MP MATERIALS : DE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

You should read the following discussion and analysis of our financial condition
and results of operations together with our Consolidated Financial Statements
and related notes appearing elsewhere in this annual report on Form 10-K for the
year ended December 31, 2020 (this "Annual Report"). 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   "Item 1A. Risk Factors"   and
elsewhere in this Annual Report. 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 own and operate one of the world's largest integrated rare earth mining and
processing facilities and the only major rare earths resource in the Western
Hemisphere.
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 believe Mountain Pass is the only such integrated facility in the
Western Hemisphere and one of the few separation facilities outside of Asia.
Current ownership and management 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. See the section entitled   "    History of Ownership and Current
Operations    "     within Item 1. Business   above. Approximately $1.7 billion
has been invested in the Mountain Pass facility since 2011, in addition to the
investments in utilities and active infrastructure completed between the 1960s
and 2008. 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. We believe our concentrate represents
approximately 15% of the rare earth content consumed in the global market during
the last 12 months. Upon completion of our Stage II optimization project, we
anticipate separating rare earth oxides ("REO") at our Mountain Pass site and
selling our products directly to end users, at which time we would no longer
sell our concentrate.
As technological innovation drives significant 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
has national security implications as well, illustrated by recent U.S.
Presidential directives seeking the onshoring of production in industries deemed
critical, including rare earth minerals. For example, on February 24, 2021,
President Biden signed an 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. This executive order calls for
a review of a broader set of U.S. supply chains covering the defense, health
care, information technology, energy, transportation and agriculture sectors.
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 our mine, 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, in accordance with generally
accepted accounting principles in the United States ("GAAP"). 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.
The SNR Mineral Rights Acquisition did not meet the criteria for the acquisition
of a business and was accounted for as an asset acquisition. The principal asset
acquired in the SNR Mineral Rights Acquisition was the mineral rights for the
rare earth ores contained in our mine, which SNR acquired in 2016 and which was
SNR's sole operating asset. In connection with the SNR Mineral Rights
Acquisition, we recorded a mineral rights asset (classified as a component of
"Property, plant and equipment" within our Consolidated Balance Sheets) in the
amount of $434.7 million, which will be depleted on a straight-line basis over
approximately 24 years. As a result, we expect to record significantly higher
depletion expense within our Consolidated Statements of Operations for periods
following the Business Combination.
In April 2017, MPMO entered into a 30-year lease and license agreement with SNR
under which MPMO paid royalties to SNR in the amount of 2.5% of gross revenue
from the sale of rare earth products made from ores extracted from the mine,
subject to a minimum non-refundable royalty of $0.5 million per year. Our
consolidated results of operations for reporting periods following the
consummation of the Business Combination will no longer reflect the payment of
such royalties. SNR's results of operations and cash flows are substantially
eliminated in consolidation in our Consolidated Financial Statements and, except
as noted above, we do not expect the SNR Mineral Rights Acquisition to
materially impact the comparability of our historical results of operations with
our results of operations for periods following the Business Combination.
Pursuant to the amended and restated letter agreement dated July 15, 2020, and
amended and restated on August 26, 2020, by and among FVAC and the holders of
FVAC Class F common stock, all of the shares of FVAC Class A common stock issued
upon the conversion of FVAC Class F common stock (held by insiders initially
purchased prior to the FVAC initial public offering), were subject to certain
vesting and forfeiture provisions (the "Vesting Shares") based on the
achievement of certain volume weighted-average price ("VWAP") thresholds of the
Company's common stock. In December 2020, such VWAP thresholds were achieved,
resulting in the vesting of 8,625,000 shares.
The holders of MPMO Holding Company (a Delaware corporation formed by MPMO
pursuant to the Merger Agreement) ("MPMO HoldCo") preferred stock and common
stock and SNR Holding Company, LLC (a Delaware limited liability company formed
by SNR pursuant to the Merger Agreement) common stock immediately prior to the
closing of the Business Combination were given the contingent right to receive
up to an additional 12,860,000 shares of the Company's common stock (the
"Earnout Shares") based on the achievement of certain VWAP thresholds of the
Company's common stock. In December 2020, 12,859,898 Earnout Shares (adjusted
for fractional shares) were issued upon the attainment of such VWAP thresholds.
Our Relationship and Agreements with Shenghe
Original Commercial Agreements
In connection with the acquisition and development of the Mountain Pass
facility, we entered into a set of commercial arrangements with Shenghe. Shenghe
and its affiliates primarily engage in the mining, separation, processing and
distribution of rare earth products. MPMO also issued to Leshan Shenghe Rare
Earth Co., Ltd. ("Leshan Shenghe"), the majority stockholder of Shenghe, 110.98
MPMO preferred units, which represented all of the issued and outstanding MPMO
preferred units at the time. As discussed above, in connection with the Business
Combination, these MPMO preferred units were exchanged for MPMO HoldCo preferred
stock and eventually our common stock and the contingent right to receive
Earnout Shares.
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The original commercial arrangements with Shenghe were entered into in May 2017,
prior to MPMO's acquisition of the Mountain Pass facility. These agreements
principally consisted of a technical services agreement (the "TSA"), an offtake
agreement (the "Original Offtake Agreement"), and a distribution and marketing
agreement (the "DMA").
Under the TSA, Shenghe provided technical services, know-how and other
assistance to MPMO in order to facilitate the development and operations of
Mountain Pass. In addition, both the TSA and Original Offtake Agreement imposed
certain funding obligations on Shenghe. The Original Offtake Agreement required
Shenghe to advance an initial $50.0 million (the "Initial Prepayment Amount")
over time to MPMO 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 the Mountain Pass facility to full operability. Shenghe also
agreed to provide additional funding in the amount of $30.0 million to MPMO
pursuant to a separate letter agreement dated June 20, 2017 (the "Letter
Agreement") (the "First Additional Advance"), in connection with MPMO's
acquisition of the Mountain Pass facility. In addition to the repayment of the
First Additional Advance in cash, pursuant to the Letter Agreement, the Initial
Prepayment Amount was 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."
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),
MPMO sold to Shenghe, and Shenghe purchased on a firm "take or pay" basis, all
of the rare earth products produced at the Mountain Pass facility. 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 MPMO repaid, and Shenghe recovered,
such amounts (the "Gross Profit Recoupment"). Under the Original Offtake
Agreement, MPMO was obliged to sell all Mountain Pass facility 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 MPMO and Shenghe, subject to certain agreed exceptions. MPMO
retained the right to distribute its 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 the Mountain Pass facility. See below for further
discussion of the DMA termination and associated accounting treatment.
In order to secure Shenghe's performance under the Original Offtake Agreement
and TSA, Leshan Shenghe issued a parent guaranty to MPMO in May 2017 (the
"Shenghe Guaranty"), and entered into an equity pledge agreement (the "Shenghe
Pledge Agreement") in June 2017.
Framework Agreement and Restructured Commercial Agreements
In May 2020, we entered into a framework agreement and amendment (the "Framework
Agreement") with Shenghe and Leshan Shenghe that significantly restructured the
parties' commercial arrangements and provided for, among other things, a revised
funding amount and schedule to settle Shenghe's prepayment obligations to MPMO,
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 and Leshan Shenghe on May 19, 2020 (the "A&R
Offtake Agreement"), which, upon effectiveness, superseded and replaced the
Original Offtake Agreement, and MPMO issued to Shenghe a warrant on June 2, 2020
(the "Shenghe Warrant"), exercisable at a nominal price for 89.88 MPMO preferred
units, which, at the time, reflected approximately 7.5% of MPMO's equity on a
diluted basis, subject to certain restrictions. 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. As discussed below,
the Shenghe Warrant was exercised in full for MPMO preferred units which were
exchanged for MPMO HoldCo preferred stock and eventually our common stock and
the contingent rights to receive Earnout Shares in connection with the Business
Combination.
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Upon the funding of the remaining obligations on June 5, 2020, (i) the TSA and
the DMA were terminated (as described below), (ii) the A&R Offtake Agreement and
the Shenghe Warrant became effective, and (iii) the Shenghe Guaranty and the
Shenghe Pledge Agreement were terminated (such events are collectively referred
to as the "June 2020 Modification"). Thus, at the present time, Leshan Shenghe's
and Shenghe's involvement with MPMO and the Mountain Pass facility 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 material 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 purchase 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, instead of our cash cost of production; (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 purchase price and other terms applicable to a quantity of offtake products
are set forth in monthly purchase agreements between MPMO 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, MPMO will have no contractual arrangements with Shenghe for the
distribution, marketing or sale of rare earth products.
Accounting Implications of the June 2017 Modification
As discussed above, 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     4,     "    Relationship     and
Agreements with Shenghe    ,    "   in the notes to the 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 of $2.3 million and
(b) the fair value allocated to the modification to the revenue arrangement of
$3.5 million) 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 of 36% 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.
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
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products by the General Administration of Customs of the People's Republic of
China during this period. The drivers of our production costs are described
below under   "Key Performance Indicators."
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 Implications of 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 purchase 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 purchase 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 is not expected to have a material impact on our results of
operations (both are treated as a reduction to the transaction price).
As a result of the above, the amount of revenue we recorded for periods that
included any portion of the period from July 1, 2019, until June 5, 2020 (the
date the Original Offtake Agreement was modified), is not comparable, in the
aggregate or on a per unit basis, to the amount of revenue recorded in other
periods that concluded before July 1, 2019, or that commenced after June 5,
2020. Furthermore, assuming static market prices, we would expect to record more
revenue per REO MT sold subsequent to June 5, 2020. See also   "Key Performance
Indicators"   section.
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, relating to periods 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
rebates to Shenghe. On account of these rebates in the second and third quarters
of 2020, we received from Shenghe certain credits against our contractual
commitments to them. As a result of these credits, during the year ended
December 31, 2020, we recognized non-cash revenue of $8.9 million and deferred
revenue of $1.4 million and reductions in debt principal of $9.7 million and
debt discount of $0.8 million.
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. Since that time, an
increasing number of countries, including the United States,
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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, 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, in the fourth quarter of 2020, we
began to again see shipping delays and container shortages from congestion at
port facilities, which has been exacerbated by COVID-19. 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 and prospects. Our calculations of these performance indicators may
differ from similarly-titled measures published by other companies in our
industry or in other industries. The following table presents our key
performance indicators:
                                                     Year ended December 31,                            2020 vs. 2019
(in whole units or dollars, except percentages)       2020                2019              Amount Change             % Change
REO Production Volume (MTs)                            38,503           27,620                    10,883                     39  %
REO Sales Volume (MTs)                                 38,367           26,821                    11,546                     43  %
Realized Price per REO MT                        $      3,311          $ 2,793             $         518                     19  %
Production Cost per REO MT                       $      1,430          $ 1,980             $        (550)                   (28) %


