, under the terms of the Letter Agreement,
Shenghe became entitled to an additional $30.0 million recovery through an
increase to the Prepaid Balance. Therefore, under the terms of the Letter
Agreement, Shenghe would ultimately receive repayment of the short-term debt
instrument from the Company, and also be entitled to realize an additional $30.0
million as a part of the contractual Gross Profit Recoupment from ultimate sales
to its customers.
As discussed in more detail within Note 3, "Relationship and Agreements with
Shenghe," in the notes to the unaudited Condensed Consolidated Financial
Statements, based on the relationship between (i) the deemed proceeds the
Company would ultimately receive from the Initial Prepayment Amount (adjusted
for (a) the fair value of the preferred interest provided to Shenghe at the time
of entering into the aforementioned commercial arrangements and (b) the fair
value allocated to the modification to the revenue arrangement) and (ii) the
contractual amount owed to Shenghe (i.e., the Prepaid Balance, which included
the Initial Prepayment Amount and the additional $30.0 million adjustment to the
Prepaid Balance in connection with the Letter Agreement) at the time, the June
2017 Modification resulted in an implied discount on the Company's sales prices
to Shenghe under the Original Offtake Agreement, for accounting purposes (the
"Shenghe Implied Discount"). The Shenghe Implied Discount applied only to sales
made to Shenghe between July 2019 and early June 2020 .
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Beginning in July 2019 and through early June 2020 , the Company periodically
agreed on a cash sales price, which was intended to approximate the Company's
cash cost of production, with Shenghe for each metric ton ("MT") of rare earth
concentrate delivered by the Company. Such sales during this period were made
under the Original Offtake Agreement and also reflected the Shenghe Sales
Discount. The Company recognized the cash sales prices as revenue upon each
sale. In addition, since the Shenghe Implied Discount applied to sales made to
Shenghe during the period from July 2019 through early June 2020 , we also
recognized an amount of deferred revenue applicable to these sales equal to 64%
of the gross profit realized by Shenghe of this product to its own customers.
For example, for a hypothetical shipment of REO to Shenghe on which it realized
gross profit of $1.00 (the difference between the sales price to its customers
and its cash cost paid to us), we would recognize $0.64 as non-cash revenue
through a reduction in the deferred revenue balance, and the remaining $0.36
would not be recorded as revenue. The full gross profit amount realized by
Shenghe on such sales reduced the Prepaid Balance (and consequently, our
contractual obligations to Shenghe). Shenghe's gross profit is influenced by
market conditions as well as import duties, which were imposed on our products
by the General Administration of Customs of the People's Republic of China
during this period. See also "Key Performance Indicators" section.
In addition, sales to Shenghe under the Original Offtake Agreement between July
2019 and early June 2020 typically provided Shenghe with a discount generally in
the amount of between 3% and 6% of the initial cash price of our rare earth
products sold in consideration of Shenghe's sales efforts to resell our rare
earth products (the "Shenghe Sales Discount"). The Shenghe Sales Discount was
considered a reduction in the transaction price; thus, was not recognized as
revenue. Additionally, the Shenghe Sales Discount was not applied to reduce the
Prepaid Balance; however, it was considered as part of Shenghe's cost of
acquiring our product in the calculation of Shenghe's gross profit.
Accounting for the June 2020 Modification
As noted above, in May 2020 , the Company renegotiated various aspects of its
relationship with Shenghe and entered into the Framework Agreement to
significantly restructure the aforementioned set of arrangements. Prior to the
June 2020 Modification, for accounting purposes, the Original Offtake Agreement
constituted a deferred revenue arrangement; however, as a result of the June
2020 Modification, the A&R Offtake Agreement constituted a debt obligation as
well as provided for the issuance of the Shenghe Warrant. In addition, as a
result of the renegotiations, the accounting treatment specific to the Shenghe
Implied Discount was no longer required.
In accounting for the June 2020 Modification, on June 5, 2020 , we:
•Derecognized the existing deferred revenue balance of $37.5 million ;
•Recognized, at fair value, a non-interest-bearing debt instrument with a
principal balance of $94.0 million and a debt discount of $8.3 million (implied
debt discount of 4.4%), resulting in a carrying amount of $85.7 million ;
•Recorded the $35.5 million proceeds received from the Second Additional
Advance;
•Recognized the issuance of the Shenghe Warrant at its fair value of
$53.8 million ; and
•Recorded a $66.6 million non-cash settlement charge (reflecting a deemed
payment to terminate the DMA).
As noted above, the June 2020 Modification provided that the sales price to be
paid by Shenghe for our rare earth products will be based on market prices (net
of taxes, tariffs and certain other agreed charges) less applicable discounts,
instead of our cash cost of production, as was the case with sales made under
the Original Offtake Agreement. A portion of the sales price is in the form of
debt repayment, with the remainder paid in cash. The elimination of the Shenghe
Sales Discount and replacement with the aforementioned fixed monthly sales
charge has not had a material impact on our results of operations (both are
treated as a reduction to the transaction price).
As a result of the June 2020 Modification, the amount of revenue we recorded for
periods that included any portion of the period from July 1, 2019 , until June 5,
2020 , is not comparable, in the aggregate or on a per unit basis, to the amount
of revenue recorded in other periods that commenced after June 5, 2020 .
Furthermore, assuming static market prices, we would expect to record more
revenue on a per unit basis subsequent to June 5, 2020 . As discussed in the
"Key Performance Indicators" section below, in the calculation of our
realized price per REO MT, we eliminate the impact of recognizing revenue at a
discount during the period between July 1, 2019 , and June 5, 2020 , in order to
reflect a consistent basis between periods.
Tariff-Related Rebates
Starting in May 2020 , the government of the People's Republic of China granted
retroactive tariff relief to certain importers of rare earth minerals including
Shenghe and its affiliates and other consignees of our products, relating to
periods
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prior to the formal lifting of the tariffs. As a result, Shenghe's actual
realized prices for the REO sold prior to May 2020 were higher than originally
reported to us and resulted in tariff rebates to end customers, which
contractually were due to Shenghe. On account of these rebates in the second and
third quarters of 2020 and the first quarter of 2021, we received from Shenghe
certain credits against our contractual commitments to them.
Impact of the COVID-19 Pandemic
In December 2019 , a novel strain of coronavirus (known as "COVID-19") began to
impact the population of China , where our principal customer is located. The
outbreak of COVID-19 has grown both in the United States and globally, and
related government and private sector responsive actions have adversely affected
the global economy. In December 2019 , a series of emergency quarantine measures
taken by the Chinese government disrupted domestic business activities in China
during the weeks after the initial outbreak of COVID-19. These disruptions have
occurred periodically since the start of COVID-19 outbreak as measures intended
to impede the spread of the virus have adapted. Since the initial COVID-19
outbreak, many countries, including the United States , have imposed restrictions
on travel to and from China and elsewhere, as well as general movement
restrictions, business closures and other measures imposed to slow the spread of
COVID-19.
