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, 2021 . 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
MP Materials Corp. is the largest producer of rare earth materials in the Western Hemisphere. The Company owns and operates theMountain Pass Rare Earth Mine and Processing Facility ("Mountain Pass "), the only rare earth mining and processing site of scale inNorth America . We estimate the rare earth concentrate we produced and sold in 2021 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 economic activity 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 a majority of the value contained in our rare earth concentrate. 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, 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 atMountain Pass , one of the world's richest rare earth deposits, co-located with integrated state-of-the-art processing and separation facilities. We acquired theMountain 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, betweenDecember 2017 andFebruary 2018 . We currently produce a rare earth concentrate that we sell toShenghe Resources (Singapore) International Trading Pte. Ltd. ("Shenghe"), an affiliate of Shenghe Resources Holding Co., Ltd., which, in turn, typically sells that product to refiners inChina . These refiners separate the constituent REE contained in our concentrate and sell the separated products to their customers. Upon completion of our Stage II optimization project ("Stage II"), we anticipate producing separated rare earth oxides ("REO"), including NdPr oxide, and selling these products directly to end users, at which time we may no longer sell our concentrate. InFebruary 2022 , we commenced construction of our initial rare earth metal, alloy and magnet manufacturing facility inFort Worth, Texas (the "Fort Worth Facility"). Furthermore, inApril 2022 , we entered into a definitive long-term supply agreement with General Motors Company (NYSE:GM ) ("GM") to supplyU.S. -sourced and manufactured rare earth materials, alloy and finished magnets for the electric motors in more than a dozen models usingGM's Ultium Platform, with a gradual production ramp that is expected to begin in late 2023, starting with alloy. The definitive long-term supply agreement solidifies the terms of a binding agreement announced by the Company inDecember 2021 . These developments are a part of our Stage III downstream expansion strategy ("Stage III"). 16 -------------------------------------------------------------------------------- T able of Contents 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 similar measures published by other companies in our industry or in other industries. The following table presents our key performance indicators: For the three months ended March 31, Change (in whole units or dollars, except percentages) 2022 2021 $ % REO production volume (MTs) 10,828 9,849 979 10 % REO sales volume (MTs) 11,706 9,793 1,913 20 % Realized price per REO MT$ 13,818 $ 5,891 $ 7,927 135 % Production cost per REO MT$ 1,594 $ 1,475 $ 119 8 % REO Production Volume We measure our REO-equivalent production volume for a given period in metric tons ("MTs"), 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 residual moisture from the production process. We target REO content of greater than 60% per dry MT of concentrate (referred to as "REO grade"). The elemental distribution of REO in our concentrate is relatively consistent over time and production lot. We consider this the natural distribution, as it reflects the distribution of elements contained, on average, in our ore. As noted above, upon completion of Stage II, we expect to refine our rare earth concentrate to produce separated rare earths, including NdPr oxide.
REO Sales Volume
Our REO sales volume for a given period is calculated in MTs. A unit, or MT, is considered sold for purposes of this performance indicator 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 rebates related to prior period sales. 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 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 generally accepted accounting principles inthe United States ("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.
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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 and permanent magnets.
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 , the U.S. government strategy
to restore domestic supply of key minerals, and the increasing acceptance of
environmental, social and governance mandates. 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 competitors may not be subject to the same
rigorous environmental standards and production costs are typically lower than
in the United States .
Maximizing Production Efficiency
In 2021, REO production was approximately 3.5x greater than the highest ever production in a twelve-month period by the prior operator ofMountain Pass using principally 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. The success of our business reflects our ability to manage our costs. Our production achievements in Stage I have provided economies of scale to lower production costs per unit of REO produced in concentrate. Stage II is designed to enable us to continue to manage our cost structure for separating REE through an optimized facility process flow. The reintroduction of the oxidizing roasting step will allow us to capitalize on the inherent advantages of the bastnaesite ore atMountain 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") plant, which was completed inDecember 2021 , removed 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
Stage II is focused on advancing our operations from the production of rare earth concentrate 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 unit of REO produced. As part of Stage II, we are in the process of reintroducing an oxidizing roasting circuit, reorienting the plant process flow, increasing product finishing capacity, improving wastewater management, and making other improvements to materials handling and storage. Upon completion of Stage II, we expect to be a global low-cost, high-volume producer of NdPr oxide, which represents a majority of the value contained in our concentrate. Further, we are pursuing opportunities to integrate further downstream into the business of upgrading NdPr into metal alloys and magnets, including magnet recycling, ultimately expanding our presence as a global source for rare earth magnetics, as evidenced by our recent announcement to build theFort Worth Facility. We believe integration into magnet production will provide some protection from commodity pricing volatility, while also enhancing our business profile as the producer of a 18 -------------------------------------------------------------------------------- T able of Contents critical industrial output in addition to a producer of resources. We expect our Stage III efforts to continue to benefit from geopolitical developments, including initiatives to repatriate critical materials supply chains. InFebruary 2022 , we were awarded a$35.0 million contract by theDepartment of Defense's Office of Industrial Base Analysis and Sustainment Program to design and build a facility to process heavy rare earth elements ("HREE"). Successful completion of this project will establish the first processing and separation facility of its kind for HREEs in support of commercial and defense applications inthe United States . The HREE processing and separations facility will be built atMountain Pass and tie into our other Stage II facilities.