REO Production Volume
We measure our REO-equivalent production volume for a given period in 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
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 batch. We consider this the
natural distribution, as it reflects the distribution of elements contained, on
average, in our ore. Upon the completion of our Stage II optimization project,
we expect to refine our rare earth concentrate to produce separated rare earths,
including separated NdPr oxide. See also   "Key Factors Affecting Our
Performance"   section below.
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. See also
  "Key Components of Sales and Expenses"   section below.
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 calculate our Total Value Realized, which
is a non-GAAP financial measure, as the sum of: (x) the revenue recognized on
our sales of REO for a given period (excluding the revenue impact of
tariff-related credits from Shenghe on account of prior sales) and (y) in
connection with our sales of REO to Shenghe between July 1, 2019, and June 5,
2020, the total amount of the Shenghe Implied Discount. The consideration
described in clause (y) is the difference between (1) 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 (2) 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. As further discussed above, for
sales under the Original Offtake
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Agreement, a portion of this non-cash consideration, the Shenghe Implied
Discount, was not recorded as revenue in our Consolidated Financial Statements,
but was applied as a reduction to the Prepaid Balance.
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 price per MT, which was intended to approximate our cash cost of
production, and in turn resold it at market prices to its customers. Our
treatment of the non-cash consideration is the result of the June 2017
Modification, which impacted the relationship between the amount of prepayments
we had received from Shenghe and the amount we owed contractually. The
$30.0 million increase to the Prepaid Balance pursuant to the Letter Agreement
(as discussed above), effectively provided Shenghe with an enhanced margin. Upon
entrance into the A&R Offtake Agreement, we began to recognize revenue at the
full value of our product. Accordingly, we calculate realized price per REO MT
for the period between July 1, 2019, and June 5, 2020, by adding back the amount
of the Shenghe Implied Discount. 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, as described
above, to reflect a consistent basis between periods by eliminating the impact
of recognizing revenue at a discount in the period between July 1, 2019, and
June 5, 2020, as a result of the Shenghe Implied Discount, and the revenue
impact of tariff-related credits. 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 calculate our Production Costs, which is a
non-GAAP financial measure, as our cost of sales (excluding depletion,
depreciation and amortization) less costs attributable to sales of legacy
stockpiles, stock-based compensation expense included in cost of sales (as
opposed to general and administrative expenses), and shipping and freight costs,
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. See the section entitled   "    Rare Earth Industry Overview and
Market Opportunity    "     within Item 1. Business   for more information.
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 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. If our
assumptions about the growth in demand for REE, and particularly NdPr, prove
wrong, our business prospects, financial condition and results of operations
could suffer materially.
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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 rare earth oxide. 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
Over the last twelve months, REO production is approximately 3.2x greater than
the highest ever production in a twelve-month period by the former operator
using the same capital equipment. We have 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-a significant improvement to that of our predecessor.
We also believe that these Stage I optimization initiatives have enabled us to
achieve world-class production cost levels for rare earth concentrate. All of
these achievements have 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 recently been suspended,
further enhancing the earnings power of our Stage I operations. See the section
entitled   "    History of Ownership and Current Operations    -Stage I
Execution Successful    "     within Item 1. Bu    siness  .
We believe that the success of our business will reflect our ability to manage
our costs. Our Stage II optimization plan (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 process is focused on advancing from concentrate
production to the separation of individual REE. Engineering, procurement,
preliminary construction and other recommissioning activities are underway and
involve upgrades and enhancements to the existing facility process flow to
produce separated REE more reliably, at significantly lower cost and with an
expected smaller environmental footprint per volume of REO produced than the
prior operator of the Mountain Pass facility. 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, in
addition to recommissioning our currently idled CHP plant to produce
electricity. Our process redesign and engineering for our Stage II optimization
project is substantially complete and we believe that our Stage II optimization
project investments will enable us to materially increase the recovery of NdPr
from our concentrate, increase NdPr production and dramatically lower the cost
of production, in each case, as compared to the prior owner's operations. Upon
the completion of Stage II, we expect to be a low-cost producer of separated
NdPr oxide, which represents a majority of the value contained in our ore. See
the section entitled   "History of Ownership and Current Operations-Stage II
Underway" within Item 1. Business  .
In the longer term, following our completion of the Stage II optimization
project, 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 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 as the
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producer of a critical industrial output in addition to a producer of resources.
We expect these Stage III downstream opportunities to be driven by geopolitical
developments, including bringing critical rare earth mining and refining
production capability to the United States, as well as the restoration of the
full U.S. magnetics supply chain. See the section entitled   "History of
Ownership and Current Operations-Stage III Downstream Expansion Opportunity"
within Item 1. Busine    ss  .
The completion of our Stage II optimization project and any development of Stage
III is expected to be capital intensive. With recent enhancements to our Stage
II process design, we now expect to invest a total of approximately
$220 million, principally in 2021 and 2022. The scope of the project has been
revised versus our prior expectations to include process design innovations that
reduce reagent consumption by greater than 10% while increasing the planned
recovery of separated REO and improving potential product mix. We now 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. However, our
estimated costs or estimated time to completion may increase, potentially
significantly, due to factors outside of our control. See   "Part I, Item 1A.
Risk Factors."   While we believe that we have sufficient cash resources to fund
our Stage II optimization 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.
Key Components of Sales and Expenses
Product Sales
A substantial majority of our product sales are generated from the sale of REO
concentrate to Shenghe, although we also sell small amounts to third parties.
The table below presents our product sales by customer type:
                                      For the year ended December 31,
(in thousands)                              2020                      2019
Product sales-Shenghe         $         133,698                    $ 73,017
Product sales-third parties                 612                         394
Total product sales           $         134,310                    $ 73,411