At the onset of the outbreak in the first quarter of 2020, we initially
experienced shipping delays due to overseas port slowdowns and container
shortages, but we did not experience a reduction in production or sales.
However, beginning in the fourth quarter of 2020, and continuing through the
third quarter of 2021, we again saw shipping delays and container shortages from
congestion at port facilities and trucking shortages, which has been exacerbated
by COVID-19 and resulting supply chain disruptions. Congestion at U.S. and
international ports could affect the capacity at ports to receive deliveries of
products or the loading of shipments onto vessels.
As the situation continues to develop, it is impossible to predict the effect
and ultimate impact of the COVID-19 pandemic on the Company's business and
results of operations. While the quarantine, social distancing and other
regulatory measures instituted or recommended in response to COVID-19 are
expected to be temporary, the duration of the business disruptions, and related
financial impact, cannot be estimated at this time.
Key Performance Indicators
We use the following key performance indicators to evaluate the performance of
our business. Our calculations of these performance indicators may differ from
similarly-titled measures presented by other companies in our industry or in
other industries. The following table presents our key performance indicators:
For the three months ended For the nine months ended
September 30, Change September 30, Change
(in whole units or dollars,
except percentages) 2021 2020 $ % 2021 2020 $ %
REO production volume (MTs) 11,998 10,197 1,801 18 % 32,152 29,166 2,986 10 %
REO sales volume (MTs) 12,814 9,429 3,385 36 % 32,484 28,047 4,437 16 %
Realized price per REO MT $ 7,693 $ 3,393 $ 4,300 127 % $ 7,043 $ 3,031 $ 4,012 132 %
Production cost per REO MT $ 1,449 $ 1,389 $ 60 4 % $ 1,484 $ 1,371 $ 113 8 %
REO Production Volume
We measure our REO-equivalent production volume for a given period in metric
tons, our principal unit of sale. This measure refers to the REO content
contained in the rare earth concentrate we produce. Our REO production volume is
a key indicator of our mining and processing capacity and efficiency.
The rare earth concentrate we currently produce is a processed, concentrated
form of our mined rare earth-bearing ores. While our unit of production and sale
is a MT of embedded REO, the actual weight of our rare earth concentrate is
significantly greater, as the concentrate also contains non-REO minerals and
water. 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. As discussed in "Key Factors Affecting Our
Performance" below, upon completion of our Stage II optimization project, we
expect to refine our rare earth concentrate to produce separated rare earths,
including separated NdPr oxide.
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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. Our REO sales volume is a
key measure of our ability to convert our production into revenue.
Realized Price per REO MT
We calculate the realized price per REO MT for a given period as the quotient
of: (i) our Total Value Realized (see below) for a given period and (ii) our REO
sales volume for the same period. We define Total Value Realized, which is a
non-GAAP financial measure, as our product sales adjusted for the revenue impact
of tariff-related rebates from Shenghe on account of prior sales, and, in
connection with our sales of REO to Shenghe between July 1, 2019 , and June 5,
2020 , the Shenghe Implied Discount. The Shenghe Implied Discount is equal to the
difference between (i) Shenghe's average realized price, net of taxes, tariffs
and certain other agreed-upon charges (such as one-time demurrage charges) on
our products once sold to their ultimate customers and (ii) the amount of
revenue we recognized on the sales of those products to Shenghe for sales
between July 1, 2019 , and June 5, 2020 , which includes the non-cash portion
discussed above.
Under the terms of the Original Offtake Agreement, for the period between
July 1, 2019 , and June 5, 2020 , Shenghe purchased our rare earth products at an
agreed-upon cash price per MT, which was intended to approximate our cash cost
of production, and in turn resold it at market prices to its customers. As
discussed above, in addition to the revenue we recognized from the cash sales
prices, we also realized an amount of deferred revenue applicable to these sales
equal to 64% of Shenghe's gross profit. Upon entrance into the A&R Offtake
Agreement, we began to recognize revenue at the full value of our product. See
also "Recent Developments and Comparability of Results" section above.
Realized price per REO MT is an important measure of the market price of our
product. Accordingly, we calculate realized price per REO MT to reflect a
consistent basis between periods by eliminating the impact of recognizing
revenue at a discount during the period between July 1, 2019 , and June 5, 2020 ,
and the revenue impact of tariff-related rebates. 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 product sales, which is determined
in accordance with GAAP, as well as the calculation of realized price per REO
MT.
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) less stock-based compensation expense included in
cost of sales, shipping and freight costs, and costs attributable to certain
other sales, for a given period.
Production cost per REO MT is a key indicator of our 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 cost of sales (excluding depletion, depreciation and
amortization), which is determined in accordance with GAAP, as well as the
calculation of production cost per REO MT.
Key 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 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 driver for REE is their use in a diverse array of growing end
markets, including: clean-energy and transportation technologies (e.g., traction
motors in EVs and generators in wind power turbines); high-technology
applications (e.g., miniaturization of smart phones and other mobile devices,
fiber optics, lasers, robotics, medical devices, etc.); critical defense
applications (e.g., guidance and control systems, global positioning systems,
radar and sonar, drones, etc.); and essential industrial infrastructure (e.g.,
advanced catalyst applications in oil refining and pollution-control systems in
traditional internal-combustion automobiles, etc.). We believe these drivers
will fuel the continued growth of the rare earth market, particularly the market
for NdPr.
We believe we benefit from several demand tailwinds for REE, and particularly
for NdPr. These include the trend toward geographic supply chain
diversification, particularly in relation to China , which accounted for
approximately 79% of global
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REE production in 2020, the U.S. government strategy to restore domestic supply
of key minerals, and increasing acceptance of environmental, social and
governance mandates, which impact global capital allocation throughout
production value chains to limit negative environmental and societal impacts.
However, changes in technology may 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. We also operate in a competitive
industry, and many of our key competitors are based in China , where production
costs are typically lower than in the United States .
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 July 1, 2020 , SRK
Consulting (U.S.), Inc. , an independent consulting firm that we have retained to
assess our reserves, estimates total proven and probable reserves of 1.5 million
short tons of REO contained in 21.1 million short tons of ore at Mountain Pass ,
with an average ore grade of 7.06%. These estimates use an estimated economical
cut-off of 3.83% total REO. Based on these estimated reserves and our expected
annual production rate of REO upon completion of our Stage II optimization
project, our expected mine life is approximately 24 years. We expect to be able
to significantly grow our expected mine life through exploratory drilling
programs and incorporation of the profitability uplift of our Stage II
optimization project over time.
Mining activities in the United States 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.
Maximizing Production Efficiency
In 2020, REO production was approximately 3.2x greater than the highest ever
production in a twelve-month period by the former operator using the same
capital equipment. We achieved these results through an optimized reagent
scheme, lower process temperatures, better management of the tailings facility,
and a commitment to operational excellence, driving approximately 95% uptime. We
also believe that our Stage I optimization initiatives enabled us to achieve
world-class production cost levels for rare earth concentrate. All of these
achievements enabled us to become operating cash flow positive, despite
significant Chinese trade tariffs on ore and concentrates in place over the
optimization period. These trade tariffs have since been suspended, further
enhancing the earnings power of our Stage I operations.