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 ofSeptember 30, 2021 ,SRK Consulting (U.S.), Inc. , an independent consulting firm that we retained to assess our reserves, estimates total proven and probable reserves of 2.1 million short tons of REO contained in 30.4 million short tons of ore atMountain Pass , with an average ore grade of 6.36%. These estimates use an estimated economical cut-off of 2.49% total rare earth oxide. Based on these estimated reserves and our expected annual production rate of REO upon completion of Stage II, as ofSeptember 30, 2021 , our expected mine life was approximately 35 years. We expect to be able to continue to grow our expected mine life through exploratory drilling programs over time. Mining activities inthe United States are heavily regulated, particularly inCalifornia . 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.
Recent Developments and Comparability of Results
Offtake Agreement with Shenghe
InMarch 2022 , the Company entered into an offtake agreement with Shenghe (the "Offtake Agreement"), which became effective upon the termination of the A&R Offtake Agreement (as discussed and defined in Note 3, "Relationship and Agreements with Shenghe," in the notes to the unaudited Condensed Consolidated Financial Statements). The initial term of the Offtake Agreement is two years, with the option to extend the term at the Company's discretion for an additional one-year period. See the " Liquidity and Capital Resources " section below for additional information on the termination of the A&R Offtake Agreement. Pursuant to the Offtake Agreement, and subject to certain exclusions, Shenghe shall purchase on a "take or pay" basis the rare earth concentrate produced by the Company as the exclusive distributor inChina , with certain exceptions for the Company's direct sales globally. In addition, at the discretion of the Company, Shenghe may be required to purchase on a "take or pay" basis certain non-concentrate rare earth products, although the Company may sell all non-concentrate rare earth products in its sole discretion to customers or end users in any jurisdiction. Under the Offtake Agreement, Shenghe will be paid a variable commission on net proceeds to the Company. The sales price of rare earth concentrate sold to Shenghe is based on an agreed-upon price per MT, subject to certain quality adjustments depending on the measured characteristics of the product, with an adjustment for the ultimate market price of the product realized by Shenghe upon sales to their customers. 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.
Tariff-Related Rebates
Starting inMay 2020 , the government ofthe 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 prior to the formal lifting of the tariffs. As a result, Shenghe's actual realized prices for the REO sold prior toMay 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 first quarter of 2021, we received from Shenghe a credit against our contractual commitments to them.
Impact of the COVID-19 Pandemic
InDecember 2019 , a novel strain of coronavirus (known as "COVID-19") began to impact the population ofChina . InMarch 2020 , the outbreak of COVID-19 was declared a global pandemic after growing both inthe United States and globally. The responses by governments, societies, and private sector entities to the COVID-19 pandemic, which include temporary 19 -------------------------------------------------------------------------------- T able of Contents closures of businesses, social distancing, travel restrictions, "shelter in place," and other governmental regulations and various economic stimulus programs, have significantly impacted market volatility and general global economic conditions, including significant business and supply chain disruption as well as broad-based changes in supply and demand. Since the onset of the COVID-19 pandemic in the first quarter of 2020, we have experienced, at times, significant shipping delays due to congestion and slowdowns atU.S. and international ports caused by shortages in vessels, containers, and truckers, also disrupting the global supply chain. Congestion and slowdowns have affected and may continue to affect the capacity at ports to receive deliveries of products or the loading of shipments onto vessels. Despite these factors, we have not experienced a reduction in production or sales due to the COVID-19 pandemic; however, the COVID-19 pandemic has contributed to certain cost and schedule pressures on the Stage II optimization project. The Company has worked proactively and diligently to adjust working schedules and hours to optimize logistics and shipping, which has thus far prevented a significant negative impact on our product sales and has mitigated certain impacts on Stage II construction and recommissioning progress. However, there can be no assurance that the ongoing COVID-19 pandemic will not have a negative impact on our production, sales, or growth projects in the future. Furthermore, as the situation continues to evolve, including as a result of new and potential future variants of COVID-19, the possibility of federal or state mandates on vaccinations, or other factors that may affect international shipping and logistics or involve responses to government actions such as strikes or other disruptions, it is impossible to predict the effect and ultimate impact of the COVID-19 pandemic on the Company's business and results of operations. The extent and duration of any business disruptions, and related financial impact, cannot be estimated at this time.