We recognize a product sale when we have a binding purchase agreement and the
product is delivered to the agreed-upon shipping point, at which point the
control of the product is transferred to the customer. The transaction price is
typically based on an agreed-upon price per REO MT, subject to certain quality
adjustments and discounts. See also   Note 2,     "    Signi    f    icant
Accoun    ting Policies    ,    "   in the notes to our Consolidated Financial
Statements.
Costs and Expenses
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 utilities), packaging materials, and
freight and shipping costs.
Royalty expense to SNR relates to our 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, prior to the Business Combination. See
  Note 1    8    ,     "    R    elate    d Party Tran    sactions,    "   in
the notes to our Consolidated Financial Statements. Following the Business
Combination, we do not incur royalty expenses on a consolidated basis.
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; property taxes; general
facilities expenses; and certain environmental, health, and safety expenses.
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. As a result of the Business Combination, specifically the SNR Mineral
Rights Acquisition, depletion will be higher in future periods.
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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 expiration of the mineral lease and on the
estimated future cash flow requirement to monitor groundwater contamination
related to prior owners' activities, respectively.
Other income, net consists mainly of gains or losses on the disposal of
property, plant and equipment and interest income.
Interest expense, net consists mainly of the amortization of the discount on our
debt obligations to Shenghe (all of which is non-cash) and, to a lesser extent,
interest on other debt instruments, offset by interest capitalized.
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.
Results of Operations
Comparison of the Years Ended December 31, 2020 and 2019
The following table summarizes our results of operations:
                                                    For the year ended December 31,                          2020 vs. 2019
(in thousands, except percentages)                      2020               2019                     $ Change               % Change
Product sales                                       $  134,310          $ 73,411                $      60,899                     83  %