We believe that the success of our business will reflect our ability to manage
our costs. Our Stage II optimization project (discussed below) is designed to
enable us to manage our cost structure for separating REE through a revised
facility process flow. The reintroduction of the oxidizing roasting step will
allow us to capitalize on the inherent advantages of the bastnaesite ore at
Mountain Pass , which is uniquely suitable to low-cost refining by selectively
eliminating the need to carry lower-value cerium through the separations
process. The recommissioning of our natural gas-powered combined heat and power
("CHP") facility will reduce energy, heating and steam costs as well as minimize
or eliminate our reliance on the regional electric power grid. Further, our
location offers significant 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 greater capital, which may allow them to make similar or
greater efficiency improvements or undercut market prices for our product.
Development of Our REE Refining Capabilities and Other Opportunities
Our Stage II optimization project is focused on advancing from concentrate
production to the separation of individual REE. Engineering, procurement,
construction and other recommissioning activities are underway and involve
upgrades and enhancements to the existing facility process flow to reliably
produce separated REE at a lower cost and with an expected smaller environmental
footprint per volume of REO produced than the prior operator of Mountain Pass .
As part of our Stage II optimization project, we plan to reintroduce a roasting
circuit, reorient the plant process flow, increase product finishing capacity,
improve wastewater management and make other improvements to materials handling
and storage. We believe that our Stage II optimization project investments will
enable us to increase the recovery of NdPr from our concentrate, increase NdPr
production, and lower the cost of production, in each case, as compared to the
prior owner's operations.
Upon completion of our Stage II optimization project, we expect to be a low-cost
producer of separated NdPr oxide, which represents a majority of the value
contained in our ore. Further, we believe we will then be in a position to
consider opportunities to integrate further downstream into the business of
upgrading NdPr into metal alloys and magnets, ultimately
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expanding our presence as a global source for rare earth magnetics. We also
believe integration into magnet production would provide some protection from
commodity pricing volatility, while enhancing our business profile and
profitability as the producer of a critical industrial output in addition to a
producer of resources. Geopolitical developments have created an increased
urgency to bring critical rare earth mining and refining production capability
to the United States and to restore the full U.S. magnetics supply chain.
The completion of our Stage II optimization project and any development of Stage
III is expected to be capital intensive. During the first quarter of 2021, we
revised the scope of our Stage II optimization project to include process design
innovations that reduce reagent consumption while increasing the planned
recovery of separated REO and improving potential product mix. We expect to be
able to reach targeted production rates and profitability in 2023 without the
need to recommission our chlor-alkali facility, which we previously estimated
would cost approximately $30 million . We believe this significantly reduces the
operational risks in achieving our targeted profitability. We expect to invest a
total of approximately $220 million on our Stage II optimization project,
principally in 2021 and 2022. Our estimated costs or estimated time to
completion may increase, potentially significantly, due to factors outside of
our control. While we believe we have sufficient cash resources to fund our
Stage II optimization project and operating working capital in the near term, we
cannot assure this. Any delays in our ongoing optimization plans or substantial
cost increases related to their execution could significantly impact our ability
to maximize our revenue opportunities and adversely impact our business and cash
flows.
Results of Operations
Comparison of the Three and Nine Months Ended September 30, 2021 and 2020
The following table summarizes our results of operations:
For the three months ended For the nine months ended
September 30, Change September 30, Change
(in thousands, except
percentages) 2021 2020 $ % 2021 2020 $ %
Revenue:
Product sales $ 98,581 $ 40,864 $ 57,717 141 % $ 230,842 $ 91,699 $ 139,143 152 %
Other sales 1,173 158 1,015 642 % 2,001 433 1,568 362 %
Total revenue 99,754 41,022 58,732 143 % 232,843 92,132 140,711 153 %
Operating costs and expenses:
Cost of sales(1) 21,907 15,425 6,482 42 % 57,798 44,957 12,841 29 %
General and administrative 14,881 5,635 9,246 164 % 40,986 14,477 26,509 183 %
Advanced projects, development
and other 1,327 11 1,316 n.m. 2,436 96 2,340 2438 %
Depreciation, depletion and
amortization 6,951 2,179 4,772 219 % 19,767 4,832 14,935 309 %
Accretion of asset retirement
and environmental obligations 595 563 32 6 % 1,780 1,691 89 5 %
Royalty expense to SNR - 1,055 (1,055) (100) % - 1,908 (1,908) (100) %
Write-down of inventories - - - n.m. 1,809 - 1,809 n.m.
Settlement charge - - - n.m. - 66,615 (66,615) (100) %
Total operating costs and
expenses 45,661 24,868 20,793 84 % 124,576 134,576 (10,000) (7) %
Operating income (loss) 54,093 16,154 37,939 235 % 108,267 (42,444) 150,711 n.m.
Other income, net 97 61 36 59 % 3,656 298 3,358 1127 %
Interest expense, net (2,624) (1,713) (911) 53 % (6,417) (3,582) (2,835) 79 %
Income (loss) before income
taxes 51,566 14,502 37,064 256 % 105,506 (45,728) 151,234 n.m.
Income tax benefit (expense) (8,803) 125 (8,928) n.m. (19,458) (211) (19,247) 9122 %
Net income (loss) $ 42,763 $ 14,627 $ 28,136 192 % $ 86,048 $ (45,939) $ 131,987 n.m.
Adjusted EBITDA $ 68,287 $ 11,609 $ 56,678 488 % $ 147,734 $ 24,645 $ 123,089 499 %
Adjusted Net Income $ 51,982 $ 7,245 $ 44,737 617 % $ 108,885 $ 14,693 $ 94,192 641 %
n.m. - Not meaningful.
(1)Excludes depreciation, depletion and amortization.
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Revenue consists primarily of product sales, which pertain to our sales of REO
concentrate principally to Shenghe under the Original Offtake Agreement for
sales between January 1, 2020 , and June 5, 2020 , or the A&R Offtake Agreement
for sales after June 5, 2020 .
Product sales increased year over year by $57.7 million , or 141%, to $98.6
million for the three months ended September 30, 2021 . The increase was driven
by higher REO sales volume, which increased by 3,385 MTs, or 36%, to 12,814 MTs
for the three months ended September 30, 2021 , as compared to the prior year
period, and a higher realized price per REO MT, which increased by 127% year
over year for the three months ended September 30, 2021 , reflecting higher
demand for rare earth products. The increase in REO sales volume for the three
months ended September 30, 2021 , as compared to the prior year period, reflects
an increase in REO production volume and is impacted by the timing of shipments.
The increase in REO production volume for the three months ended September 30,
2021 , as compared to the prior year period, reflects continued improvement in
the efficiency of our processing operations.