Results of Operations
Comparison of the Three Months Ended
The following table summarizes our results of operations:
For the three months ended March
31, Change
(in thousands, except percentages) 2022 2021 $ %
Revenue:
Product sales $ 161,755 $ 59,739 $ 102,016 171 %
Other sales 4,503 232 4,271 1841 %
Total revenue 166,258 59,971 106,287 177 %
Operating costs and expenses:
Cost of sales(1) 23,173 17,936 5,237 29 %
Selling, general and administrative 20,565 13,458 7,107 53 %
Advanced projects, development and other 1,818 125 1,693 1354 %
Depreciation, depletion and amortization 5,260 6,150 (890) (14) %
Accretion of asset retirement and
environmental obligations 418 593 (175) (30) %
Total operating costs and expenses 51,234 38,262 12,972 34 %
Operating income 115,024 21,709 93,315 430 %
Other income, net 194 55 139 253 %
Interest expense, net (1,905) (1,154) (751) 65 %
Income before income taxes 113,313 20,610 92,703 450 %
Income tax expense (27,762) (4,491) (23,271) 518 %
Net income $ 85,551 $ 16,119 $ 69,432 431 %
Adjusted EBITDA $ 132,257 $ 33,000 $ 99,257 301 %
Adjusted Net Income $ 96,337 $ 23,177 $ 73,160 316 %
(1)Excludes depreciation, depletion and amortization.
Revenue consists primarily of product sales, which pertain to our sales of rare earth concentrate principally to Shenghe under the A&R Offtake Agreement for sales betweenJanuary 2021 andFebruary 2022 , or the Offtake Agreement for sales beginning inMarch 2022 . The sales price of rare earth concentrate sold to Shenghe under both agreements is based on an agreed-upon price per MT, subject to certain quality adjustments depending on the measured characteristics of the product, with an adjustment for the ultimate market price of the product realized by Shenghe upon sales to their customers. 20 -------------------------------------------------------------------------------- T able of Contents The increase in product sales for the three months endedMarch 31, 2022 , as compared to the prior year period, was driven by higher REO sales volume, which increased by 1,913 MTs, or 20%, to 11,706 MTs for the three months endedMarch 31, 2022 , and a higher realized price per REO MT, which increased by 135%, reflecting higher demand for rare earth products. REO production volume increased by 979 MTs, or 10%, to 10,828 MTs for the three months endedMarch 31, 2022 , as compared to the prior year period, primarily reflecting higher ore feed rates and mineral recoveries. The improvements were driven by continued optimization of the flotation circuit, including operational consistency, and adjustments to the reagent scheme developed through previous pilots that resulted in higher production and improved product quality. 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 for the three months endedMarch 31, 2022 , increased year over year primarily due to higher REO sales volume. The increase in production cost per REO MT from$1,475 for the three months endedMarch 31, 2021 , to$1,594 for the three months endedMarch 31, 2022 , 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, as well as slightly higher energy costs incurred following the restart of our CHP plant inJanuary 2022 . Cost discipline and production efficiencies achieved during the three months endedMarch 31, 2022 , more than offset higher material and supplies costs. Notwithstanding an increase in employee headcount as we progress toward completion of our Stage II optimization project, 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 as well as anticipated tie-ins of certain Stage II-related facilities in the next twelve months. See the "Quarterly Performance Trend" section below for further discussion on production cost per REO MT. Selling, general and administrative expenses consist primarily of accounting, finance 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. Selling, general and administrative expenses for the three months endedMarch 31, 2022 , reflect an increase in stock-based compensation expense of$4.6 million , primarily from a grant of restricted stock units made to our chief executive officer during the fourth quarter of 2021. Excluding stock-based compensation expense, selling, general and administrative expense increased by$2.5 million , or 28%, primarily due to increases in personnel costs and other general and administrative costs. Advanced projects, development and other consists principally of costs incurred in connection with research and development of new processes or to significantly enhance our existing processes, certain government contracts, and start-up costs, as well as costs incurred to support growth and development initiatives or other opportunities. Advanced projects, development and other for the three months endedMarch 31, 2022 , increased year over year primarily due to one-time start-up costs associated with restart of our CHP plant as well as certain costs associated with our Stage III initiatives that do not qualify for capitalization. Depreciation, depletion and amortization primarily consists of depreciation of property, plant and equipment and depletion of mineral rights. The year-over-year decrease in depreciation, depletion and amortization for the three months endedMarch 31, 2022 , primarily reflects a decrease in depletion resulting from a revision to extend our estimate of the remaining useful life of the mineral rights at the beginning of the fourth quarter of 2021. 