Operating costs and expenses:
Cost of sales (excluding depreciation, depletion
and amortization)                                       63,798            61,261                        2,537                      4  %
Royalty expense to SNR                                   2,406             1,885                          521                     28  %
General and administrative expenses                     27,008            11,104                       15,904                    143  %
Depreciation, depletion and amortization                 6,931             4,687                        2,244                     48  %
Accretion of asset retirement and environmental
obligations                                              2,255             2,094                          161                      8  %
Settlement charge                                       66,615                 -                       66,615                      n.m.
Total operating costs and expenses                     169,013            81,031                       87,982                    109  %
Operating loss                                         (34,703)           (7,620)                     (27,083)                   355  %
Other income, net                                          251             4,278                       (4,027)                   (94) %
Interest expense, net                                   (5,009)           (3,412)                      (1,597)                    47  %
Loss before income taxes                               (39,461)           (6,754)                     (32,707)                   484  %
Income tax benefit (expense)                            17,636                (1)                      17,637                      n.m.
Net loss                                            $  (21,825)         $ (6,755)               $     (15,070)                   223  %


n.m. - Not meaningful.
Product sales increased year over year by $60.9 million, or 83%, to $134.3
million for the year ended December 31, 2020. The increase was driven primarily
by higher REO sales volume, which increased by 11,546 MTs to 38,367 MTs for the
year ended December 31, 2020, as compared to the prior year, reflecting the
improved efficiency of our processing operations, while our realized price per
REO MT increased 19% year over year, primarily reflecting lower tariffs. Tariff
credits from Shenghe contributed $10.3 million in product sales for the year
ended December 31, 2020. However, product sales for the year ended December 31,
2020, were negatively impacted by the accounting treatment of the Shenghe
Implied Discount in connection with the Original Offtake Agreement, in which
$3.7 million of the value of products sold to Shenghe from January 1, 2020,
until June 5, 2020, was not recognized as product sales. As mentioned above,
starting June 5, 2020, the accounting treatment specific to the Shenghe Implied
Discount is no longer required and, going forward, we will recognize product
sales on the full value of our sales to Shenghe. See also   "Recent Developments
and Comparability of Results"   section above.
Cost of sales (excluding depreciation, depletion and amortization) increased
year over year by $2.5 million, or 4%, to $63.8 million for the year ended
December 31, 2020. The increase was driven by higher sales volume and higher
operating lease costs from leases that commenced in the second half of 2020,
offset by significantly lower per unit production costs. The decrease in
production cost per REO MT from $1,980 for the year ended December 31, 2019, to
$1,430 for the year ended December 31, 2020, reflected the increased efficiency
in processing our rare earth concentrate, driven by higher mineral
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recoveries in our froth flotation circuit, higher concentrate grade, lower
reagent usage per ton of concentrate produced, economies of scale, and improved
operational uptime. We believe our cost of sales on a per unit basis has
stabilized in the short-term, although we anticipate additional efficiency
opportunities as we increase REO production volumes in our milling and flotation
circuit over time.
Royalty expense to SNR increased year over year by $0.5 million, or 28%, to $2.4
million for the year ended December 31, 2020, reflecting our increased product
sales (prior to the Business Combination, the royalty rate was 2.5% of our gross
revenue from products derived from mined ore). Subsequent to the Business
Combination in November 2020, we no longer incur this expense on a consolidated
basis.
General and administrative expenses increased year over year by $15.9 million,
or 143%, to $27.0 million for the year ended December 31, 2020, reflecting $4.7
million in stock-based compensation expense from grants of restricted stock and
restricted stock units ("Stock Awards") during the fourth quarter of 2020 and a
$7.1 million increase in professional service and legal fees, including
accounting advisory services related to the Business Combination. The majority
of the Stock Awards were issued upon the consummation of the Business
Combination, and thus, are not necessarily reflective of future grants.
Furthermore, prior to the fourth quarter of 2020, we had not granted any Stock
Awards nor recorded any stock-based compensation expense. Excluding these items,
the increase was $4.1 million, or 37%, mainly due to an increase in personnel
costs, reflecting headcount growth, including new hires to support our
operations as a public company.
Depreciation, depletion and amortization increased year over year by $2.2
million, or 48%, to $6.9 million for the year ended December 31, 2020,
reflecting the impact of additional equipment purchases and depletion of the
mineral rights resulting from the SNR Mineral Rights Acquisition in November
2020.
Accretion of asset retirement and environmental obligation remained relatively
flat year over year.
Settlement charge of $66.6 million for the year ended December 31, 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 was $0.3 million for the year ended December 31, 2020,
primarily reflecting interest income and an environmental incentive credit.
Other income, net, for the year ended December 31, 2019, was $4.3 million,
primarily reflecting a gain on the disposal of idle assets and interest income.
Interest expense, net increased year over year by $1.6 million, or 47%, to $5.0
million for the year ended December 31, 2020, mainly reflecting implied interest
expense from the amortization of a debt discount on the issuance of a
non-interest-bearing debt instrument to Shenghe in connection with the June 2020
Modification. During the year ended December 31, 2020, we capitalized interest
of $0.2 million. See also   "Recent Developments and Comparability of Results"
section above.
Income tax benefit (expense) was $17.6 million for the year ended December 31,
2020, and related to current year activity as well as the release of a valuation
allowance, which were partially offset by current California state income tax
expense, mainly attributable to our inability to offset this obligation with
state net operating losses due to temporary new legislation. Income tax expense
was negligible for the year ended December 31, 2019.
Net loss increased year over year by $15.1 million to $21.8 million for the year
ended December 31, 2020, primarily due to the settlement charge, as well as
other reasons discussed above.
Non-GAAP Financial Measures
We present Total Value Realized, Production Costs, Adjusted EBITDA, Adjusted Net
Income (Loss) 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 (Loss) 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
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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 year ended December 31,
(in thousands, unless otherwise stated)                                2020                2019
Product sales                                                      $  134,310          $  73,411
Adjusted for:
Shenghe Implied Discount (1)                                            3,664              1,882
Other (2)                                                             (10,960)              (394)
Total Value Realized                                               $  