Product sales increased year over year by $139.1 million , or 152%, to $230.8
million for the nine months ended September 30, 2021 . The increase was driven by
higher REO sales volume, which increased by 4,437 MTs, or 16%, to 32,484 MTs for
the nine months ended September 30, 2021 , as compared to the prior year period,
and a higher realized price per REO MT, which increased by 132% year over year
for the nine months ended September 30, 2021 , reflecting higher demand for rare
earth products. The increase in REO sales volume for the nine months ended
September 30, 2021 , as compared to the prior year period, primarily reflects an
increase in REO production volume. The increase in REO production volume for the
nine months ended September 30, 2021 , as compared to the prior year period,
reflects an improvement in the efficiency of our processing operations. Product
sales for the nine months ended September 30, 2020 , were negatively impacted by
the Shenghe Implied Discount, in which $3.7 million of the value of products
sold to Shenghe during the nine months ended September 30, 2020 , was not
recognized as revenue. As mentioned above, starting June 5, 2020 , the accounting
treatment specific to the Shenghe Implied Discount was no longer required.
REO sales volume varies period-to-period based on the timing of shipments, but
sales volumes generally track our production volumes over time given our
take-or-pay arrangement with Shenghe. See the "Quarterly Performance Trend"
section below for further discussion on realized price per REO MT.
Cost of sales (excluding depreciation, depletion and amortization) consists of
production- and processing-related labor costs (including wages and salaries,
benefits, and bonuses), 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.
Cost of sales increased year over year by $6.5 million , or 42%, to $21.9 million
for the three months ended September 30, 2021 , driven primarily by higher sales
volume. The increase in production cost per REO MT from $1,389 for the three
months ended September 30, 2020 , to $1,449 for the three months ended
September 30, 2021 , is primarily due to higher payroll costs and employee
headcount, including an increase in hiring ahead of the completion of our Stage
II optimization project. Cost discipline and production efficiencies achieved
during the three months ended September 30, 2021 , more than offset higher
material and supplies costs as well as COVID-19-impacted freight-in costs.
Cost of sales increased year over year by $12.8 million , or 29%, to $57.8
million for the nine months ended September 30, 2021 , driven primarily by higher
sales volume. The increase in production cost per REO MT from $1,371 for the
nine months ended September 30, 2020 , to $1,484 for the nine months ended
September 30, 2021 , is primarily due to higher payroll costs and employee
headcount, including an increase in hiring ahead of the completion of our Stage
II optimization project. In addition, production efficiencies achieved during
the nine months ended September 30, 2021 , were partially offset by higher
material and supplies costs as well as COVID-19-impacted freight-in costs.
We believe our production cost per REO MT has stabilized in the short-term, with
operating efficiencies largely offsetting raw material and logistics pressures.
We anticipate additional efficiency opportunities as we increase REO production
volumes in our milling and flotation circuit over time. In addition, production
cost per REO MT may vary period-to-period based on the timing of scheduled
outages of our production facilities for maintenance. See the "Quarterly
Performance Trend" section below for further discussion on production cost per
REO MT.
General and administrative expenses consist primarily of accounting, finance,
executive, and administrative personnel costs, including stock-based
compensation expense related to these personnel; professional services
(including legal, regulatory, audit and others); certain engineering expenses;
insurance, license and permit costs; facilities rent and other costs; office
supplies; general facilities expenses; certain environmental, health, and safety
expenses; and gain or loss on sale or disposal of long-lived assets.
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General and administrative expenses increased year over year by $9.2 million , or
164%, to $14.9 million for the three months ended September 30, 2021 , reflecting
$3.9 million in stock-based compensation expense primarily from grants of
restricted stock and restricted stock units ("Stock Awards") made during the
fourth quarter of 2020 related to the Business Combination. Prior to the fourth
quarter of 2020, we had not granted any Stock Awards nor recorded any
stock-based compensation expense. Excluding this item, the increase was $5.3
million , or 94%, mainly due to increases in personnel, insurance, and legal
costs, the majority of which were incurred to support our operations as a public
company, as well as a legal settlement of $1.0 million , including legal fees.
General and administrative expenses increased year over year by $26.5 million ,
or 183%, to $41.0 million for the nine months ended September 30, 2021 ,
reflecting $12.1 million in stock-based compensation expense primarily from
grants of Stock Awards made during the fourth quarter of 2020 related to the
Business Combination. Excluding this item, the increase was $14.4 million , or
99%, mainly due to increases in personnel, professional service, insurance, and
legal costs, the majority of which were incurred to support our operations as a
public company, as well as a legal settlement of $1.0 million , including legal
fees.
Advanced projects, development and other consists principally of costs incurred
in connection with certain government contracts, the research or development of
new processes or to significantly enhance our existing processes, as well as
costs incurred to support growth and development initiatives or other
opportunities. Advanced projects, development and other increased year over year
by $1.3 million to $1.3 million for the three months ended September 30, 2021
and by $2.3 million to $2.4 million for the nine months ended September 30,
2021 , primarily due to increased costs incurred under our government contracts
as well as other costs incurred to support growth and development initiatives,
particularly with regards to metal, alloy, and magnet manufacturing.
Depreciation, depletion and amortization consist of depreciation of property,
plant and equipment related to our mining equipment and processing facilities,
depletion of our mineral resources, and amortization of capitalized computer
software (prior to the adoption of Accounting Standards Update No. 2018-15).
Depreciation, depletion and amortization increased year over year by $4.8
million , or 219%, to $7.0 million for the three months ended September 30, 2021 ,
and by $14.9 million , or 309%, to $19.8 million for the nine months ended
September 30, 2021 , reflecting primarily the depletion of the mineral rights
resulting from the SNR Mineral Rights Acquisition in November 2020 , as well as
the impact of additional equipment purchases and assets placed into service.
Accretion of asset retirement and environmental obligations is based on the
requirement to reclaim and remediate the land surrounding our mine and
processing facilities upon the retirement of the Mountain Pass facility and on
the estimated future cash flow requirement to monitor groundwater contamination,
respectively. Accretion of asset retirement and environmental obligation
remained relatively flat year over year.
Royalty expense to SNR for the three and nine months ended September 30, 2020 ,
related to our prior obligation to pay SNR for the right to extract rare earth
ores contained in our mine and was based on 2.5% of product sales, subject to
certain minimums. Following the Business Combination, we do not incur royalty
expenses on a consolidated basis. See Note 17, "Related-Party Transactions,"
to our unaudited Condensed Consolidated Financial Statements.
Write-down of inventories for the nine months ended September 30, 2021 , pertains
to a non-cash write-down of a portion of our legacy low-grade stockpile
inventory during the second quarter of 2021 after determining that the inventory
contained a significant amount of alluvial material that did not meet our
requirement for mill feed and, as a result, was deemed unusable.
Settlement charge of $66.6 million for the nine months ended September 30, 2020 ,
which was non-cash, was recorded in connection with the termination of the DMA.
See also "Recent Developments and Comparability of Results" section above.
Other income, net consists primarily of gains or losses on extinguishment of
debt and interest income. Other income, net increased year over year for the
three months ended September 30, 2021 , due to higher interest income, and
increased year over year for the nine months ended September 30, 2021 , as a
result of a non-cash gain recognized during the second quarter of 2021 as a
result of the Small Business Administration's approval to forgive the Paycheck
Protection Loan, which had a principal amount of $3.4 million . For more
information, see the "Liquidity and Capital Resources" section below.