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; and the expense associated with the 0.25% per annum interest rate on our Convertible Notes, offset by interest capitalized. Interest expense, net for the three months endedMarch 31, 2022 , increased year over year due to the timing of the issuance of the Convertible Notes inMarch 2021 . 21 -------------------------------------------------------------------------------- T able of Contents Income tax expense consists of an estimate ofU.S. federal and state income taxes in the jurisdictions in which we conduct business, adjusted for federal, state and local allowable income tax benefits, the effect of permanent differences and any valuation allowance against deferred tax assets. The effective tax rate (income taxes as a percentage of income or loss before income taxes) was 24.5% and 21.8% for the three months endedMarch 31, 2022 and 2021, respectively. The effective tax rates differed from the statutory tax rate of 21% primarily due to state income tax expense and a deduction limitation on officer's compensation, partially offset by theCalifornia competes tax credit awarded to us in the fourth quarter of 2021.
Quarterly Performance Trend
While our business is not highly 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, quarterly production is impacted by the timing of scheduled outages of our production facilities for maintenance. 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 inMay 2019 ). The import duties were lifted inMay 2020 . The following table presents our key performance indicators for the quarterly periods indicated: FY2022 FY2021 FY2020 (in whole units or dollars) Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 REO production volume (MTs) 10,828 10,261 11,998 10,305 9,849 9,337 10,197 9,287 9,682 REO sales volume (MTs) 11,706 9,674 12,814 9,877 9,793 10,320 9,429 10,297 8,321
Realized price per REO MT
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. In recent years, our principal sources of liquidity have been financing through the consummation of the business combination withFortress Value Acquisition Corp. inNovember 2020 , the issuance of the Convertible Notes inMarch 2021 , and net cash from operating activities. As ofMarch 31, 2022 , we had$1,233.3 million of cash and cash equivalents and$690.0 million principal amount of long-term debt. 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 constrained to a relatively limited number of refiners, a significant majority of which are based inChina . Although we believe that our cash flows from operations and cash on hand are 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 and potential future variants. 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 and related HREE project and the development of the Fort Worth Facility. Our future capital requirements will depend on several factors, including future acquisitions and potential additional investments in further downstream production. The completion of our mission to become a fully integrated domestic magnetics producer is expected to be capital intensive. In accelerating the strategic opportunity for the separation of HREE, enhancements were made to the design and scope of the initial Stage II project. Including these enhancements and other factors impacting the remaining cost of completion, and including the initial costs of a HREE separation facility and the development and construction costs of the Fort Worth Facility as well as other growth and infrastructure investments atMountain Pass , we expect to incur approximately$500 million of capital costs in 2022. We expect to incur further costs to complete the HREE separation facility and the Fort Worth Facility in 2023 and 2024. Our estimated costs or estimated time to complete these projects may increase, potentially significantly, due to factors outside of our control. While we believe that we have sufficient cash resources to fund these initiatives and operating working capital in the near term, we cannot assure this. 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. Any 22 -------------------------------------------------------------------------------- T able of Contents delays in our ongoing capital projects or substantial cost increases, including construction costs and related materials costs, related to their execution could significantly impact our ability to maximize our revenue opportunities and adversely impact our business and cash flows.