127,014 $ 74,899

Total Value Realized                                               $  127,014          $  74,899
Divided by:
REO Sales Volume (in MTs)                                              38,367             26,821
Realized Price per REO MT (in dollars) (3)                         $    

3,311 $ 2,793

(1)Shenghe Implied Discount represents the difference between the contractual
amount realized by Shenghe and the amount of deferred revenue we recognized.
(2)Includes mainly the net impact of a tariff rebate from Shenghe due to the
retroactive effect of lifting of a Chinese tariff in 2020 (an additional
$10.3 million in tariff rebate was applied to reduce the Prepaid Balance) and
sales of PhosFix stockpiles in 2019.
(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 year ended December 31,
(in thousands, unless otherwise stated)                                 2020                2019
Cost of sales (excluding depreciation, depletion and amortization)  $   63,798          $  61,261
Adjusted for:
Costs attributable to sales of stockpiles                                 (446)              (374)
Stock-based compensation expense (1)                                      (277)                 -
Shipping and freight                                                    (8,220)            (7,793)
Production Costs                                                    $   54,855          $  53,094

Production Costs                                                    $   54,855          $  53,094
Divided by:
REO Sales Volume (in MTs)                                               38,367             26,821
Production Cost per REO MT (in dollars) (2)                         $    

1,430 $ 1,980

(1)Pertains only to the amount of stock-based compensation expense included in
cost of sales (as opposed to general and administrative expenses).
(2)May not recompute as presented due to rounding.
Adjusted EBITDA
We define 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 costs, other non-recurring costs,
non-cash accretion of asset retirement and environmental obligations and gain on
sale or disposal of long-lived assets. We present Adjusted EBITDA because it is
used by management to evaluate our underlying operating and financial
performance and trends.
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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.
Our Adjusted EBITDA does not reflect our results of operations on a comparable
basis between periods because of the accounting consequences 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 years 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
years ended December 31, 2020 and 2019, would have been higher by $3.7 million
and $1.9 million, respectively.
The following table presents a reconciliation of our Adjusted EBITDA, which is a
non-GAAP financial measure, to our net loss, which is determined in accordance
with GAAP:
                                                                         For the year ended December 31,
(in thousands)                                                               2020                2019
Net loss                                                                 $  (21,825)         $  (6,755)
Adjusted for:
Depreciation, depletion and amortization                                      6,931              4,687
Interest expense, net                                                         5,009              3,412
Income tax expense (benefit)                                                (17,636)                 1
Stock-based compensation expense (1)                                          5,014                  -
Transaction-related costs (2)                                                 3,258                270
Accretion of asset retirement and environmental obligations                   2,255              2,094
Other non-recurring costs (3)                                                 1,180                618
Royalty expense to SNR (4)                                                    2,406              1,885
Settlement charge (5)                                                        66,615                  -
Tariff credits (6)                                                          (10,347)                 -
Other income, net (7)                                                          (251)            (4,278)
Adjusted EBITDA                                                          $   42,609          $   1,934


(1)Principally included in "General and administrative expenses" within our
Consolidated Statements of Operations.
(2)Includes mainly advisory, consulting, accounting, legal expenses, and
one-time employee bonuses in connection with the Business Combination.
(3)Includes mainly non-recurring costs for SAP implementation for the year ended
December 31, 2020, and one-time severance payments to certain former members of
our executive team for the year ended December 31, 2019.
(4)Represents royalty expenses paid to SNR prior to the completion of the SNR
Mineral Rights Acquisition. As mentioned above, the royalty expense to SNR
eliminates in consolidation after the consummation of the Business Combination.
(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 during the year ended December 31,
2020, in connection with the tariff credits received from Shenghe relating to
product sales primarily from prior periods.
(7)Primarily represents gains or losses on disposals of equipment and interest
income. For the year ended December 31, 2019, we recorded a gain on sales of
idle mining equipment following the acquisition of the Mountain Pass mine and
processing facilities.
Adjusted Net Income (Loss)
We calculate Adjusted Net Income (Loss) as our GAAP net income or loss excluding
the impact of depletion, stock-based compensation expense, transaction-related
costs, and other non-recurring costs, 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 (Loss) because it is used by management to
evaluate our underlying operating and financial performance and trends.
Adjusted Net Income (Loss) 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,
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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 (Loss) does not reflect our results of operations on a
comparable basis between periods primarily because of the accounting
consequences of the modifications of our agreements with Shenghe (see the
  "Recent Developments and Comparability of Results"   section above).
Accordingly, our Adjusted Net Income (Loss) trend for the years presented may
not be indicative of future trends.
The following table presents a reconciliation of our Adjusted Net Income (Loss),
which is a non-GAAP financial measure, to our net loss, which is determined in
accordance with GAAP:
                                               For the year ended December 31,
(in thousands)                                       2020                      2019
Net loss                               $         (21,825)                   $ (6,755)
Adjusted for:
Depletion (1)                                      1,961                         114
Stock-based compensation expense (2)               5,014                           -
Transaction-related costs (3)                      3,258                         270
Other non-recurring costs (4)                      1,180                         618
Royalty expense to SNR (5)                         2,406                       1,885
Settlement charge (6)                             66,615                           -
Tariff credits (7)                               (10,347)                          -
Other income, net (8)                               (251)                     (4,278)
Tax impact of adjustments above (9)              (17,438)                   