Interest expense, net consists of the amortization of the debt issuance costs on
our Convertible Notes (as defined in the "Liquidity and Capital Resources"
section below); the amortization of the discount on our debt obligation to
Shenghe; interest expense associated with promissory notes with certain
investment funds managed by and/or affiliated with JHL Capital Group and QVT
Financial , which were repaid in full upon the consummation of the Business
Combination; and the expense associated with the 0.25% per annum interest rate
on our Convertible Notes, offset by interest capitalized.
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Interest expense, net increased year over year by $0.9 million , or 53%, to $2.6
million for the three months ended September 30, 2021 , reflecting interest
expense from our Convertible Notes and the amortization of the discount on our
debt obligations to Shenghe, which was higher than the interest expense incurred
on the promissory notes in the prior year. During the three months ended
September 30, 2021 , we capitalized interest of less than $0.1 million . No
interest was capitalized for the three months ended September 30, 2020 .
Interest expense, net increased year over year by $2.8 million , or 79%, to $6.4
million for the nine months ended September 30, 2021 , reflecting interest
expense from our Convertible Notes and the amortization of the discount on our
debt obligations to Shenghe, which was higher than the interest expense incurred
on the promissory notes in the prior year. During the nine months ended
September 30, 2021 , we capitalized interest of $0.2 million . No interest was
capitalized for the nine months ended September 30, 2020 .
Income tax benefit (expense) consists of an estimate of U.S. federal and state
income taxes and 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 taxes as a percentage of income or loss
before income taxes) including discrete items was 17.1% and 18.4% for the three
and nine months ended September 30, 2021 , respectively, as compared to (0.9)%
and (0.5)% for the three and nine months ended September 30, 2020 , respectively,
principally due to a full valuation allowance as of September 30, 2020 . The
effective tax rate for the three and nine months ended September 30, 2021 ,
differed from the statutory tax rate of 21% primarily due to state income tax
expense and income tax benefit from percentage depletion.
Quarterly Performance Trend
While our business is not seasonal in nature, we sometimes experience a timing
lag between production and sales, which may result in volatility in our results
of operations between periods. In addition, our realized price per REO MT for
the quarterly periods prior to the second quarter of 2020 were adversely
impacted by the imposition of Chinese import duties in 2018 (and subsequent
increase in May 2019 ). The import duties were lifted in May 2020 .
The following table presents our key performance indicators for the quarterly
periods indicated:
FY2021 FY2020 FY2019
(in whole units or dollars) Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
REO production volume (MTs) 11,998 10,305 9,849 9,337 10,197 9,287 9,682 8,673 9,417
REO sales volume (MTs) 12,814 9,877 9,793 10,320 9,429 10,297 8,321 8,561 9,852
Realized price per REO MT
Non-GAAP Financial Measures
We present Total Value Realized, Production Costs, Adjusted EBITDA, Adjusted Net
Income and Free Cash Flow, which are non-GAAP financial measures that we use to
supplement our results presented in accordance with GAAP. These measures are
similar to measures reported by other companies in our industry and are
regularly used by securities analysts and investors to measure companies'
financial performance. Total Value Realized, Production Costs, Adjusted EBITDA,
Adjusted Net Income and Free Cash Flow are not intended to be a substitute for
any GAAP financial measure and, as calculated, may not be comparable to other
similarly titled measures of performance or liquidity of other companies within
our industry or in other industries.
Total Value Realized
Total Value Realized, which we use to calculate our key performance indicator,
realized price per REO MT, is a non-GAAP financial measure. As mentioned above,
realized price per REO MT is an important measure of the market price of our
product. The following table presents a reconciliation of our Total Value
Realized, to our product sales, which is determined in accordance with GAAP, as
well as the calculation of realized price per REO MT:
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For the three months ended For the nine months ended
September 30, September 30,
(in thousands, unless otherwise stated) 2021 2020 2021 2020
Product sales $ 98,581 $ 40,864 $ 230,842 $ 91,699
Adjusted for:
Shenghe Implied Discount(1) - 34 - 3,664
Tariff rebates(2) - (8,901) (2,050) (10,347)
Total Value Realized $ 98,581 $ 31,997 $ 228,792 $ 85,016
Total Value Realized $ 98,581 $ 31,997 $ 228,792 $ 85,016
Divided by:
REO sales volume (in MTs) 12,814 9,429 32,484 28,047
Realized price per REO MT (in
(1)Represents the difference between the contractual amount realized by Shenghe and the amount of deferred revenue we recognized. (2)The amounts pertain to tariff rebates due to the retroactive effect of lifting the Chinese tariffs inMay 2020 . (3)May not recompute as presented due to rounding. Production Costs Production Costs, which we use to calculate our key performance indicator, production cost per REO MT, is a non-GAAP financial measure. As mentioned above, production cost per REO MT is a key indicator of our production efficiency. The following table presents a reconciliation of our Production Costs to our cost of sales (excluding depreciation, depletion and amortization), which is determined in accordance with GAAP, as well as the calculation of production cost per REO MT: For the three months ended For the nine months ended September 30, September 30, (in thousands, unless otherwise stated) 2021 2020 2021 2020 Cost of sales (excluding depreciation, depletion and amortization)$ 21,907 $ 15,425 $ 57,798 $ 44,957 Adjusted for: Stock-based compensation expense(1) (542) - (2,438) - Shipping and freight (2,795) (2,184) (7,076) (6,096) Other(2) - (144) (79) (406) Production Costs$ 18,570 $ 13,097 $ 48,205 $ 38,455 Production Costs$ 18,570 $ 13,097 $ 48,205 $ 38,455 Divided by: REO sales volume (in MTs) 12,814 9,429 32,484 28,047
Production cost per REO MT (in
(1)Pertains only to the amount of stock-based compensation expense included in
cost of sales.
(2)Pertains primarily to costs attributable to sales of stockpiles.
(3)May not recompute as presented due to rounding.
Adjusted EBITDA
We calculate Adjusted EBITDA as our GAAP net income or loss before interest
expense, net; income tax expense or benefit; and depreciation, depletion and
amortization; further adjusted to eliminate the impact of stock-based
compensation expense; transaction-related and other non-recurring costs;
non-cash accretion of asset retirement and environmental obligations; gain or
loss on sale or disposal of long-lived assets; write-downs of inventories;
royalty expense to SNR; tariff rebates; and other income, net. We present
Adjusted EBITDA because it is used by management to evaluate our underlying
operating and financial performance and trends.
Adjusted EBITDA excludes certain expenses that are required in accordance with
GAAP because they are non-recurring, non-cash or are not related to our
underlying business performance. This non-GAAP financial measure is intended to
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supplement our GAAP results and should not be used as a substitute for financial
measures presented in accordance with GAAP.