Debt and Other Long-Term Obligations
Convertible Notes: InMarch 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, onApril 1, 2026 (the "Convertible Notes"), at a price of par. Interest on the Convertible Notes is payable onApril 1st andOctober 1st of each year, beginning onOctober 1, 2021 . 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 price exceed 28.5714 shares of common stock per$1,000 principal amount of notes. We aim 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. 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: InMarch 2022 , the Company made a$2.9 million payment to Shenghe pursuant to an obligation under the A&R Offtake Agreement 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 was reduced to zero (terms as discussed and defined in Note 3, "Relationship and Agreements with Shenghe," in the notes to the unaudited Condensed Consolidated Financial Statements). Upon payment by the Company, the Prepaid Balance was repaid in full, and the A&R Offtake Agreement was terminated. Prior to full repayment, the debt to Shenghe was satisfied primarily through product sales, where partial non-cash consideration was 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). Equipment Notes: We have entered into several financing agreements for the purchase of equipment, including trucks, tractors, loaders, graders, and various other machinery. As ofMarch 31, 2022 , we had$9.0 million in principal (and accrued interest) outstanding under the equipment notes.
Cash Flows
The following table summarizes our cash flows:
For the three months ended March
31, Change
(in thousands, except percentages) 2022 2021 $ %
Net cash provided by (used in):
Operating activities $ 120,971 $ 9,335 $ 111,636 1196 %
Investing activities $ (49,802) $ (19,173) $ (30,629) 160 %
Financing activities $ (17,911) $ 671,793 $ (689,704) n.m.
n.m. - Not meaningful.
Net Cash Provided by Operating Activities: Net cash provided by operating
activities increased by $111.6 million for the three months ended March 31,
2022 , as compared to the prior year period, reflecting the increase in product
sales and a net increase due to the timing of receipt or payment of working
capital items, such as accounts receivable and accounts payable, partially
offset by the increase in our cost of sales and selling, general and
administrative expenses. In addition, $13.6 million of our product sales was
excluded from cash provided by operating activities for the three months ended
March 31, 2022 , since that portion of the sales price was retained by Shenghe to
reduce the debt obligation, compared to $11.3 million in the prior year period.
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Net Cash Used in Investing Activities: Net cash used in investing activities
increased by $30.6 million for the three months ended March 31, 2022 , compared
to the prior year period, attributable mainly to an increase in capital
expenditures relating primarily to our Stage II optimization project and our
Fort Worth Facility, partially offset by $5.1 million of proceeds from a
government award used for construction, specifically our Stage II optimization
project.
Net Cash Provided by (Used in) Financing Activities: Net cash used in financing
activities was $17.9 million for the three months ended March 31, 2022 , compared
to net cash provided by financing activities of $671.8 million in the prior year
period. The current year period consisted primarily of tax withholding on
stock-based awards and principal payments on debt obligations and finance leases
while the prior year period consisted primarily of the net proceeds received
from the issuance of the Convertible Notes in March 2021 of $672.6 million .
Non-GAAP Financial Measures
We present Total Value Realized, Production Costs, Adjusted EBITDA, Adjusted Net Income, Adjusted Diluted EPS, and Free Cash Flow, which are non-GAAP financial measures that we use to supplement our results presented in accordance with GAAP. These measures may be similar to measures reported by other companies in our industry and are regularly used by securities analysts and investors to measure companies' financial performance. Total Value Realized, Production Costs, Adjusted EBITDA, Adjusted Net Income, Adjusted Diluted EPS, and Free Cash Flow are not intended to be a substitute for any GAAP financial measure and, as calculated, may not be comparable to other similarly titled measures of performance or liquidity of other companies within our industry or in other industries.
Total Value Realized
Total Value Realized, which we use to calculate our key performance indicator,
realized price per REO MT, is a non-GAAP financial measure. As mentioned above,
realized price per REO MT is an important measure of the market price of our
product. The following table presents a reconciliation of our Total Value
Realized, to our product sales, which is determined in accordance with GAAP, as
well as the calculation of realized price per REO MT:
For the three months ended March
31,
(in thousands, unless otherwise stated) 2022 2021 Product sales$ 161,755 $ 59,739 Adjusted for: Tariff rebate(1) - (2,050) Total Value Realized 161,755 57,689 Divided by: REO sales volume (in MTs) 11,706 9,793 Realized price per REO MT (indollars)(2 ) $
13,818
(1)Represents non-cash revenue recognized in connection with a tariff rebate received relating to product sales from prior periods.