379

Release of valuation allowance (10)               (9,333)                          -
Adjusted Net Income (Loss)             $          21,240                    $ (7,767)


(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. See   Note 3, "Business Combination and Reverse
Recapitalization"   in the notes to our Consolidated Financial Statements for
more information on the accounting for the asset acquisition.
(2)Principally included in "General and administrative expenses" within our
Consolidated Statements of Operations.
(3)Includes mainly advisory, consulting, accounting, legal expenses, and
one-time employee bonuses in connection with the Business Combination.
(4)Includes mainly non-recurring costs for SAP implementation for the year ended
December 31, 2020, and one-time severance payments to certain former members of
our executive team for the year ended December 31, 2019.
(5)Represents royalty expenses paid to SNR prior to the completion of the SNR
Mineral Rights Acquisition. As mentioned above, the royalty expense to SNR
eliminates in consolidation after the consummation of the Business Combination.
(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 during the year ended December 31,
2020, in connection with the tariff credits received from Shenghe relating to
product sales primarily from prior periods.
(8)Primarily represents gains or losses on disposals of equipment and interest
income. For the year ended December 31, 2019, we recorded a gain on sales of
idle mining equipment following the acquisition of the Mountain Pass mine and
processing facilities.
(9)Tax impact of adjustments is calculated by applying the annual effective tax
rate, excluding the impact of discrete tax costs and benefits, to each
adjustment. The adjusted effective tax rates used were 25.0% and 27.3% for the
years ended December 31, 2020 and 2019, respectively. See   Note 12, "Income
Taxes,"   in the notes to our Consolidated Financial Statements for more
information on the effective tax rate.
(10)Reflects the one-time impact of the release of the majority of our 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. 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.
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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 year ended December 31,
(in thousands)                                                         2020                2019
Net cash provided by (used in) operating activities (1)            $    3,277          $    (437)
Additions of property, plant and equipment                            (22,370)            (2,274)
Free Cash Flow                                                     $  (19,093)         $  (2,711)


(1)Under the terms of the A&R Offtake Agreement and pursuant to the accounting
treatment thereof, we recognized $21.3 million of non-cash revenue during the
year ended December 31, 2020, which was retained by Shenghe to reduce our
outstanding debt obligation.
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, the efficiency improvements we made
in the processing of our rare earth materials has resulted in significantly
higher production of REO starting in the third quarter of 2019. Our realized
price per REO MT was adversely impacted by the imposition of Chinese import
duties in July 2018 as well as the subsequent increase of such tariffs in May
2019. The lifting of tariffs contributed to the improvement in realized price
per REO MT in the second and third quarters of 2020.
The following table presents our REO production and sales volumes, as well as
our realized price per REO MT, for the quarterly periods indicated:
                                                        FY2019                                                              FY2020
(in whole units or dollars)      Q1               Q2               Q3               Q4               Q1               Q2               Q3               

Q4

REO Production Volume (MTs)    4,040            5,490            9,417            8,673            9,682            9,287           10,197           

9,337

REO Sales Volume (MTs)         3,875            4,533            9,852            8,561            8,321           10,297            9,429           

10,320

Realized Price per REO MT
(1)                          $ 2,902          $ 3,081          $ 2,967          $ 2,389          $ 2,544          $ 3,093          $ 3,393          $ 4,070