Our Adjusted EBITDA does not reflect our results of operations on a comparable
basis between periods due to the accounting treatment of the modifications of
our agreements with Shenghe (see the "Recent Developments and Comparability of
Results" section above). Accordingly, our Adjusted EBITDA trend for the
periods presented may not be indicative of future trends. If the Shenghe Implied
Discount applicable to sales made under the Original Offtake Agreement had been
included in our deferred revenue, our Adjusted EBITDA for the nine months ended
September 30, 2020 , would have been higher by $3.7 million .
The following table presents a reconciliation of our Adjusted EBITDA, which is a
non-GAAP financial measure, to our net income (loss), which is determined in
accordance with GAAP:
For the three months ended For the nine months ended
September 30, September 30,
(in thousands) 2021 2020 2021 2020
Net income (loss) $ 42,763 $ 14,627 $ 86,048 $ (45,939)
Adjusted for:
Depreciation, depletion and amortization 6,951 2,179 19,767 4,832
Interest expense, net 2,624 1,713 6,417 3,582
Income tax expense (benefit) 8,803 (125) 19,458 211
Stock-based compensation expense(1) 4,552 - 14,723 -
Transaction-related and other non-recurring
costs(2) 1,914 559 3,219 2,390
Accretion of asset retirement and environmental
obligations 595 563 1,780 1,691
Loss on sale or disposal of long-lived assets,
net(3) 182 - 219 -
Write-down of inventories(4) - - 1,809 -
Royalty expense to SNR - 1,055 - 1,908
Settlement charge(5) - - - 66,615
Tariff rebate(6) - (8,901) (2,050) (10,347)
Other income, net(7) (97) (61) (3,656) (298)
Adjusted EBITDA $ 68,287 $ 11,609 $ 147,734 $ 24,645
(1)Principally included in "General and administrative" within our unaudited
Condensed Consolidated Statements of Operations. Approximately $3.9 million and
$11.7 million of the amounts for the three and nine months ended September 30,
2021 , respectively, pertained to a one-time grant of stock awards to employees
and executives upon the consummation of the Business Combination.
(2)Amounts for the three and nine months ended September 30, 2021 , relate to
advisory, consulting, accounting, and legal expenses and settlements incurred in
connection with non-recurring transactions, including secondary equity offerings
to existing shareholders (no proceeds were received by the Company), the
redemption of the Company's Public Warrants, and other matters. Amounts for the
three and nine months ended September 30, 2020 , relate to advisory, consulting,
accounting and legal expenses in connection with the Business Combination and
non-recurring costs for SAP implementation.
(3)Included in "General and administrative" within our unaudited Condensed
Consolidated Statements of Operations.
(4)Represents a non-cash write-down of a portion of our legacy low-grade
stockpile inventory during the second quarter of 2021.
(5)As discussed in the "Recent Developments and Comparability of Results"
section above, in connection with terminating the DMA, we recognized a one-time,
non-cash settlement charge.
(6)Represents non-cash revenue recognized in connection with tariff rebates
received relating to product sales from prior periods.
(7)The amount for the nine months ended September 30, 2021 , principally
represents a non-cash gain recognized as a result of the Small Business
Administration's approval to forgive the Paycheck Protection Loan.
Adjusted Net Income
We calculate Adjusted Net Income as our GAAP net income or loss excluding the
impact of depletion; stock-based compensation expense; transaction-related and
other non-recurring costs; gain or loss on sale or disposal of long-lived
assets; write-downs of inventories; royalty expense to SNR; tariff rebates; and
other income or loss, net; adjusted to give effect to the income tax impact of
such adjustments. To calculate the income tax impact of such adjustments on a
year-to-date basis, we utilize an effective tax rate equal to our income tax
expense excluding material discrete costs and benefits, with any impacts of
changes in effective tax rate being recognized in the current period. We present
Adjusted Net Income because it is used by management to evaluate our underlying
operating and financial performance and trends.
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Adjusted Net Income excludes certain expenses that are required in accordance
with GAAP because they are non-recurring, non-cash, or not related to our
underlying business performance. As a result of the SNR Mineral Rights
Acquisition, the mineral rights for the rare earth ores contained in our mine
were recorded at fair value as of the date of the Business Combination,
resulting in a significant step-up of the carrying amount of the asset which
will cause depletion to be meaningfully higher in future periods. This non-GAAP
financial measure is intended to supplement our GAAP results and should not be
used as a substitute for financial measures presented in accordance with GAAP.
Our Adjusted Net Income does not reflect our results of operations on a
comparable basis between periods primarily due to the accounting treatment of
the modifications of our agreements with Shenghe (see the "Recent Developments
and Comparability of Results" section above). Accordingly, our Adjusted Net
Income trend for the periods presented may not be indicative of future trends.
The following table presents a reconciliation of our Adjusted Net Income, which
is a non-GAAP financial measure, to our net income (loss), which is determined
in accordance with GAAP:
For the three months ended For the nine months ended
September 30, September 30,
(in thousands) 2021 2020 2021 2020
Net income (loss) $ 42,763 $ 14,627 $ 86,048 $ (45,939)
Adjusted for:
Depletion(1) 4,754 29 13,971 86
Stock-based compensation expense(2) 4,552 - 14,723 -
Transaction-related and other non-recurring
costs(3) 1,914 559 3,219 2,390
Loss on sale or disposal of long-lived assets,
net(4) 182 - 219 -
Write-down of inventories(5) - - 1,809 -
Royalty expense to SNR - 1,055 - 1,908
Settlement charge(6) - - - 66,615
Tariff rebate(7) - (8,901) (2,050) (10,347)
Other income, net(8) (97) (61) (3,656) (298)
Tax impact of adjustments above(9) (2,086) (63) (5,398) 278
Adjusted Net Income $ 51,982 $ 7,245 $ 108,885 $ 14,693
(1)Principally includes the depletion associated with the mineral rights for the
rare earth ores contained in the Company's mine, which were recorded in
connection with the SNR Mineral Rights Acquisition at fair value as of the date
of the Business Combination, resulting in a significant step-up of the carrying
amount of the asset.
(2)Principally included in "General and administrative" within our unaudited
Condensed Consolidated Statements of Operations. Approximately $3.9 million and
$11.7 million of the amounts for the three and nine months ended September 30,
2021 , respectively, pertained to a one-time grant of stock awards to employees
and executives upon the consummation of the Business Combination..
(3)Amounts for the three and nine months ended September 30, 2021 , relate to
advisory, consulting, accounting, and legal expenses and settlements incurred in
connection with non-recurring transactions, including secondary equity offerings
to existing shareholders (no proceeds were received by the Company), the
redemption of the Company's Public Warrants, and other matters. Amounts for the
three and nine months ended September 30, 2020 , relate to advisory, consulting,
accounting and legal expenses in connection with the Business Combination and
non-recurring costs for SAP implementation.
(4)Included in "General and administrative" within our unaudited Condensed
Consolidated Statements of Operations.
(5)Represents a non-cash write-down of a portion of our legacy low-grade
stockpile inventory during the second quarter of 2021.