(2)May not recompute as presented due to rounding.
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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 March
31,
(in thousands, unless otherwise stated) 2022 2021
Cost of sales (excluding depreciation, depletion and amortization) $ 23,173 $ 17,936
Adjusted for:
Stock-based compensation expense(1) (715) (1,318)
Shipping and freight (3,244) (2,098)
Other(2) (556) (73)
Production Costs 18,658 14,447
Divided by:
REO sales volume (in MTs) 11,706 9,793
Production cost per REO MT (in dollars)(3 ) $
1,594
(1)Pertains only to the amount of stock-based compensation expense included in cost of sales.
(2)Pertains primarily to costs (excluding shipping and freight) attributable to sales of stockpiles, including rare earth fluoride.
(3)May not recompute as presented due to rounding.
Adjusted EBITDA
We calculate Adjusted EBITDA as our GAAP net income 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, start-up and other non-recurring
costs; accretion of asset retirement and environmental obligations; gain or loss
on sale or disposal of long-lived assets; 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 supplement our GAAP
results and should not be used as a substitute for financial measures presented
in accordance with GAAP.
The following table presents a reconciliation of our Adjusted EBITDA, which is a
non-GAAP financial measure, to our net income, which is determined in accordance
with GAAP:
For the three months ended March
31,
(in thousands) 2022 2021
Net income $ 85,551 $ 16,119
Adjusted for:
Depreciation, depletion and amortization 5,260 6,150
Interest expense, net 1,905 1,154
Income tax expense 27,762 4,491
Stock-based compensation expense(1) 9,773 5,673
Transaction-related, start-up and other non-recurring costs(2) 1,525 1,058
Accretion of asset retirement and environmental obligations 418 593
Loss (gain) on sale or disposal of long-lived assets, net(3) 257 (133)
Tariff rebate(4) - (2,050)
Other income, net (194) (55)
Adjusted EBITDA $ 132,257 $ 33,000 (1)Principally included in "Selling, general and administrative" within our unaudited Condensed Consolidated Statements of Operations.
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(2)Amount for the three months ended March 31, 2022 , is principally comprised of
start-up costs that do not qualify for capitalization, which relate to the
restart of our CHP plant as well as certain costs associated with our Stage III
initiatives. Amount for the three months ended March 31, 2021 , relates to
advisory, consulting, accounting and legal expenses principally in connection
with the secondary equity offering, which was completed contemporaneously with
the Convertible Notes offering in March 2021 .
(3)Included in "Selling, general and administrative" within our unaudited Condensed Consolidated Statements of Operations.
(4)Represents non-cash revenue recognized in connection with a tariff rebate received relating to product sales from prior periods.
Adjusted Net Income and Adjusted Diluted EPS
We calculate Adjusted Net Income as our GAAP net income excluding the impact of
depletion; stock-based compensation expense; transaction-related, start-up and
other non-recurring costs; gain or loss on sale or disposal of long-lived
assets; tariff rebates; and other income or loss, net; adjusted to give effect
to the income tax impact of such adjustments. We calculate Adjusted Diluted EPS
as our GAAP diluted earnings per share ("EPS") excluding the per share impact,
using GAAP diluted weighted-average shares outstanding as the denominator, of
depletion; stock-based compensation expense; transaction-related, start-up and
other non-recurring costs; gain or loss on sale or disposal of long-lived
assets; 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
and Adjusted Diluted EPS because it is used by management to evaluate our
underlying operating and financial performance and trends.
Adjusted Net Income and Adjusted Diluted EPS exclude 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
acquisition of Secure Natural Resources LLC , the mineral rights for the rare
earth ores contained in our mine were recorded at fair value, resulting in a
significant step-up of the carrying amount of the asset which caused depletion
to be meaningfully higher than prior periods. While the depletion expense
related to the stepped-up mineral rights asset is excluded from Adjusted Net
Income and Adjusted Diluted EPS, the revenue related to such mineral rights is
reflected in Adjusted Net Income and Adjusted Diluted EPS as this asset
contributes to our revenue generation. These non-GAAP financial measures are
intended to supplement our GAAP results and should not be used as a substitute
for financial measures presented in accordance with GAAP.