(1)Realized price per REO MT for certain periods prior to May 2020 would have
generally been higher if the tariff credits received from Shenghe were applied
in the same periods the relevant sales occurred. See   "Recent Developments and
Comparability of Results."
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 cash from
operating activities. Recently, we raised capital through the consummation of
the Business Combination, which included the PIPE Financing that resulted in
$200.0 million in gross proceeds.
As of December 31, 2020, we had $519.7 million of cash and cash equivalents and
$71.8 million principal amount of related-party debt pertaining to our Offtake
Advances with Shenghe. The promissory notes with JHL Capital Group and QVT
Financial and their affiliates (described below) were repaid in full upon the
consummation of the Business Combination.
We believe that our cash flows from operations and cash on hand is adequate to
meet our liquidity requirements for the foreseeable future. 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 funding 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, if we move forward with plans to develop our Stage III
project 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.
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Debt Obligations
Offtake Advances: As of December 31, 2020, we had debt recorded to Shenghe with
a carrying amount of $66.4 million, of which $71.8 million was principal and
$5.4 million was debt discount. The debt was recorded in connection with the
accounting for the June 2020 Modification. 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 December 31, 2020, was between 4.41% and 5.27%. As of December 31,
2020, we estimated the timing of repayment to be within three years and an
updated imputed interest rate of 6.59%. The relative increase in rates is
primarily due to changes in expected market prices, which will result in earlier
anticipated repayment of the outstanding balance through the various mechanisms,
and result in a higher implicit interest rate in order to fully amortize the
debt discount concurrent with the expected final repayment of the debt balance.
Promissory Note: In April 2017, we issued a 5% callable unsecured promissory
note to certain investment funds managed by or affiliated with JHL Capital Group
and QVT Financial, in exchange for loans extended by those entities. This note
was repaid in full upon the consummation of the Business Combination.
Secured Promissory Note: In August 2017, we issued a 10% secured promissory note
to certain investment funds managed by and/or affiliated with JHL Capital Group
and QVT Financial, in exchange for a loan extended by those entities to enable
us to purchase certain equipment. This promissory note was secured by a lien on
certain equipment that was purchased by us with the proceeds of the note. In
addition, the interest on this promissory note was payable in kind whereby the
interest would be added to the principal balance. This note was repaid in full
upon the consummation of the Business Combination.
Paycheck Protection Loan: In April 2020, we obtained a loan of $3.4 million
pursuant to the Paycheck Protection Program (the "PPP") under Division A, Title
I of the CARES Act, which was enacted in March 2020 (the "Paycheck Protection
Loan" or the "Loan"). The Paycheck Protection Loan, which was in the form of a
note dated April 15, 2020, issued by CIBC Bank USA, matures on April 14, 2022,
and bears interest at a rate of 1% per annum, payable monthly commencing on
March 15, 2021. Under the terms of the PPP, the Loan may be forgiven if the
funds are used for qualifying expenses as described in the CARES Act, which
include payroll costs, costs used to continue group health care benefits, rent
and utilities. As we have used the entire Loan amount for qualifying expenses,
in November 2020, we applied for forgiveness of the entire balance in accordance
with the requirements and limitations under the CARES Act and Small Business
Administration ("SBA") regulations and requirements. However, no assurance can
be provided that any portion of the Loan will be forgiven. Based on guidance
from the U.S. Department of the Treasury, since the proceeds exceeded
$2.0 million, our forgiveness application is subject to audit by the SBA. We are
currently awaiting a determination on forgiveness of the Paycheck Protection
Loan.
Equipment Notes: We entered into several financing agreements for the purchase
of equipment, including trucks, tractors, loaders, graders, and various other
machinery. As of December 31, 2020, we had $2.1 million in principal (and
accrued interest) outstanding under the equipment notes.
Public Warrants
Warrants to purchase 11,499,968 shares of the Company's Common Stock at $11.50
per share were issued during FVAC's IPO (the "Public Warrants"). The Public
Warrants become exercisable 12 months from the closing of FVAC's IPO, which was
May 4, 2020. The Public Warrants expire five years after the completion of the
Business Combination or earlier upon redemption or liquidation. Assuming the
exercise of all of the outstanding Public Warrants for cash, we would receive
gross proceeds of approximately $132 million. For more information on the Public
Warrants, see   Note     14,     "    Sto    ckholders    '

Equity , " in the notes to our Consolidated Financial Statements.

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Cash Flows
The following table summarizes our cash flows:
                                              For the year ended December 31,                          2020 vs. 2019
(in thousands, except percentages)                2020               2019                     $ Change               % Change
Net cash provided by (used in) operating
activities                                    $    3,277          $   (437)               $        3,714                     n.m.
Net cash provided by (used in) investing
activities                                    $  (22,370)         $  5,624                $      (27,994)                    n.m.
Net cash provided by (used in) financing
activities                                    $  521,961          $ (4,096)               $      526,057                     n.m.


n.m. - Not meaningful.
Net Cash Provided by (Used in) Operating Activities: Net cash provided by
operating activities was $3.3 million for the year ended December 31, 2020,
compared to net cash used in operating activities of $0.4 million in the prior
year. The improvement mainly reflects the increase in product sales and
increased efficiency in our production costs (as discussed above), offset by a
reduction due to the timing of payment of working capital items, such as
accounts payable, and a build in ore stockpiles per our mine plan. In addition,
of our product sales, $21.3 million was 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 Provided by (Used in) Investing Activities: Our current, recurring
capital expenditure needs consist mainly of purchases of property, plant and
equipment, including mining equipment.
Net cash used in investing activities was $22.4 million for the year ended
December 31, 2020, compared to net cash provided by investing activities of $5.6
million in the prior year. The change was mainly attributable to an increase in
capital expenditures relating primarily to initial expenditures related to our
Stage II optimization project, as well as commissioning of our CHP and water
treatment plants during the year ended December 31, 2020. For the year ended
December 31, 2019, we sold long-lived assets, from which we received $7.9
million.
Net Cash Provided by (Used in) Financing Activities: Net cash provided by
financing activities was $522.0 million for the year ended December 31, 2020,
compared to net cash used in financing activities of $4.1 million in the prior
year. The change primarily relates to the Business Combination, including the
PIPE Financing. In addition, the change reflects the $35.5 million received from
Shenghe relating to the Second Additional Advance, $40.3 million payments of
underwriting and transaction costs, and a year-over-year increase of
$8.9 million in principal payments on debt obligations and finance leases.
Contractual Obligations
The following table presents our contractual obligations and commitments as of
December 31, 2020:
                                                                       Payments due by period
                                                               Less                                                 More
                                                               than               1-3              3-5              than
(in thousands)                              Total             1 year             years            years            5 years
Lease obligations (1)                    $   2,275          $  1,114          $    947          $   214          $      -
Debt obligations (2)                         5,466             3,238             2,128              100                 -
Offtake Advances (3)                        71,843            25,710            46,133                -                 -
Asset retirement and environmental
obligations (4)                             42,737               546             1,084            1,074            40,033

Total                                    $ 122,321          $ 30,608          $ 50,292          $ 1,388          $ 40,033