(6)As discussed in the "Recent Developments and Comparability of Results"
section above, in connection with terminating the DMA, we recognized a one-time,
non-cash settlement charge.
(7)Represents non-cash revenue recognized in connection with tariff rebates
received relating to product sales from prior periods.
(8)The amount for the nine months ended September 30, 2021 , principally
represents a non-cash gain recognized as a result of the Small Business
Administration's approval to forgive the Paycheck Protection Loan.
(9)Tax impact of adjustments is calculated using an adjusted effective tax rate,
excluding the impact of discrete tax costs and benefits, to each adjustment. The
adjusted effective tax rates were 18.5%, 19.1%, (0.9)%, and (0.5)% for the three
and nine months ended September 30, 2021 and 2020, respectively. The rate for
the three and nine months ended September 30, 2020 , reflects a full valuation
allowance.
Free Cash Flow
We calculate Free Cash Flow as net cash provided by or used in operating
activities less additions of property, plant and equipment, net of proceeds
received from government awards used for construction. We believe Free Cash Flow
is useful for
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comparing our ability to generate cash with that of our peers. The presentation
of Free Cash Flow is not meant to be considered in isolation or as an
alternative to cash flows from operating activities and does not necessarily
indicate whether cash flows will be sufficient to fund cash needs.
The following table presents a reconciliation of our Free Cash Flow, which is a
non-GAAP financial measure, to our net cash provided by (used in) operating
activities, which is determined in accordance with GAAP:
For the nine months ended
September 30,
(in thousands) 2021 2020
Net cash provided by (used in) operating activities(1) $ 70,464 $ (318)
Additions of property, plant and equipment, net(2) (83,805) (9,695)
Free Cash Flow $ (13,341) $ (10,013)
(1)Under the terms of the A&R Offtake Agreement and pursuant to the accounting
treatment thereof, $38.9 million and $14.7 million of our product sales for the
nine months ended September 30, 2021 and 2020, respectively, were excluded from
cash provided by operating activities since that portion of the sales price was
retained by Shenghe to reduce the debt obligation.
(2)Amount for the nine months ended September 30, 2021 , is net of $2.6 million
in proceeds received from a government award used for construction, specifically
our Stage II optimization project.
Liquidity and Capital Resources
Liquidity refers to our ability to generate sufficient cash flows to meet the
cash requirements of our business operations, including working capital and
capital expenditure needs, contractual obligations, debt service and other
commitments. Historically, our principal sources of liquidity have been the
Offtake Advances from Shenghe, issuances of notes or other debt, and net cash
from operating activities. More recently, through the consummation of the
Business Combination, including the PIPE Financing, and the issuance of the
Convertible Notes (as discussed further below), we raised $504.4 million and
$672.3 million in net proceeds, respectively.
As of September 30, 2021 , we had $1,179.4 million of cash and cash equivalents,
$690.0 million principal amount of long-term debt (to third parties) and $32.6
million principal amount of related-party debt pertaining to our Offtake
Advances with Shenghe.
Our results of operations and cash flows depend in large part upon the market
prices of REO and particularly the price of rare earth concentrate. Rare earth
concentrate is not quoted on any major commodities market or exchange and demand
is currently limited to a relatively limited number of refiners, a significant
majority of which are based in China . Although we believe that our cash flows
from operations and cash on hand is adequate to meet our liquidity requirements
for the foreseeable future, uncertainty exists as to the market price of REO,
especially in light of the ongoing COVID-19 pandemic, including the emergence of
new variants (such as the Delta variant).
Our current working capital needs relate mainly to our mining and beneficiation
operations. Our principal capital expenditure requirements relate mainly to the
periodic replacement of mining or processing equipment, as well as our Stage II
optimization project to recommission and optimize our idled refining facilities.
Our future capital requirements will depend on several factors, including future
acquisitions and potential additional investments in further downstream
production (for example, pursuit of Stage III downstream opportunities for the
production of rare-earth-based magnets and/or other finished components). If our
available resources prove inadequate to fund our plans or commitments, we may be
forced to revise our strategy and business plans or could be required, or elect,
to seek additional funding through public or private equity or debt financings;
however, such funding may not be available on terms acceptable to us, if at all.
Debt and Other Long-Term Obligations
Convertible Notes: On March 26, 2021 , we issued $690.0 million aggregate
principal amount of 0.25% unsecured green convertible senior notes that mature,
unless earlier converted, redeemed or repurchased, on April 1, 2026 (the
"Convertible Notes"), at a price of par. Interest on the Convertible Notes is
payable on April 1st and October 1st of each year, beginning on October 1, 2021 .
The Company received net proceeds of $672.3 million from the issuance of the
Convertible Notes.
The Convertible Notes are convertible into shares of the Company's Common Stock
at an initial conversion price of $44.28 per share, or 22.5861 shares, per
$1,000 principal amount of notes, subject to adjustment upon the occurrence of
certain corporate events. However, in no event will the conversion exceed
28.5714 shares of Common Stock per $1,000 principal amount of notes.
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Prior to January 1, 2026 , at their election, holders of the Convertible Notes
may convert their outstanding notes under the following circumstances: (i)
during any calendar quarter commencing with the third quarter of 2021 if the
last reported sale price of the Company's Common Stock for at least 20 trading
days (whether or not consecutive) during the period of 30 consecutive trading
days ending on, and including, the last trading day of the immediately preceding
calendar quarter is greater than or equal to 130% of the conversion price on
each applicable trading day; (ii) during the five business day period after any
five consecutive trading day period (the "measurement period") in which the
trading price (as defined below) per $1,000 principal amount of Convertible
Notes for each trading day of the measurement period was less than 98% of the
product of the last reported sale price of the Company's Common Stock and the
conversion rate on each such trading day; (iii) if we call any or all of the
Convertible Notes for redemption, at any time prior to the close of business on
the scheduled trading day immediately preceding the redemption date; or (iv)
upon the occurrence of specified corporate events set forth in the indenture
governing the Convertible Notes. On or after January 1, 2026 , and prior to the
maturity date of the Convertible Notes, holders may convert their outstanding
notes at any time, regardless of the foregoing circumstances.
The Convertible Notes may, at the Company's election, be settled in cash, shares
of Common Stock of the Company, or a combination thereof. The Company has the
option to redeem the Convertible Notes, in whole or in part, beginning on April
5, 2024 .
If we undergo a fundamental change (as defined in the indenture governing the
Convertible Notes), holders may require us to repurchase for cash all or any
portion of their outstanding notes at a price equal to 100% of the principal
amount of the notes to be repurchased, plus accrued and unpaid interest to, but
excluding, the fundamental change repurchase date. In addition, following
certain corporate events that occur prior to the maturity date of the
Convertible Notes or if we deliver a notice of redemption, we will, in certain
circumstances, increase the conversion rate for holders who elect to convert
their outstanding notes in connection with such corporate event or notice of
redemption, as the case may be.