The following table presents a reconciliation of our Adjusted Net Income, which is a non-GAAP financial measure, to our net income, which is determined in accordance with GAAP:
For the three months ended March
31,
(in thousands) 2022 2021
Net income $ 85,551 $ 16,119
Adjusted for:
Depletion(1) 3,069 4,531
Stock-based compensation expense(2) 9,773 5,673
Transaction-related, start-up and other non-recurring costs(3) 1,525 1,058
Loss (gain) on sale or disposal of long-lived assets, net(4) 257 (133)
Tariff rebate(5) - (2,050)
Other income, net (194) (55)
Tax impact of adjustments above(6) (3,644) (1,966)
Adjusted Net Income $ 96,337 $ 23,177 (1)Represents the depletion associated with the mineral rights for the rare earth ores contained in the Company's mine.
(2)Principally included in "Selling, general and administrative" within our unaudited Condensed Consolidated Statements of Operations.
(3)Amount for the three months endedMarch 31, 2022 , is principally comprised of start-up costs that do not qualify for capitalization, which relate to the restart of our CHP plant as well as certain costs associated with our Stage III initiatives. Amount for the three months endedMarch 31, 2021 , relates to advisory, consulting, accounting and legal expenses principally in connection with the secondary equity offering, which was completed contemporaneously with the Convertible Notes offering inMarch 2021 .
(4)Included in "Selling, general and administrative" within our unaudited Condensed Consolidated Statements of Operations.
(5)Represents non-cash revenue recognized in connection with a tariff rebate received relating to product sales from prior periods.
(6)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 25.3% and 21.8%, for the three months endedMarch 31, 2022 and 2021, respectively. 26 -------------------------------------------------------------------------------- T able of Contents The following table presents a reconciliation of our Adjusted Diluted EPS, which is a non-GAAP financial measure, to our diluted EPS, which is determined in accordance with GAAP:
For the three months ended
2022 2021
Diluted EPS $ 0.45 $ 0.09
Adjusted for:
Depletion(1) 0.01 0.02
Stock-based compensation expense(2) 0.05 0.03
Transaction-related, start-up and other non-recurring costs(3) 0.01 0.01
Loss (gain) on sale or disposal of long-lived assets, net(4) 0.00 0.00
Tariff rebate(5) 0.00 (0.01)
Other income, net 0.00 0.00
Tax impact of adjustments above(6) (0.02) (0.01)
Adjusted Diluted EPS $ 0.50 $ 0.13
Diluted weighted-average shares outstanding 193,490,330 179,319,489
(1)Represents the depletion associated with the mineral rights for the rare earth ores contained in the Company's mine.
(2)Principally included in "Selling, general and administrative" within our unaudited Condensed Consolidated Statements of Operations.
(3)Amount for the three months endedMarch 31, 2022 , is principally comprised of start-up costs that do not qualify for capitalization, which relate to the restart of our CHP plant as well as certain costs associated with our Stage III initiatives. Amount for the three months endedMarch 31, 2021 , relates to advisory, consulting, accounting and legal expenses principally in connection with the secondary equity offering, which was completed contemporaneously with the Convertible Notes offering inMarch 2021 .
(4)Included in "Selling, general and administrative" within our unaudited Condensed Consolidated Statements of Operations.
(5)Represents non-cash revenue recognized in connection with a tariff rebate received relating to product sales from prior periods.
(6)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 25.3% and 21.8%, for the three months endedMarch 31, 2022 and 2021, respectively.
Free Cash Flow
We calculate Free Cash Flow as net cash provided by 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
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 operating activities,
which is determined in accordance with GAAP:
For the three months ended March
31,
(in thousands) 2022 2021
Net cash provided by operating activities(1) $ 120,971 $ 9,335
Additions of property, plant and equipment, net(2) (49,802) (19,298)
Free Cash Flow $ 71,169 $ (9,963)
(1)Under the terms of the A&R Offtake Agreement and pursuant to the accounting
treatment thereof, $13.6 million and $11.3 million of our product sales for the
three months ended March 31, 2022 and 2021, 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 three months ended March 31, 2022 , is net of $5.1 million in
proceeds received from a government award used for construction, specifically
our Stage II optimization project.
Critical Accounting Policies
A complete discussion of our critical accounting policies is included in our Form 10-K for the year endedDecember 31, 2021 . There have been no significant changes in our critical accounting policies during the three months endedMarch 31, 2022 . 27
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T able of Contents Recently Adopted and Issued Accounting Pronouncements Recently adopted and issued accounting pronouncements are described in Note 2, "Significant Accounting Policies," in the notes to the unaudited Condensed Consolidated Financial Statements.
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