(1)Includes future lease payments required under operating leases and finance
leases that have initial or remaining non-cancellable lease terms in excess of
one year.
(2)Includes scheduled or expected principal payments on our debt obligations as
well as our equipment notes.
(3)Based on our expected repayments, considering expected production volumes,
forecasted prices and cost projections. Actual amounts may differ from these
estimates.
(4)Represents payments that we are expecting to make in the future based on our
estimates of asset retirement and environmental obligations, on a discounted
basis.
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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
Preparation of the Consolidated Financial Statements in accordance with GAAP
requires our management to make judgments, estimates and assumptions that impact
the reported amount of product sales and operating expenses, assets and
liabilities and the disclosure of contingent assets and liabilities. We consider
an accounting judgment, estimate or assumption to be critical when (1) the
estimate or assumption is complex in nature or requires a high degree of
judgment and (2) the use of different judgments, estimates and assumptions could
have a material impact on our Consolidated Financial Statements. Our significant
accounting policies are described in   Note 2    ,     "    Significant
Accounting Policies    ,    "   in the notes to our Consolidated Financial
Statements. Our critical accounting policies are described below.
Revenue
We recognize revenue from sales of rare earth products produced from our mine.
Our principal customer, Shenghe, purchased substantially all of our production
for the years ended December 31, 2020 and 2019, and is an affiliate of an
equityholder of the Company. We recognize revenue at the point in time control
of the products transfers to the customer and, under our offtake agreements with
Shenghe, our performance obligation is typically satisfied when we deliver
products to the agreed-upon shipping point. The transaction price with Shenghe
is typically based on an agreed-upon price per MT but subject to certain quality
adjustments based on REO content, with an adjustment for the ultimate market
price of the product realized by Shenghe, further adjusted for certain
contractually negotiated amounts. We typically negotiate with and bill an
initial price to Shenghe; such prices are then updated based on final
adjustments for REO content and/or actual sales prices realized by Shenghe.
Sales to Shenghe under the Original Offtake Agreement also reflect an adjustment
for the Shenghe Implied Discount, which did not apply to sales prior to July 1,
2019, or after June 5, 2020.
Debt Obligations and Imputed Interest Rate Applied to Debt Discount
In connection with the June 2020 Modification, we recorded a total principal
amount of $94.0 million in debt due to the nature of our obligations, including
a carrying amount upon issuance of $85.7 million based on the fair value of the
instrument upon issuance, and offset by the resulting debt discount of
$8.3 million. Since the A&R Offtake Agreement does not have a stated rate, and
the timing and method of repayment is contingent on several factors, including
our production and sales volumes, market prices realized by Shenghe, our sales
to other parties, our asset sales and the amount of our annual net income, we
estimated the timing of payments and other reductions to the outstanding balance
to determine an imputed interest rate.
The debt discount represents the difference between the fair value of the debt
liability issued and the total amount of the contractual obligation as a
consequence of our entry into the A&R Offtake Agreement. The imputed interest
rate is calculated by amortizing the debt discount over the time period that
management expects to bring the total outstanding principal balance to zero and
determining the annualized interest rate necessary to fully amortize the
discount in the same period when final principal reduction is expected to occur.
Actual repayments or reductions in the principal balance may differ in timing
and amount from our estimates, and we therefore expect to update our estimates
each reporting period. Accordingly, the imputed interest rate is likely to
differ in future periods.
We have determined that we will recognize adjustments from these estimates using
the prospective method. Under the prospective method, we will update our
estimate of the effective imputed interest rate in future periods based on
revised estimates of the timing of remaining principal reductions. This rate
will then be used to recognize interest expense for subsequent reporting
periods, until the estimates are updated again. Under this method, the effective
interest rate is not constant, and changes are recognized prospectively as an
adjustment to the effective yield. See   Note 9, "Debt Obligations,"   in the
notes to our Consolidated Financial Statements for further discussion.
Asset Retirement Obligations
We recognize asset retirement obligations for estimated costs of legally and
contractually required closure, dismantlement, and reclamation activities
associated with the Mountain Pass mine and processing facility. Asset retirement
obligations are initially recognized at their estimated fair value in the period
in which the obligation is incurred. Fair value is based on the expected timing
of reclamation activities, cash flows to perform activities, amount and
uncertainty associated with the cash flows, including adjustments for a market
risk premium, and discounted using a credit-adjusted risk-free rate. The
liability is accreted over time through periodic charges to earnings and reduced
as reclamation activities occur; differences between
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estimated and actual amounts are recognized as an adjustment to operating
expense. Subsequent increments in expected undiscounted cash flows are measured
at their discounted values using updated estimates of our credit-adjusted
risk-free rate applied to the increment only. Subsequent decrements are reduced
based on the weighted-average discount rate associated with the obligation. As
of December 31, 2020, the credit-adjusted risk-free rate ranged between 7.1% and
8.2%, depending on the timing of expected settlement and when the layer or
increment was recognized. Associated asset retirement costs, including the
effect of increments and decrements, are recognized as adjustments to the
related asset's carrying amount and depreciated or depleted over its remaining
useful life.
Environmental Obligations
We have assumed certain environmental remediation obligations that primarily
relate to groundwater monitoring activities. Estimated remediation costs are
accrued based on management's best estimate at the end of each period of the
costs expected to be incurred at a site to settle the obligation when those
amounts are probable and estimable. Such cost estimates may include ongoing
care, maintenance and monitoring costs associated with remediation activities.
Changes in remediation estimates are reflected in earnings in the period.
Remediation costs included in environmental obligations are discounted to their
present value as cash flows when payments are readily estimable, and are
discounted using a risk-free rate, which we derive from U.S. Treasury yields.
Emerging Growth Company Accounting Election
Section 102(b)(1) of the Jumpstart Our Business Startups Act of 2012 ("JOBS
Act") exempts emerging growth companies from being required to comply with new
or revised financial accounting standards until private companies are required
to comply with the new or revised financial accounting standards. The JOBS Act
provides that a company can choose not to take advantage of the extended
transition period and comply with the requirements that apply to non-emerging
growth companies, and any such election to not take advantage of the extended
transition period is irrevocable. We are an "emerging growth company" as defined
in Section 2(a) of the Securities Act, and have irrevocably elected to take
advantage of the benefits of this extended transition period, which means that
when a standard is issued or revised and has different application dates for
public or private companies, we, for so long as we remain an emerging growth
company, may adopt the new or revised standard at the time private companies are
required to adopt the new or revised standard.
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 Consolidated Financial
Statements.

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