We intend to allocate an amount equal to the net proceeds from the Convertible
Notes offering to existing or future investments in, or the financing or
refinancing of, eligible "green projects." Eligible green projects are intended
to reduce the Company's environmental impact and/or enable the production of
low-carbon technologies. We aim to achieve a level of allocation for eligible
green projects which matches the amount of such net proceeds. Pending such
allocation of the net proceeds to eligible green projects, we intend to use the
net proceeds from the Convertible Notes offering for general corporate purposes.
Offtake Advances: As of September 30, 2021 , we had debt recorded to Shenghe with
a carrying amount of $30.9 million , of which $32.6 million was principal and
$1.7 million was debt discount. The debt to Shenghe is to be satisfied primarily
through product sales, as described above, where partial non-cash consideration
is received by the Company in the form of debt reduction (generally equal to
approximately 15% of the ultimate market value of the REO, excluding tariffs,
duties and certain other charges). Additional cash payments will be required as
a result of sales of offtake products to other parties, and under certain other
conditions. See also "Recent Developments and Comparability of Results"
section above.
We follow an imputed interest rate model to calculate the amortization of the
embedded discount, which is recognized as non-cash interest expense, by
estimating the timing of anticipated payments and reductions of the debt
principal balance. The effective rate applicable from the June 5, 2020 ,
inception to September 30, 2021 , was between 4.41% and 11.50%. As of
September 30, 2021 , we estimated the timing of repayment to be within the next
year which resulted in an updated imputed interest rate of 16.28%. The increase
in the imputed rate is primarily due to changes in expected market prices
resulting in an earlier anticipated repayment of the outstanding balance through
the various mechanisms, which results in a higher implicit interest rate in
order to fully amortize the debt discount concurrent with the expected final
repayment of the debt balance.
Paycheck Protection Loan: In April 2020 , we obtained a loan of $3.4 million
pursuant to the Paycheck Protection Program under Division A, Title I of the
CARES Act, which was enacted in March 2020 (the "Loan"). The Loan, which was in
the form of a note dated April 15, 2020 , issued by CIBC Bank USA , was to mature
on April 14, 2022 , and bore interest at a rate of 1% per annum. In June 2021 , we
received notification from the Small Business Administration that the Loan and
related accrued interest was forgiven.
Equipment Notes: We have entered into several financing agreements for the
purchase of equipment, including trucks, tractors, loaders, graders, and various
other machinery. As of September 30, 2021 , we had $10.3 million in principal
(and accrued interest) outstanding under the equipment notes.
In February 2021 , we entered into financing agreements for the purchase of
equipment, including trucks and loaders, in the aggregate amount of $9.7
million , including $0.3 million for the associated extended warranties. These
equipment notes have terms of 5 years and interest rates of 4.5% per annum with
monthly payments commencing in April 2021 .
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Public Warrants
Warrants to purchase 11,499,968 shares of the Company's Common Stock at $11.50
per share were issued in connection with FVAC's initial public offering ("IPO")
(the "Public Warrants") pursuant to the Warrant Agreement, dated April 29, 2020
(the "Warrant Agreement"), by and between the Company and Continental Stock
Transfer & Trust Company ("CST"), as warrant agent.
On May 4, 2021 , at the direction of the Company, CST, in its capacity as warrant
agent, delivered a notice of redemption to each of the registered holders of the
outstanding Public Warrants for a redemption price of $0.01 per warrant (the
"Redemption Price"), that remained outstanding following 5:00 p.m. New York City
time on June 7, 2021 (the "Redemption Date").
In accordance with the Warrant Agreement, the Company's Board of Directors
elected to require that, upon delivery of the notice of redemption, all Public
Warrants were to be exercised only on a "cashless basis." Accordingly, holders
could not exercise Public Warrants and receive Common Stock in exchange for
payment in cash of the $11.50 per warrant exercise price. Instead, a holder
exercising a Public Warrant was deemed to pay the $11.50 per warrant exercise
price by the surrender of 0.3808 of a share of Common Stock that such holder
would have been entitled to receive upon a cash exercise of a Public Warrant.
Accordingly, by virtue of the cashless exercise of the Public Warrants,
exercising warrant holders received 0.6192 of a share of Common Stock for each
Public Warrant surrendered for exercise. All Public Warrants that remained
unexercised at 5:00 p.m. New York City time on the Redemption Date were
delisted, voided and no longer exercisable, and the holders had no rights with
respect to those Public Warrants, except to receive the Redemption Price.
During the nine months ended September 30, 2021 , the Company issued 7,080,005
shares of its Common Stock as a result of the cashless exercise of 11,434,455
Public Warrants. The Company redeemed the remaining 65,513 Public Warrants
outstanding at the Redemption Date for a nominal amount.
Cash Flows
The following table summarizes our cash flows:
For the nine months ended
September 30, Change
(in thousands, except percentages) 2021 2020 $ %
Net cash provided by (used in) operating
activities $ 70,464 $ (318) $ 70,782 n.m.
Net cash used in investing activities
$ (73,985) 763 %
Net cash provided by financing activities
$ 633,424 1750 % n.m. - Not meaningful. Net Cash Provided by (Used in) Operating Activities: The net cash provided by operating activities of$70.5 million for the nine months endedSeptember 30, 2021 , as compared to the net cash used in operating activities of$0.3 million in the prior year period, reflects the increase in product sales, partially offset by the increase in our cost of sales and general and administrative expenses (all as discussed above). In addition, of our product sales for the nine months endedSeptember 30, 2021 and 2020,$38.9 million and$14.7 million , respectively, were excluded from cash provided by operating activities since that portion of the sales price was retained by Shenghe to reduce the debt obligation.Net Cash Used in Investing Activities: Our current, recurring capital expenditure needs consist mainly of purchases of property, plant and equipment, including mining equipment. The increase in net cash used in investing activities of$74.0 million for the nine months endedSeptember 30, 2021 , compared to the prior year period, is attributable to an increase in capital expenditures relating primarily to our Stage II optimization project, as well as commissioning of our CHP facility and water treatment plant, partially offset by$2.6 million of proceeds from a government award used for construction, specifically our Stage II optimization project. Net Cash Provided by Financing Activities: The increase in net cash provided by financing activities of$633.4 million for the nine months endedSeptember 30, 2021 , compared to the prior year period, primarily relates to the net proceeds received from the issuance of the Convertible Notes inMarch 2021 of$672.3 million , versus the$35.5 million in proceeds received from the Second Additional Advance during the nine months endedSeptember 30, 2020 . 38
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Table of Contents Off-Balance Sheet Commitments and Arrangements We do not engage in any off-balance sheet financing activities, nor do we have any interest in entities referred to as variable interest entities. Critical Accounting Policies A complete discussion of our critical accounting policies is included in our Form 10-K for the year endedDecember 31, 2020 . There have been no significant changes in our critical accounting policies during the three months endedSeptember 30, 2021 . Recently Adopted and Issued Accounting Pronouncements Recently adopted and issued accounting pronouncements are described in Note 2, "Significant Accounting Policies," in the notes to our unaudited Condensed Consolidated Financial Statements.
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